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Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 01 1. What is the primary goal of financial management? A. Increased earnings B. Maximizing cash flow C. Maximizing shareholder wealth D. Minimizing risk of the firm

2. Proper risk-return management means that: A. the firm should take as few risks as possible. B. consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined. C. the firm should earn the highest return possible. D. the firm should value future profits more highly than current profits.

3. Which of the following is not a major area of concern and emphasis in modern financial management and in this text? A. Inflation and its effect on profits B. Stable short-term interest rates C. Changing international environment D. Increased reliance on debt

4. Which of the following is not a major area of concern and emphasis in modern financial management and in this text? A. Marginal analysis B. Risk-return trade-off C. Commodity trading D. Changing financial institutions

5. The effect of the high rates of inflation experienced during the 1970s and early 1980s was to make: A. the gold standard was eliminated. B. purchasing power increased. C. interest rates fell. D. capital budgeting decisions less reliable.

Foundations of Financial Management - 10th Canadian Edition by Block

6. In the past, the study of finance has included: A. operational efficiency. B. employee relationships. C. legal cases. D. mergers and acquisitions.

7. A financial manager's goal of maximizing current or short-term earnings may not be appropriate because: A. it considers the timing of the benefits. B. increased earnings may be accompanied by acceptably higher levels of risk. C. share ownership is widely dispersed. D. earnings are subjective; they can be defined in various ways such as accounting or economic earnings.

8. One of the major disadvantages of a sole proprietorship is: A. that there is unlimited liability to the owner. B. the simplicity of decision making. C. low organizational costs. D. low operating costs.

9. The partnership form of organization: A. avoids the double taxation of earnings and dividends found in the corporate form of organization. B. usually provides limited liability to the partners. C. has unlimited life. D. simplifies decision making.

10. A corporation is not: A. owned by shareholders who enjoy the privilege of limited liability. B. easily divisible between owners. C. a separate legal entity with perpetual life. D. a separate legal entity with limited life.

11. Inflation: A. increases corporations' reliance on debt for capital expansion needs. B. creates larger asset values on the firm's historical balance sheet. C. makes it cheaper (in terms of interest costs) for firms to borrow money. D. creates stability for investors.

Foundations of Financial Management - 10th Canadian Edition by Block

12. Which of the following securities is not included as part of the capital market? A. Common stock B. Commercial paper C. Government bonds D. Preferred stock

13. Maximization of shareholder wealth is a concept in which: A. increased earnings is of primary importance. B. profits are maximized on a quarterly basis. C. virtually all earnings are paid as dividends to common shareholders. D. optimally increasing the long-term value of the firm is emphasized.

14. The largest Canadian corporations are mainly: A. widely held. B. family controlled. C. U.S. controlled. D. Japanese controlled.

15. Which of the following is not a true statement about the goal of maximizing shareholder wealth? A. It takes into account the timing of cash-flows. B. It is a short-run point of view which takes risk into account. C. It considers risk as a factor. D. It is a long-run point of view which takes risk into account.

16. Increased international competition can be seen as a motivator to emphasize: A. asset diversification strategies. B. the risk side of the risk-return relationship. C. the return side of the risk-return relationship. D. invest in a new risky project.

17. Corporations can reduce portfolio risk by: A. narrowing their focus on one successful product. B. merging with companies in unrelated industries. C. repurchasing their own stock. D. selling their own stock.

Foundations of Financial Management - 10th Canadian Edition by Block

18. The shift to the return side of the risk-return relationship has occurred because: A. narrow focus on production. B. stock splits. C. there has been a decrease in the use of advanced technology in the production process. D. there has been an increase in international competition.

19. A corporate buy-back, or the repurchasing of shares, is: A. an example of balance sheet restructuring. B. an excellent source of profits when the firm's stock is over-priced. C. a method of reducing the debt-to-equity ratio. D. shown as revenue on the income statement.

20. Which of the following is (are) a result of high inflation? A. Loss from disposal of assets B. Over-valued liabilities C. Lower stock price D. Under-valued assets

21. A corporate restructuring can result in: A. increased revenue. B. buying of low-profit margin divisions. C. selling of high-profit margin divisions. D. reductions in the work force.

22. Which of the following is not an example of restructuring as discussed in the text? A. Repurchase of common stock B. Creating a new organizational chart C. Merging with companies in related industries D. Divesting of an unprofitable division

23. Agency theory deals with the issue of: A. when to hire an agent to represent the firm in negotiations. B. the legal liabilities of a firm if an employee, acting as the firm's agent, injures someone. C. the limitations placed on an employee acting as the firm's agent to obligate or bind the firm. D. the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers.

Foundations of Financial Management - 10th Canadian Edition by Block

24. As mergers, acquisitions, and restructurings have increased in importance, agency theory has become more important in assessing whether: A. a stock repurchase should be undertaken. B. shareholder goals are truly being achieved by managers in the long run. C. managers are actually agents or only employees of the firm. D. managers and owners are actually the same people with the same interests.

25. Insider trading occurs when: A. someone has information not available to the public, which they use to profit from trading in stocks. B. corporate officers buy stock in their company. C. lawyers, investment dealers, and others buy common stock in companies represented by their firms D. stock transactions occur with reduced brokerage fees.

26. The major difficulty in most insider-trading cases has been: A. that lenient judges have simply released the guilty individuals. B. that insider trading, even though illegal, actually serves a beneficial economic and financial purpose. C. that inside trades have not been legally well defined. D. inside trades actually have a beneficial effect on the wealth of all shareholders.

27. The 1990 Nobel Prize in economics was given to three finance professors. They are: A. Harry Markowitz, Merton Miller, William Sharpe B. Harry Markowitz, Franco Modigilani, Paul Samuelson C. Merton Miller, Franco Modigliani, Robert Merton D. William Sharpe, Richard Roll, Steve Ross

28. Future financial managers will need to understand: A. employment standards. B. production engineering. C. actuarial calculations. D. international currency hedging strategies.

29. Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the: A. options pricing model. B. theories of working capital management. C. theories of risk-return and portfolio theory. D. theories of international capital budgeting.

Foundations of Financial Management - 10th Canadian Edition by Block

30. In the 1930s, financial practices didn't focus on: A. maintenance of liquidity. B. reorganization of financially distressed companies. C. the bankruptcy process. D. international exchange costs.

31. The increasing percentage ownership of public corporations by institutional investors has: A. had no effect on corporate management. B. created higher returns for the stock market in general. C. created more pressure on public companies to manage their firms more efficiently. D. taken away the voice of the individual investor.

32. Money markets would include which of the following securities? A. Common stock and corporate bonds B. Treasury bills and commercial paper C. Certificates of deposit and preferred stock D. Government bonds.

33. When a corporation uses the financial markets to raise new funds, the sale of securities is made in the: A. primary market. B. secondary market. C. on-line market. D. third market.

34. Companies that have higher risk than a competitor in the same industry will generally have: A. to pay a lower interest rate than its competitors. B. a higher relative stock price than its competitors. C. a lower cost of funds than its competitors. D. to pay a higher interest rate than its competitors.

35. The financial markets allocate capital to corporations by: A. reflecting expectations of the market participants in the corporation's share price. B. requiring higher returns from companies with lower risk than their competitors. C. rewarding companies with expected high returns with lower relative stock prices. D. relying on the opinion of investment dealers.

Foundations of Financial Management - 10th Canadian Edition by Block

36. Corporate restructuring has been one result of more institutional ownership. Restructuring can cause: A. stability in the asset and liabilities of the firm. B. the purchase of low-profit margin divisions. C. the promotion of current management and/or large increases in the workforce. D. changes in the asset and liabilities of the firm.

37. Corporate restructuring in the late 1990s more often took the form of: A. leveraged buyouts. B. mergers to refocus on core businesses. C. a change in capital structure. D. addition of senior management.

38. The increase in the internationalization of financial markets has led: A. to companies searching the global financial markets for high cost funds. B. to a decrease in Canadian companies listing on the New York Stock Exchange. C. to a decrease in debt obligations denominated in foreign currency on Canadian corporate balance sheets. D. to the tasks of the financial manager being reshaped.

39. The internationalization of the financial markets has: A. allowed firms such as Bombardier to raise capital around the world. B. raised the cost of capital. C. forced companies to value everything in U.S. dollars. D. created ASPE.

40. Increased use of technology has increased corporate efficiency by: A. increasing the firm's reliance on debt. B. creating larger asset values on the firm's balance sheet. C. made it cheaper (in terms of interest costs) for firms to borrow money. D. creating electronic communication networks.

41. Maximization of shareholder wealth is a concept in which: A. increased earnings are of primary importance. B. increased cash flows are of primary importance. C. increased dividends are of primary importance. D. increased share price is of primary importance.

Foundations of Financial Management - 10th Canadian Edition by Block

42. Capital structure is: A. the relative mix of capital and intangible assets held by the firm. B. the relative importance of debt and equity in the firm's financing. C. the relative importance of long-term investment decisions. D. the terms required to borrow money.

43. Financial markets allocate capital based on: A. the pricing mechanism. B. the efforts of financial intermediaries. C. intervention by the Bank of Canada. D. the number of treasury bills outstanding.

44. Corporate governance is the: A. relationship and exercise of oversight by the board of directors of the company. B. relationship between the chief financial officer and institutional investors. C. operation of the firm by the chief executive officer (CEO) and other senior executives on the management team. D. strategically directing the company through the board of directors with a focus on social responsibility.

45. Agency theory examines the relationship between: A. shareholders of the firm and its investment dealers. B. shareholders of the firm and its managers. C. the board of directors and large institutional investors. D. shareholders of the firm and its transfer agent.

46. Agency theory would imply that conflicts are more likely to occur between management and shareholders when: A. the company is owned and operated by the same person. B. management acts in the best interests of maximizing shareholder wealth. C. the chairman of the board is also the chief executive officer (CEO). D. the board of directors exerts strong and involved oversight of managers.

47. The internationalization of the financial markets has: A. lowered the cost of capital. B. raised the cost of capital. C. forced companies to value everything in U.S. dollars. D. had no effect on the cost of capital.

Foundations of Financial Management - 10th Canadian Edition by Block

48. In analysis of a firm's market share value, an investor should not consider: A. the risk inherent in the firm. B. the time pattern of the firm's earnings and cash flow. C. the quality and reliability of reported earnings. D. book value of assets.

49. The increased percentage of ownership of public corporations by institutional investors has: A. had no effect on corporate management. B. created higher returns for the stock market in general. C. created less pressure on public companies to manage their firms more efficiently. D. increased the ethical standards of management.

50. As finance emerged as an analytical, decision oriented discipline, the initial emphasis was placed on capital acquisitions. True False

51. Inflation is assumed to be a temporary problem that does not affect financial decisions. True False

52. Timing is not a particularly important consideration in financial decisions. True False

53. Institutional investors have had increasing influence over corporations with their ability to vote large blocks of stock and replace poor performing boards of directors. True False

54. Insider trading involves the use of information not available to the general public to make profits from trading in a company's shares. True False

55. Agency theory assumes that corporate managers act to increase the wealth of corporate shareholders. True False

Foundations of Financial Management - 10th Canadian Edition by Block

56. Historically the field of finance as a discipline described capital preservation, liquidity, reorganization, and bankruptcy through the 1930s depression. True False

57. The higher the profit of a firm, the higher the value the firm is assured of receiving in the market. True False

58. Social responsibility and profit maximization are synonymous. True False

59. There is unlimited liability in a general partnership. True False

60. In the mid1950s, finance began to change to a more analytical, decision oriented approach. True False

61. There are some serious problems with the financial goal of maximizing the earnings of the firm. True False

62. Maximizing the earnings of the firm is the goal of financial management. True False

63. Because socially desirable goals can impede profitability in many instances, managers should not try to operate under the assumption of wealth maximization. True False

64. The sole proprietorship represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs. True False

Foundations of Financial Management - 10th Canadian Edition by Block

65. Profits of sole proprietorships are taxed at corporate tax rates. True False

66. The primary market includes the sale of securities by way of initial public offerings. True False

67. The most common partnership arrangement carries limited liability to the partners. True False

68. A limited partnership limits the profits partners may receive. True False

69. In terms of size of revenues and profits, the corporation is by far the most important form of business organization in Canada. True False

70. Dividends paid to corporate shareholders have already been taxed once as corporate income. True False

71. One advantage of the corporate form of organization is that income received by shareholders is not taxable since the corporation already paid taxes on the income distributed. True False

72. A corporation must have at least 35 shareholders. True False

73. Profits of a manufacturing corporation are taxed at the same rate as dividends. True False

74. Recently, the emphasis of financial management has been on the relationships between risk and return. True False

Foundations of Financial Management - 10th Canadian Edition by Block

75. The formation of a corporation is a way to circumvent personal liability. True False

76. The secondary market characteristically has had stable prices over the past 20 years. True False

77. The first Nobel Prizes given to finance professors was for their contributions to capital structure theory and portfolio theories of risk and return. True False

78. Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide. True False

79. Inflation has led to phantom profits and undervalued assets. True False

80. Money markets refer to those markets dealing with short-term securities having a life of one year or less. True False

81. Capital markets refer to those markets dealing with short-term securities having a life of one year or less. True False

82. New issues are sold in the secondary market. True False

83. Existing securities are traded in the secondary market. True False

84. The financial markets value assets based on the most productive current use. True False

Foundations of Financial Management - 10th Canadian Edition by Block

85. The 1990s demonstrated that the old valuation models were no longer effective. True False

86. The largest financial intermediaries after the banks are insurance companies. True False

87. The TSX Composite Index is representative of equity market value of the top listed Canadian companies. True False

88. The Internet is largely responsible for the internationalization of the financial markets. True False

89. Agency theory examines the relationship between companies and their customers. True False

90. Honesty in business requires timely and full disclosure of pertinent firm developments. True False

91. Businesses will increasingly rely on B2B Internet applications to speed up cash flows. True False

92. Issues over corporate governance are often agency problems. True False

93. Agency theory examines the relationship between the owners of the firm and the managers of the firm. True False

94. Secondary markets are the markets that trade previously issued securities. True False

Foundations of Financial Management - 10th Canadian Edition by Block

95. Financial management builds upon the disciplines of economics and accounting. Describe what a: economics provides the financial manager b: accounting provides the financial manager

96. Selecting profit maximization as the primary goal of the firm may not increase its value, because a profitonly focus has several drawbacks. List and describe these drawbacks.

97. What 4 factors will investors consider in the analysis of a firm market share value?

98. According to agency theory, other than maximizing shareholder wealth what other self-interests do financial managers have?

Foundations of Financial Management - 10th Canadian Edition by Block

99. Besides maximizing shareholder wealth, what should corporations consider to be goals? List and briefly explain.

100. What are the 4 components of good corporate governance?

101. List the 4 components of good corporate governance and identify additional measures that could be added to strengthen corporate governance.

102. List the occasional functions of the finance manager connected to the efficient raising and investing of funds.

103. What are the characteristics of a sole proprietorship? What are the drawbacks?

Foundations of Financial Management - 10th Canadian Edition by Block

104. What are the characteristics of a partnership? What are the advantages compared to a sole proprietorship?

105. What are the characteristics of a corporation?

106. What 2 choices does the board of directors have to distribute earnings of a corporation?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 01 Key

1. What is the primary goal of financial management? A. Increased earnings B. Maximizing cash flow C. Maximizing shareholder wealth D. Minimizing risk of the firm

Accessibility: Keyboard Navigation Block - Chapter 01 #1 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #2 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-05 Measuring the Goal Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #3 Difficulty: Medium Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk. Topic: 01-03 Goals of Financial Management Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #4 Difficulty: Medium Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk. Topic: 01-03 Goals of Financial Management Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #5 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

6. In the past, the study of finance has included: A. operational efficiency. B. employee relationships. C. legal cases. D. mergers and acquisitions.

Accessibility: Keyboard Navigation Block - Chapter 01 #6 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #7 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #8 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #9 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #10 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #11 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

12. Which of the following securities is not included as part of the capital market? A. Common stock B. Commercial paper C. Government bonds D. Preferred stock

Accessibility: Keyboard Navigation Block - Chapter 01 #12 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-13 Structure and Functions of the Financial Markets Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #13 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Concept

14. The largest Canadian corporations are mainly: A. widely held. B. family controlled. C. U.S. controlled. D. Japanese controlled.

Accessibility: Keyboard Navigation Block - Chapter 01 #14 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #15 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #16 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #17 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #18 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #19 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Concept

20. Which of the following is (are) a result of high inflation? A. Loss from disposal of assets B. Over-valued liabilities C. Lower stock price D. Under-valued assets

Accessibility: Keyboard Navigation Block - Chapter 01 #20 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

21. A corporate restructuring can result in: A. increased revenue. B. buying of low-profit margin divisions. C. selling of high-profit margin divisions. D. reductions in the work force.

Accessibility: Keyboard Navigation Block - Chapter 01 #21 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #22 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #23 Difficulty: Hard Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #24 Difficulty: Hard Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #25 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #26 Difficulty: Hard Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #27 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-05 Measuring the Goal Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

28. Future financial managers will need to understand: A. employment standards. B. production engineering. C. actuarial calculations. D. international currency hedging strategies.

Accessibility: Keyboard Navigation Block - Chapter 01 #28 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #29 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-05 Measuring the Goal Type: Memory

30. In the 1930s, financial practices didn't focus on: A. maintenance of liquidity. B. reorganization of financially distressed companies. C. the bankruptcy process. D. international exchange costs.

Accessibility: Keyboard Navigation Block - Chapter 01 #30 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #31 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #32 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-12 The Role of the Financial Markets Type: Memory

33. When a corporation uses the financial markets to raise new funds, the sale of securities is made in the: A. primary market. B. secondary market. C. on-line market. D. third market.

Accessibility: Keyboard Navigation Block - Chapter 01 #33 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #34 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #35 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #36 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-10 Functions of Financial Management Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #37 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #38 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-10 Functions of Financial Management Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #39 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #40 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #41 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #42 Difficulty: Hard Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #43 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #44 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-08 Social Responsibility Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #45 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #46 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #47 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #48 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-06 Market Share Price Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #49 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

50. As finance emerged as an analytical, decision oriented discipline, the initial emphasis was placed on capital acquisitions. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #50 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Concept

51. Inflation is assumed to be a temporary problem that does not affect financial decisions. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #51 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-01 The Field of Finance Type: Memory

52. Timing is not a particularly important consideration in financial decisions. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #52 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

53. Institutional investors have had increasing influence over corporations with their ability to vote large blocks of stock and replace poor performing boards of directors. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #53 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

54. Insider trading involves the use of information not available to the general public to make profits from trading in a company's shares. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #54 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Memory

55. Agency theory assumes that corporate managers act to increase the wealth of corporate shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #55 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

56. Historically the field of finance as a discipline described capital preservation, liquidity, reorganization, and bankruptcy through the 1930s depression. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #56 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

57. The higher the profit of a firm, the higher the value the firm is assured of receiving in the market. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #57 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-06 Market Share Price Type: Concept

58. Social responsibility and profit maximization are synonymous. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #58 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-08 Social Responsibility Type: Concept

59. There is unlimited liability in a general partnership. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #59 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

60. In the mid1950s, finance began to change to a more analytical, decision oriented approach. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #60 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

61. There are some serious problems with the financial goal of maximizing the earnings of the firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #61 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-05 Measuring the Goal Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

62. Maximizing the earnings of the firm is the goal of financial management. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #62 Difficulty: Easy Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk. Topic: 01-03 Goals of Financial Management Type: Concept

63. Because socially desirable goals can impede profitability in many instances, managers should not try to operate under the assumption of wealth maximization. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #63 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Memory

64. The sole proprietorship represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #64 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

65. Profits of sole proprietorships are taxed at corporate tax rates. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #65 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

66. The primary market includes the sale of securities by way of initial public offerings. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #66 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

67. The most common partnership arrangement carries limited liability to the partners. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #67 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

68. A limited partnership limits the profits partners may receive. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #68 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

69. In terms of size of revenues and profits, the corporation is by far the most important form of business organization in Canada. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #69 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

70. Dividends paid to corporate shareholders have already been taxed once as corporate income. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #70 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

71. One advantage of the corporate form of organization is that income received by shareholders is not taxable since the corporation already paid taxes on the income distributed. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #71 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

72. A corporation must have at least 35 shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #72 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

73. Profits of a manufacturing corporation are taxed at the same rate as dividends. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #73 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

74. Recently, the emphasis of financial management has been on the relationships between risk and return. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #74 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-10 Functions of Financial Management Type: Concept

75. The formation of a corporation is a way to circumvent personal liability. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #75 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

76. The secondary market characteristically has had stable prices over the past 20 years. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #76 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

77. The first Nobel Prizes given to finance professors was for their contributions to capital structure theory and portfolio theories of risk and return. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #77 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

78. Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #78 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-12 The Role of the Financial Markets Type: Memory

79. Inflation has led to phantom profits and undervalued assets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #79 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Concept

80. Money markets refer to those markets dealing with short-term securities having a life of one year or less. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #80 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-12 The Role of the Financial Markets Type: Memory

81. Capital markets refer to those markets dealing with short-term securities having a life of one year or less. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #81 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-12 The Role of the Financial Markets Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

82. New issues are sold in the secondary market. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #82 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

83. Existing securities are traded in the secondary market. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #83 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

84. The financial markets value assets based on the most productive current use. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #84 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

85. The 1990s demonstrated that the old valuation models were no longer effective. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #85 Difficulty: Medium Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Concept

86. The largest financial intermediaries after the banks are insurance companies. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #86 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

87. The TSX Composite Index is representative of equity market value of the top listed Canadian companies. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #87 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Memory

88. The Internet is largely responsible for the internationalization of the financial markets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #88 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-12 The Role of the Financial Markets Type: Concept

89. Agency theory examines the relationship between companies and their customers. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #89 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

90. Honesty in business requires timely and full disclosure of pertinent firm developments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #90 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Concept

91. Businesses will increasingly rely on B2B Internet applications to speed up cash flows. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #91 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

92. Issues over corporate governance are often agency problems. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #92 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

93. Agency theory examines the relationship between the owners of the firm and the managers of the firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #93 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

94. Secondary markets are the markets that trade previously issued securities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #94 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

95. Financial management builds upon the disciplines of economics and accounting. Describe what a: economics provides the financial manager b: accounting provides the financial manager Economics provides the financial manager with • A broad picture of the economy and the key measures that influence the corporation's decisions and performance (gross domestic product, industrial production, disposable income, unemployment, inflation, interest rates, taxes). • An understanding of the institutional structure of our mixed capitalist system (government regulation, Bank of Canada, chartered banks, investment dealers, trusts, insurance companies, financial markets). Capital is accumulated and valued in competitive financial markets, affecting its cost and availability to the firm. • A structure for decision making (risk analysis, pricing theory through supply and demand relationships, comparative return analysis). Accounting provides the financial manager with • Much of the language of finance (assets, liabilities, cash flow). • Financial data (income statements, balance sheets, statement of cash flows). The financial manager must know how to interpret and use this data in allocating the firm's financial resources to generate the best value on the basis of return and risk. Finance links economic theory with the numbers of accounting, and all corporate managers—whether in the area of production, sales, research, marketing, management, or long run strategic planning-must know what it means to assess the financial performance of the firm.

Block - Chapter 01 #95 Difficulty: Hard Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-01 The Field of Finance Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

96. Selecting profit maximization as the primary goal of the firm may not increase its value, because a profitonly focus has several drawbacks. List and describe these drawbacks. 1. Risk may increase as profit changes. More debts or investment in projects with cyclical earnings to increase profits also increase risk. Shareholders may consider the increase in risk insufficient for the increased earnings. 2. Profit fails to take into account the timing of benefits. We might be indifferent between the following alternatives if our emphasis were solely on maximizing earnings, as the total is the same. However, alternative B is clearly superior, because larger benefits occur earlier; we could reinvest the difference in earnings for alternative B for an extra period. Earnings per Share

3. Accurately measuring profit is almost impossible. Economics and accounting define profit (earnings) differently. Furthermore, earnings may not correspond to current values due to the methods used to capture accounting accruals and the amortization of capital expenditures. As well, financial statements are subject to manipulation by managers, so reported earnings may be misleading.

Block - Chapter 01 #96 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-05 Measuring the Goal Type: Memory

97. What 4 factors will investors consider in the analysis of a firm market share value? • The risk inherent in the firm (nature of its operations and how the firm is financed) • The time pattern of the firm's earnings and cash flows • The quality and reliability of reported earnings (as a guidepost to future earning power) • Economic and political factors

Block - Chapter 01 #97 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-06 Market Share Price Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

98. According to agency theory, other than maximizing shareholder wealth what other self-interests do financial managers have? Financial managers are interested in: • Maintaining their jobs (may discourage value-enhancing takeovers) • Protecting "private spheres of influence" • Maximizing their own compensation package • Arbitrating among the firm's different stakeholders (shareholders, creditors, employees, unions, environmentalists, consumer groups, Canada Revenue Agency, government regulatory bodies, customers) Pursuit of these interests may emphasize short-term results over long-term wealth building. Management may also perceive the risk of investment decisions differently from shareholders, leading to different points of view as to the best decision regarding the investment of the firm's resources.

Block - Chapter 01 #98 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Memory

99. Besides maximizing shareholder wealth, what should corporations consider to be goals? List and briefly explain. Corporations, which receive their operational charters from society, should consider socially desirable actions that include: • Community works (charitable giving, employment opportunities for marginalized groups) • Customer respect (safe products, fair pricing, appropriate advertising and communication) • Strong employee relations (fair benefits and compensation, equitable hiring, education, health and safety) • Environmental health (pollution controls, appropriate use and renewal of resources) • Human rights promotion (respecting the dignity of individuals globally)

Block - Chapter 01 #99 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

100. What are the 4 components of good corporate governance? Good corporate governance results from: • Board composition (strong leadership, competent education, balanced competencies) • Director and officers ownership positions in the firm (other than by stock options) • A published code of ethics • Independent audits and a financially literate audit committee

Block - Chapter 01 #100 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Memory

101. List the 4 components of good corporate governance and identify additional measures that could be added to strengthen corporate governance. Good corporate governance results from: • Board composition (strong leadership, competent education, balanced competencies) • Director and officers ownership positions in the firm (other than by stock options) • A published code of ethics • Independent audits and a financially literate audit committee There have been increased demands for additional corporate governance practices by firms, despite the increased costs of compliance and sometimes delays in timely reporting of financial results. These measures include: • Separating the roles of CEO and chair of the board • Independent board of directors members • Improved accounting standards (stock options, internal audit controls, "off-balance sheet items") • More stringent reporting and disclosure requirements • Closer monitoring by regulatory bodies (securities commissions) • Questioning the use of "dual class" shares

Block - Chapter 01 #101 Difficulty: Hard Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

102. List the occasional functions of the finance manager connected to the efficient raising and investing of funds. Intermediate financing, bond issues, leasing, stock issues, capital budgeting, dividend decisions, forecasting

Block - Chapter 01 #102 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-10 Functions of Financial Management Type: Memory

103. What are the characteristics of a sole proprietorship? What are the drawbacks? A sole proprietorship is characterized by: • Single-person ownership • Simplicity of decision making • Low organizational and operating costs • Unlimited liability to the owner (can lose personal assets in settlement of firm's debts) • Profits or losses taxed in hands of individual owner Most small businesses with one to ten employees are sole proprietorships. The unlimited liability is a serious drawback and few lenders are willing to advance funds to a small business without a personal liability commitment from the owner.

Block - Chapter 01 #103 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

104. What are the characteristics of a partnership? What are the advantages compared to a sole proprietorship? A partnership is characterized by • Multiple ownership • Ability to raise more capital and share ownership responsibilities • Unlimited liability for the owners (one wealthy partner may have to bear a disproportionate share of losses in a general partnership) • Taxation of profits or losses are allocated in percentages to partners To circumvent the unlimited liability feature, a special form of partnership, called a limited partnership, can be utilized. Under this arrangement one or more partners are designated general partners and have unlimited liability for the debts of the firm; other partners are designated limited partners and are liable only for their initial contribution. The limited partners are normally prohibited from being active in the management of the firm.

Block - Chapter 01 #104 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

105. What are the characteristics of a corporation? A corporation is characterized by: • A legal entity unto itself (may sue or be sued, engage in contracts, acquire property) • Ownership by shareholders (each with limited liability, although bankers may require small business owners to give their personal guarantee) • Divisibility of the ownership (many shareholders) • Continuous life span (not dependent on life of one shareholder) • Taxation on its own income (individual shareholders pay tax on dividends or capital gain tax when shares are sold) In terms of revenue and profits produced, the corporation is by far the most important form of economic unit.

Block - Chapter 01 #105 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

106. What 2 choices does the board of directors have to distribute earnings of a corporation? Earnings generated by the corporation are owned equally by each shareholder, and the board of directors has two choices for these earnings. Earnings can be: • Paid out as dividends (shareholders pay tax on dividends: a dividend tax credit reduces the effect of double taxation) • Reinvested in the firm (recorded as retained earnings)

Block - Chapter 01 #106 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 01 Summary Category

# of Question s

Accessibility: Keyboard Navigation

Block - Chapter 01

106

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.

Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk.

Learning Objective: 0103 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.

Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.

Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.

Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.

Topic: 01-01 The Field of Finance

Topic: 01-02 Evolution of Finance as a Discipline

Topic: 01-03 Goals of Financial Management

Topic: 01-04 Maximizing Shareholder Wealth

Topic: 01-05 Measuring the Goal

Topic: 01-06 Market Share Price

Topic: 01-07 Management and Shareholder Wealth

Topic: 01-08 Social Responsibility

Topic: 01-09 Ethical Behaviour

Topic: 01-10 Functions of Financial Management

Topic: 01-11 Forms of Organization

Topic: 01-12 The Role of the Financial Markets

Topic: 01-13 Structure and Functions of the Financial Markets

Topic: 01-14 Allocation of Capital

Topic: 01-15 Risk

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 02 1. Which of the following is not one of the three basic financial statements required by Accounting Standards for Private Enterprises (ASPE)? A. Income Statement B. Statement of Retained Earnings C. Statement of Cash Flows D. Balance Sheet

2. Which of the following would not be classified as a current asset? A. Marketable securities B. Long term Investments C. Prepaid expenses D. Inventory

3. An item that may be converted to cash within one year or one operating cycle of the firm is classified as a: A. current liability. B. long-term asset. C. current asset. D. long-term liability.

4. Which of the following is not a primary source of capital to the firm? A. Assets B. Common stock C. Preferred stock D. Bonds

5. The residual income of the firm belongs to: A. creditors. B. preferred shareholders. C. common shareholders. D. bondholders.

Foundations of Financial Management - 10th Canadian Edition by Block

6. The best indication of the operational efficiency of management is: A. net income. B. earnings per share. C. earnings before interest and taxes (EBIT). D. gross profit.

7. Which account represents the cumulative earnings of the firm since its formation, minus dividends paid? A. Share price B. Common stock C. Retained earnings D. Accumulated amortization

8. A firm has $3,500,000 in its common stock account and $2,500,000 in its retained earnings account. The firm issued 100,000 shares of common stock. What was the original issue price if only one stock issue has ever been sold? A. $35 per share B. $25 per share C. $60 per share D. Not enough information to tell

9. A firm has $2,000,000 in its common stock account and $20,000,000 in its retained earnings account. The firm issued 500,000 shares of common stock. What are accumulated earnings per share? A. $4 per share B. $44 per share C. $40 per share D. $5 per share

10. The major limitation of financial statements is: A. in their complexity. B. in their lack of comparability. C. in their use of historical cost accounting. D. in their lack of detail.

11. Inflation has its major impact on balance sheets in which of the following areas? A. Inventory and accounts payable B. Plant and equipment and long-term debt C. Plant and equipment and inventory D. Interest expense and earnings per share

Foundations of Financial Management - 10th Canadian Edition by Block

12. "Inventory profits" are most likely to occur in an inflationary economy under which of the following inventory cost assumptions? A. Weighted average B. Specific item C. FIFO D. Lower of cost or market

13. The orientation of book value per share is __________, while the orientation of market value per share is ___________. A. short term; long term B. future; historical C. historical; future D. long term; short term

14. A firm with earnings per share of $5 and a price-earnings ratio of 15 will have a share price of? A. $20.00 B. $75.00 C. $3.00 D. The market assigns a stock price independent of EPS and the P/E ratio

15. Earnings per share is: A. operating profit divided by number of shares outstanding. B. net income divided by number of shares outstanding. C. net income divided by shareholders' equity. D. net income minus preferred dividends divided by number of shares outstanding.

16. Which of the following is an outflow of cash? A. Profitable operations B. The sale of equipment C. The sale of the company's common stock D. The payment of cash dividends

17. Which of the following is an inflow of cash? A. Funds spent in normal business operations B. The purchase of a new factory C. The sale of the firm's bonds D. The retirement of the firm's bonds

Foundations of Financial Management - 10th Canadian Edition by Block

18. Amortization is a source of cash inflow because: A. it is a tax-deductible noncash expense. B. it supplies cash for future asset purchases. C. it is a tax-deductible cash expense. D. it is a taxable expense.

19. Assuming a tax rate of 35%, amortization expenses of $400,000 will: A. reduce income by $140,000. B. reduce taxes by $140,000. C. reduce taxes by $400,000. D. have no effect on income or taxes, since amortization is not a cash expense.

20. Assuming a tax rate of 30%, the after tax cost of interest expense of $200,000 is: A. $60,000. B. $140,000. C. $200,000. D. $120,000.

21. Gross profit is equal to: A. sales minus cost of goods sold. B. sales minus (selling and administrative expenses). C. sales minus (cost of goods sold and selling and administrative expenses). D. sales minus (cost of goods sold and amortization expense).

22. The firm's price-earnings (P/E) ratio is not influenced by its: A. capital structure. B. earnings volatility. C. sales, profit margins, and earnings. D. Purchase of machinery.

23. Total shareholders' equity consists of: A. preferred stock and common stock. B. common stock and retained earnings. C. common stock and contributed surplus. D. preferred stock, common stock, contributed surplus, and retained earnings.

Foundations of Financial Management - 10th Canadian Edition by Block

24. The Balance Sheet cannot show: A. the current ratio. B. the value of common stock outstanding. C. the change in retained earnings. D. the price earnings relationship.

25. Well prepared accounting statements: A. let management know if cash flow from internal operations is large enough to make necessary equipment replacements. B. provide no new information to financial managers. C. determine the market price of common stock. D. eliminate the effects of inflation from decision making.

26. The Glorius VanderBuilt Denim Slacks Company has taxable income of $100,000. Assuming a 34% tax rate, what is the tax payable? A. $34,000 B. $66,000 C. $100,000 D. $12,250

27. Book value of a firm: A. is usually the same as the firm's market value. B. is based on current asset costs. C. is the same as net worth. D. none of the choices are correct.

28. A statement of cash flows allows a financial analyst to determine: A. whether a cash dividend is affordable. B. how increase in asset accounts have been financed. C. whether long-term assets are being financed with long-term or short-term financing. D. all of the choices are correct.

29. A firm has $200,000 in current assets, $400,000 in long-term assets, $80,000 in current liabilities, and $200,000 in long-term liabilities. What is its net working capital? A. $120,000 B. $320,000 C. $520,000 D. None of the choices are correct

Foundations of Financial Management - 10th Canadian Edition by Block

30. A firm has current assets of $25,000, long term assets of $100,000, long term liabilities of $50,000, and $50,000 in shareholders' equity. What is its net working capital? A. $0 B. $50,000 C. $100,000 D. $25,000

31. Assuming a tax rate of 40%, the after tax cost of a $200,000 dividend payment is: A. $200,000. B. $70,000. C. $130,000. D. None of the choices are correct

32. Which of the following would not be included in the balance sheet investment account? A. Shares of other corporations B. Long term government bonds C. Marketable securities D. Investments in other corporations

33. Which of the following is not true of current cost accounting? A. The book value of equipment is near replacement value B. The book value of the common stock equals market value C. Dividends and income are adjusted for inflation D. All of the choices are correct

34. The primary disadvantage of accrual accounting is that: A. it does not match revenues and expenses in the period in which they are incurred. B. it does not appropriately measure accounting profit. C. it does not recognize the actual exchange of cash. D. it does not adequately show the actual cash flow position of the firm.

35. The statement of cash flows does not include which of the following sections? A. Cash flows from operating activities B. Cash flows from sales activities C. Cash flows from investing activities D. Cash flows from financing activities

Foundations of Financial Management - 10th Canadian Edition by Block

36. Which of the following would represent a use of funds and, indirectly, a reduction in cash balances? A. An increase in inventories. B. A decrease in marketable securities. C. An increase in accounts payable. D. The sale of new bonds by the firm.

37. Which of the following would represent a source of funds and, indirectly, an increase in cash balances? A. A reduction in accounts receivable. B. The repurchase of shares of the firm's stock. C. A decrease in net income. D. A reduction in notes payable.

38. A firm's purchase of plant and equipment would be considered as a: A. use of cash for financing activities. B. use of cash for operating activities. C. source of cash for investment activities. D. use of cash for investment activities.

39. Reinvested funds from retained earnings theoretically belong to: A. bondholders. B. common shareholders. C. employees. D. all of the choices are correct.

40. For private companies, asset accounts on the balance sheet are listed in the order of: A. liquidity. B. profitability. C. size. D. importance.

41. An increase in investments in long-term securities will: A. increase cash flow from investing activities. B. decrease cash flow from investing activities. C. increase cash flow from financing activities. D. decrease cash flow from financing activities.

Foundations of Financial Management - 10th Canadian Edition by Block

42. Free cash flow is equal to cash flow from operating activities: A. plus capital expenditures, minus dividends. B. plus capital expenditures, plus dividends. C. plus dividends, minus capital expenditures. D. minus capital expenditures, minus dividends.

43. In the last decade, free cash flow has been associated with special financial activities such as: A. leveraged buyouts. B. Registered Retirement Savings Plan (RRSPs). C. stock options. D. golden parachutes.

44. Common stock dividends are __________ by preferred stock dividends. A. increased B. decreased C. not effected D. Not enough information to tell

45. Increasing interest expense will have what effect on EBIT? A. Increase it B. Decrease it C. No effect D. Not enough information to tell

46. When a firm's earnings are falling more rapidly than its stock price, its P/E ratio will: A. remain the same. B. go up. C. go down. D. could go either up or down.

47. Net worth is equal to shareholders' equity: A. plus dividends. B. minus preferred stock. C. plus preferred stock. D. minus liabilities.

Foundations of Financial Management - 10th Canadian Edition by Block

48. Net worth for an individual is the same as _____ for a corporation. A. shareholders' equity B. capital assets minus long-term debt C. book value D. current assets minus current debt

49. Amortization tends to: A. increase cash flow and decrease income. B. decrease cash flow and increase income. C. affect only cash flow. D. affect only income.

50. Accrual based accounting results in income and cash flow being: A. the same. B. different. C. equal except for amortization. D. equal except for dividends.

51. The P/E ratio is determined by: A. net worth divided by earnings. B. market capitalization divided by dividend. C. net worth per share divided by earnings per share. D. market value per share divided by earnings per share.

52. A balance sheet valuation measure is: A. earnings per share. B. the P/E ratio. C. the dividend yield. D. market value to book value.

53. Preferred share dividends ________ earnings available to common shareholders. A. increase B. decrease C. due not effect D. not enough information to tell

Foundations of Financial Management - 10th Canadian Edition by Block

54. Which of the following is not subtracted to arrive at operating profit? A. Interest expense B. Cost of goods sold C. Amortization D. Selling and administration expense

55. Given the following what is free cash flow?

A. $115,000 B. $235,000 C. $150,000 D. $140,000

56. All of the following would be included in Cash Flows from Investing, except: A. investments in Plant. B. merchandise Purchases. C. purchases of Investments. D. sale of Long-Term Investments.

57. An item that must be paid within one year or one operating cycle of the firm is classified as a: A. current liability. B. long-term asset. C. current asset. D. None of the choices are correct.

58. Assuming no conversion rights of bond holders or preferred shareholders, the retained earnings of the firm belongs to: A. creditors. B. preferred shareholders. C. common shareholders. D. Canada Revenue Agency.

Foundations of Financial Management - 10th Canadian Edition by Block

59. A firm has $7,500,000 in its common stock account and $2,500,000 in its retained earnings account. The firm issued 100,000 shares of common stock. What was the original issue price if only one stock issue has ever been sold? A. $75 per share B. $25 per share C. $100 per share D. Not enough information to tell

60. Assuming a tax rate of 35%, amortization expenses of $800,000 will: A. reduce income by $280,000. B. reduce taxes by $280,000. C. reduce taxes by $800,000. D. have no effect on income or taxes, since amortization is not a cash expense.

61. Assuming a tax rate of 30%, the after tax cost of interest expense of $400,000 is: A. $120,000. B. $280,000. C. $400,000. D. $240,000.

62. The income statement is the primary financial statement for measuring the profitability of a firm over a period of time. True False

63. The income statement measures the increase in the assets of a firm over a period of time. True False

64. Accounting income is based on verifiably completed transactions. True False

65. For private companies, asset accounts are listed in order of their liquidity. True False

66. Book value per share and market value per share are usually the same dollar amount. True False

Foundations of Financial Management - 10th Canadian Edition by Block

67. Book value per share is of greater concern to the financial manager than market value per share. True False

68. Book value is equal to net worth. True False

69. Equity is a measure of the monetary contributions that have been made directly or indirectly on behalf of the shareholders of the company. True False

70. Shareholders' equity is equal to liabilities plus assets. True False

71. Shareholders' equity is equal to assets minus liabilities. True False

72. Shareholders' equity minus preferred stock is the same thing as what is sometimes called net worth or book value. True False

73. The statement of cash flows helps measure how the changes in a balance sheet are financed between two time periods. True False

74. An increase in an asset represents a source of funds. True False

75. Accumulated amortization shows up in the income statement. True False

Foundations of Financial Management - 10th Canadian Edition by Block

76. The change in accumulated amortization is usually equal to the amortization expense charged in the income statement. True False

77. Net working capital is the difference between current assets and current liabilities. True False

78. Amortization is an accounting entry and does not involve a cash expense. True False

79. An advantage of the net working capital approach over the cash approach is that it looks at the changes of every account of the statement of cash flows. True False

80. Cash flow is equal to earnings before taxes minus amortization. True False

81. The corporate tax rate is 25% on the first $200,000 of income and 50% on any amount over $200,000. True False

82. Interest expense is deductible before taxes and therefore has an after tax cost equal to the interest paid times (1-tax rate). True False

83. Preferred stock dividends are paid out before income taxes. True False

84. Total assets of a firm are financed with liabilities and shareholders' equity. True False

Foundations of Financial Management - 10th Canadian Edition by Block

85. Retained earnings shown on the balance sheet represents available cash on hand generated from prior year's earnings but not paid out in dividends. True False

86. Current cost accounting adjusts financial statements by using the consumer price index. True False

87. An increase in a liability account represents a source of funds. True False

88. The statement of cash flows includes the effects of dividends paid and amortization expense. True False

89. The net working capital approach to funds flow analysis looks at the difference between total assets and total liabilities. True False

90. The marginal corporate tax rate for incomes over $1,000,000 is 50%. True False

91. Preferred stock is always excluded from shareholders' equity because it is a hybrid security and does not have full voting rights. True False

92. Current cost accounting undervalues plant and equipment because it does not adjust for inflation. True False

93. The investments account includes marketable securities. True False

Foundations of Financial Management - 10th Canadian Edition by Block

94. The investments account represents a commitment of funds of at least one year. True False

95. A $125,000 credit sale could be a part of a firm's cash flow from operations if paid off within a firm's fiscal year. True False

96. An increase in accounts receivable represents a reduction in cash flows from operations. True False

97. An increase in accounts payable represents a reduction in cash flows from operations. True False

98. The purchase of a new factory would reduce the cash flows from investing activities. True False

99. The sale of corporate bonds held by the firm as a long-term investment would increase cash flows from investing activities. True False

100. Paying dividends to common shareholders will not affect cash flows from financing activities. True False

101. It is not possible for a company with a high profit margin to have a low operating profit. True False

102. Operating profit is essentially a measure of how efficient management is in generating revenues and controlling expenses. True False

Foundations of Financial Management - 10th Canadian Edition by Block

103. The P/E ratio provides no indication of investors' expectations about the future of a company. True False

104. The real value of a firm is the same in an economic and accounting sense. True False

105. A balance sheet represents the assets, liabilities, and shareholders' equity of a company at a given point in time. True False

106. Balance sheet items are usually adjusted for inflation. True False

107. Marketable securities are temporary investments of excess cash and are carried at the lower of cost or market. True False

108. Retained earnings represent the firm's cumulative earnings since inception, minus dividends and other adjustments. True False

109. Cash flow consists of illiquid cash equivalents which are difficult to convert to cash within 90 days. True False

110. The sale of a firm's securities is a source of funds, whereas the payment of dividends is a use of funds. True False

111. The use of amortization is an attempt to allocate the past and future cost of an asset over its useful life. True False

Foundations of Financial Management - 10th Canadian Edition by Block

112. Free cash flow is equal to cash flow from operating activities plus amortization. True False

113. Free cash flow is equal to cash flow from operating activities minus necessary capital expenditures and normal dividend payments. True False

114. Taxes on individuals have traditionally been progressive, meaning that the more taxable income you have, the higher your marginal tax rate. True False

115. The P/E ratio is strongly related to the past performance of the firm. True False

116. An increase in assets represents a source of funds. True False

117. Sales less cost of goods sold is equal to earnings before taxes. True False

118. Sales less cost of goods sold is equal to gross profit. True False

119. When a firm has a sharp drop off in earnings, its P/E ratio may be artificially high. True False

120. The investments account does not directly affect cash and cash equivalents. True False

121. Amortization expense is charged in the income statement. True False

Foundations of Financial Management - 10th Canadian Edition by Block

122. An increase in inventory represents a source of funds. True False

123. The income statement allows analysts and investors to measure a firm's profitability of over a period of a month, quarter or year. True False

124. Earnings available to common shareholders includes potential dividends to be paid to preferred shareholders. True False

125. The effective tax rate on dividend income is lower than interest income because of the dividend tax credit (DTC). Canadians are allowed to claim the DTC because the government wants to reduce the effects of double taxation. True False

126. Prior Adjustments may be added or subtracted from a firm's Retained Earnings. These "adjustments" are usually for accounting errors or substantive changes to historical cost of assets or liabilities. True False

127. Preferred and/or Common Share dividends are added to Cash Flow from Operations in determining Free Cash Flow. True False

128. The sale of a firm's preferred shares is a source of funds, whereas the payment of preferred dividends is a use of funds. True False

129. What is an income statement and what is its purpose as it relates to financial management?

Foundations of Financial Management - 10th Canadian Edition by Block

130. What is the P/E ratio? Why is it an important ratio? List 3 factors that influence the P/E ratio.

131. In the text, the author said that "Earnings are flexible." What was meant by this?

132. Several theories have been suggested about the factors contributing to the management or "manipulation" of reported earnings. List and explain them.

133. Explain these terms found on a typical balance sheet. Provide examples of each if applicable.

134. List and describe the limitations of the balance sheet.

Foundations of Financial Management - 10th Canadian Edition by Block

135. What is a cash flow statement? What information can it provide? Why is a cash flow statement important to small business?

136. List the 3 primary sections on the cash flow statement.

137. Describe and briefly explain the steps used in the indirect method to compute cash flows from typical operating activities of a company.

138. Define free cash flow. Explain what it is equal to and why it is important a finance manager needs to know the value of free cash flow.

139. What causes the after tax cash flow to the individuals to vary?

Foundations of Financial Management - 10th Canadian Edition by Block

140. What is a tax savings?

142. Two-by-Four Wood Products (TBF) report net income of $2 per share in its most recent financial statements. If TBF has no preferred shares outstanding and the market price of its stock is $4 what is TBF's P/E ratio?

143. Jane is considering an investment in Fauna Flowers (FF). FF is trading at $33 a share. It the company's current dividend is $1.50 a share, what is FF's dividend yield?

Foundations of Financial Management - 10th Canadian Edition by Block

144. Blink and Wink (BW) manufactures contact lens. In its most recent fiscal year BW reported after-tax interest expense on a new bond issue of $550,000. If BW's effective tax rate is 35%, what was the firm's before tax interest expense?

145. Cool Ties and Things (CTT) has Total Shareholder's Equity of $350,000. CTT issued $85,000 in preferred stock two years ago. If CTT has 37,000 shares issued and outstanding what is CTT's book value per share?

146. The following is the December 31, 2014 balance sheet for the Epics Corporation.

Sales for 2015 were $2,000,000, with the cost of goods sold being 55% of sales. Amortization expense was 10% of the gross plant and equipment at the beginning of the year. Interest expense was 9% on the notes payable and 11% on the bonds payable. Selling, general, and administrative expenses were $200,000 and the firm's tax rate is 40%. A) Prepare an income statement. B) If the dividend payout ratio for Epics is 35%, what is the value of the retained earnings account on December 31, 2015?

Foundations of Financial Management - 10th Canadian Edition by Block

147. Given the financial information for the A.E. Neuman Corporation, A) Prepare a Statement of Cash Flows for the year ended December 31, 2015. B) What is the dividend payout ratio? C) If we increased the dividend payout ratio to 100%, what would happen to retained earnings?

Foundations of Financial Management - 10th Canadian Edition by Block

148. Calculate the tax bill for a corporation that earned $250,000 in 2015 in Manitoba as a manufacturer.

149. Calculate the after tax cost of the interest. Assume the company has issued 10,000 bonds with a coupon rate of 8% and a face value of $1,000 per bond, and the company has a marginal tax rate of 42%.

150. ElectroWizard Company produces a popular video game called Destructo, which sells for $32. Last year ElectroWizard sold 50,000 Destructo games, each of which costs $6 to produce. ElectroWizard incurred selling and administrative expenses of $80,000 and amortization expense of $10,000. In addition, ElectroWizard has a $100,000 loan outstanding at 12%. Its tax rate is 40%. There are 100,000 common shares outstanding. Prepare an income statement for ElectroWizard in good form (include EPS).

Foundations of Financial Management - 10th Canadian Edition by Block

151. Identify each of the following as increasing (+) or decreasing (-) cash flows from operating activities (O), investment activities (I), or financing activities (F). (EXAMPLE: the sale of plant and equipment would increase cash flows from investing activities, and the correct answer would be + I).

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 02 Key

1. Which of the following is not one of the three basic financial statements required by Accounting Standards for Private Enterprises (ASPE)? A. Income Statement B. Statement of Retained Earnings C. Statement of Cash Flows D. Balance Sheet

Accessibility: Keyboard Navigation Block - Chapter 02 #1 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Memory

2. Which of the following would not be classified as a current asset? A. Marketable securities B. Long term Investments C. Prepaid expenses D. Inventory

Accessibility: Keyboard Navigation Block - Chapter 02 #2 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

3. An item that may be converted to cash within one year or one operating cycle of the firm is classified as a: A. current liability. B. long-term asset. C. current asset. D. long-term liability.

Accessibility: Keyboard Navigation Block - Chapter 02 #3 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

4. Which of the following is not a primary source of capital to the firm? A. Assets B. Common stock C. Preferred stock D. Bonds

Accessibility: Keyboard Navigation Block - Chapter 02 #4 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Memory

5. The residual income of the firm belongs to: A. creditors. B. preferred shareholders. C. common shareholders. D. bondholders.

Accessibility: Keyboard Navigation Block - Chapter 02 #5 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

6. The best indication of the operational efficiency of management is: A. net income. B. earnings per share. C. earnings before interest and taxes (EBIT). D. gross profit.

Accessibility: Keyboard Navigation Block - Chapter 02 #6 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

7. Which account represents the cumulative earnings of the firm since its formation, minus dividends paid? A. Share price B. Common stock C. Retained earnings D. Accumulated amortization

Accessibility: Keyboard Navigation Block - Chapter 02 #7 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 02 #8 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #9 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

10. The major limitation of financial statements is: A. in their complexity. B. in their lack of comparability. C. in their use of historical cost accounting. D. in their lack of detail.

Accessibility: Keyboard Navigation Block - Chapter 02 #10 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #11 Difficulty: Hard Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #12 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #13 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #14 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #15 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

16. Which of the following is an outflow of cash? A. Profitable operations B. The sale of equipment C. The sale of the company's common stock D. The payment of cash dividends

Accessibility: Keyboard Navigation Block - Chapter 02 #16 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

17. Which of the following is an inflow of cash? A. Funds spent in normal business operations B. The purchase of a new factory C. The sale of the firm's bonds D. The retirement of the firm's bonds

Accessibility: Keyboard Navigation Block - Chapter 02 #17 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #18 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #19 Difficulty: Easy Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-23 Amortization (Capital Cost Allowance) as a Tax Shield Type: Concept

20. Assuming a tax rate of 30%, the after tax cost of interest expense of $200,000 is: A. $60,000. B. $140,000. C. $200,000. D. $120,000.

Accessibility: Keyboard Navigation Block - Chapter 02 #20 Difficulty: Easy Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-22 Cost of a Tax-Deductible Expense Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #21 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

22. The firm's price-earnings (P/E) ratio is not influenced by its: A. capital structure. B. earnings volatility. C. sales, profit margins, and earnings. D. Purchase of machinery.

Accessibility: Keyboard Navigation Block - Chapter 02 #22 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #23 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

24. The Balance Sheet cannot show: A. the current ratio. B. the value of common stock outstanding. C. the change in retained earnings. D. the price earnings relationship.

Accessibility: Keyboard Navigation Block - Chapter 02 #24 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #25 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

26. The Glorius VanderBuilt Denim Slacks Company has taxable income of $100,000. Assuming a 34% tax rate, what is the tax payable? A. $34,000 B. $66,000 C. $100,000 D. $12,250

Accessibility: Keyboard Navigation Block - Chapter 02 #26 Difficulty: Easy Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-19 Corporate Tax Rates Type: Concept

27. Book value of a firm: A. is usually the same as the firm's market value. B. is based on current asset costs. C. is the same as net worth. D. none of the choices are correct.

Accessibility: Keyboard Navigation Block - Chapter 02 #27 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #28 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #29 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #30 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

31. Assuming a tax rate of 40%, the after tax cost of a $200,000 dividend payment is: A. $200,000. B. $70,000. C. $130,000. D. None of the choices are correct

Accessibility: Keyboard Navigation Block - Chapter 02 #31 Difficulty: Medium Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable. Topic: 02-21 Personal Taxes Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #32 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #33 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #34 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #35 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-11 Developing an Actual Statement Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 02 #36 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #37 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #38 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

39. Reinvested funds from retained earnings theoretically belong to: A. bondholders. B. common shareholders. C. employees. D. all of the choices are correct.

Accessibility: Keyboard Navigation Block - Chapter 02 #39 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

40. For private companies, asset accounts on the balance sheet are listed in the order of: A. liquidity. B. profitability. C. size. D. importance.

Accessibility: Keyboard Navigation Block - Chapter 02 #40 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #41 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #42 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #43 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Concept

44. Common stock dividends are __________ by preferred stock dividends. A. increased B. decreased C. not effected D. Not enough information to tell

Accessibility: Keyboard Navigation Block - Chapter 02 #44 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

45. Increasing interest expense will have what effect on EBIT? A. Increase it B. Decrease it C. No effect D. Not enough information to tell

Accessibility: Keyboard Navigation Block - Chapter 02 #45 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

46. When a firm's earnings are falling more rapidly than its stock price, its P/E ratio will: A. remain the same. B. go up. C. go down. D. could go either up or down.

Accessibility: Keyboard Navigation Block - Chapter 02 #46 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

47. Net worth is equal to shareholders' equity: A. plus dividends. B. minus preferred stock. C. plus preferred stock. D. minus liabilities.

Accessibility: Keyboard Navigation Block - Chapter 02 #47 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

48. Net worth for an individual is the same as _____ for a corporation. A. shareholders' equity B. capital assets minus long-term debt C. book value D. current assets minus current debt

Accessibility: Keyboard Navigation Block - Chapter 02 #48 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

49. Amortization tends to: A. increase cash flow and decrease income. B. decrease cash flow and increase income. C. affect only cash flow. D. affect only income.

Accessibility: Keyboard Navigation Block - Chapter 02 #49 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

50. Accrual based accounting results in income and cash flow being: A. the same. B. different. C. equal except for amortization. D. equal except for dividends.

Accessibility: Keyboard Navigation Block - Chapter 02 #50 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #51 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

52. A balance sheet valuation measure is: A. earnings per share. B. the P/E ratio. C. the dividend yield. D. market value to book value.

Accessibility: Keyboard Navigation Block - Chapter 02 #52 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

53. Preferred share dividends ________ earnings available to common shareholders. A. increase B. decrease C. due not effect D. not enough information to tell

Accessibility: Keyboard Navigation Block - Chapter 02 #53 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

54. Which of the following is not subtracted to arrive at operating profit? A. Interest expense B. Cost of goods sold C. Amortization D. Selling and administration expense

Accessibility: Keyboard Navigation Block - Chapter 02 #54 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

55. Given the following what is free cash flow?

A. $115,000 B. $235,000 C. $150,000 D. $140,000

Block - Chapter 02 #55 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Concept

56. All of the following would be included in Cash Flows from Investing, except: A. investments in Plant. B. merchandise Purchases. C. purchases of Investments. D. sale of Long-Term Investments.

Accessibility: Keyboard Navigation Block - Chapter 02 #56 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-13 Determining Cash Flows from Investing Activities Type: Concept

57. An item that must be paid within one year or one operating cycle of the firm is classified as a: A. current liability. B. long-term asset. C. current asset. D. None of the choices are correct.

Accessibility: Keyboard Navigation Block - Chapter 02 #57 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #58 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 02 #59 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #60 Difficulty: Easy Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-23 Amortization (Capital Cost Allowance) as a Tax Shield Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

61. Assuming a tax rate of 30%, the after tax cost of interest expense of $400,000 is: A. $120,000. B. $280,000. C. $400,000. D. $240,000.

Accessibility: Keyboard Navigation Block - Chapter 02 #61 Difficulty: Easy Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-22 Cost of a Tax-Deductible Expense Type: Concept

62. The income statement is the primary financial statement for measuring the profitability of a firm over a period of time. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #62 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

63. The income statement measures the increase in the assets of a firm over a period of time. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #63 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

64. Accounting income is based on verifiably completed transactions. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #64 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

65. For private companies, asset accounts are listed in order of their liquidity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #65 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

66. Book value per share and market value per share are usually the same dollar amount. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #66 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

67. Book value per share is of greater concern to the financial manager than market value per share. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #67 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

68. Book value is equal to net worth. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #68 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

69. Equity is a measure of the monetary contributions that have been made directly or indirectly on behalf of the shareholders of the company. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #69 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

70. Shareholders' equity is equal to liabilities plus assets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #70 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Memory

71. Shareholders' equity is equal to assets minus liabilities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #71 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Memory

72. Shareholders' equity minus preferred stock is the same thing as what is sometimes called net worth or book value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #72 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

73. The statement of cash flows helps measure how the changes in a balance sheet are financed between two time periods. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #73 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

74. An increase in an asset represents a source of funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #74 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

75. Accumulated amortization shows up in the income statement. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #75 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

76. The change in accumulated amortization is usually equal to the amortization expense charged in the income statement. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #76 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

77. Net working capital is the difference between current assets and current liabilities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #77 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Memory

78. Amortization is an accounting entry and does not involve a cash expense. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #78 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

79. An advantage of the net working capital approach over the cash approach is that it looks at the changes of every account of the statement of cash flows. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #79 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

80. Cash flow is equal to earnings before taxes minus amortization. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #80 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

81. The corporate tax rate is 25% on the first $200,000 of income and 50% on any amount over $200,000. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #81 Difficulty: Medium Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-19 Corporate Tax Rates Type: Memory

82. Interest expense is deductible before taxes and therefore has an after tax cost equal to the interest paid times (1-tax rate). TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #82 Difficulty: Medium Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-23 Amortization (Capital Cost Allowance) as a Tax Shield Type: Concept

83. Preferred stock dividends are paid out before income taxes. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #83 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

84. Total assets of a firm are financed with liabilities and shareholders' equity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #84 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

85. Retained earnings shown on the balance sheet represents available cash on hand generated from prior year's earnings but not paid out in dividends. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #85 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

86. Current cost accounting adjusts financial statements by using the consumer price index. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #86 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-06 Effects of IFRS on Financial Analysis Type: Concept

87. An increase in a liability account represents a source of funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #87 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

88. The statement of cash flows includes the effects of dividends paid and amortization expense. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #88 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

89. The net working capital approach to funds flow analysis looks at the difference between total assets and total liabilities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #89 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

90. The marginal corporate tax rate for incomes over $1,000,000 is 50%. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #90 Difficulty: Easy Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-19 Corporate Tax Rates Type: Memory

91. Preferred stock is always excluded from shareholders' equity because it is a hybrid security and does not have full voting rights. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #91 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

92. Current cost accounting undervalues plant and equipment because it does not adjust for inflation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #92 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

93. The investments account includes marketable securities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #93 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

94. The investments account represents a commitment of funds of at least one year. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #94 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

95. A $125,000 credit sale could be a part of a firm's cash flow from operations if paid off within a firm's fiscal year. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #95 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

96. An increase in accounts receivable represents a reduction in cash flows from operations. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #96 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

97. An increase in accounts payable represents a reduction in cash flows from operations. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #97 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

98. The purchase of a new factory would reduce the cash flows from investing activities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #98 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-13 Determining Cash Flows from Investing Activities Type: Concept

99. The sale of corporate bonds held by the firm as a long-term investment would increase cash flows from investing activities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #99 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-14 Determining Cash Flows from Financing Activities Type: Concept

100. Paying dividends to common shareholders will not affect cash flows from financing activities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #100 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-13 Determining Cash Flows from Investing Activities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

101. It is not possible for a company with a high profit margin to have a low operating profit. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #101 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

102. Operating profit is essentially a measure of how efficient management is in generating revenues and controlling expenses. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #102 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

103. The P/E ratio provides no indication of investors' expectations about the future of a company. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #103 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

104. The real value of a firm is the same in an economic and accounting sense. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #104 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

105. A balance sheet represents the assets, liabilities, and shareholders' equity of a company at a given point in time. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #105 Difficulty: Medium Learning Objective: 02-02 Examine the limitations of the income statement as a measure of a firms profitability. Topic: 02-05 Balance Sheet Type: Concept

106. Balance sheet items are usually adjusted for inflation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #106 Difficulty: Medium Learning Objective: 02-02 Examine the limitations of the income statement as a measure of a firms profitability. Topic: 02-05 Balance Sheet Type: Concept

107. Marketable securities are temporary investments of excess cash and are carried at the lower of cost or market. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #107 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

108. Retained earnings represent the firm's cumulative earnings since inception, minus dividends and other adjustments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #108 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

109. Cash flow consists of illiquid cash equivalents which are difficult to convert to cash within 90 days. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #109 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-13 Determining Cash Flows from Investing Activities Type: Concept

110. The sale of a firm's securities is a source of funds, whereas the payment of dividends is a use of funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #110 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-14 Determining Cash Flows from Financing Activities Type: Concept

111. The use of amortization is an attempt to allocate the past and future cost of an asset over its useful life. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #111 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

112. Free cash flow is equal to cash flow from operating activities plus amortization. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #112 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

113. Free cash flow is equal to cash flow from operating activities minus necessary capital expenditures and normal dividend payments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #113 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Memory

114. Taxes on individuals have traditionally been progressive, meaning that the more taxable income you have, the higher your marginal tax rate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #114 Difficulty: Easy Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable. Topic: 02-21 Personal Taxes Type: Concept

115. The P/E ratio is strongly related to the past performance of the firm. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #115 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

116. An increase in assets represents a source of funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #116 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

117. Sales less cost of goods sold is equal to earnings before taxes. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #117 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

118. Sales less cost of goods sold is equal to gross profit. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #118 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

119. When a firm has a sharp drop off in earnings, its P/E ratio may be artificially high. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #119 Difficulty: Hard Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

120. The investments account does not directly affect cash and cash equivalents. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #120 Difficulty: Hard Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

121. Amortization expense is charged in the income statement. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #121 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

122. An increase in inventory represents a source of funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #122 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

123. The income statement allows analysts and investors to measure a firm's profitability of over a period of a month, quarter or year. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #123 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

124. Earnings available to common shareholders includes potential dividends to be paid to preferred shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #124 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #125 Difficulty: Medium Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable. Topic: 02-21 Personal Taxes Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #126 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

127. Preferred and/or Common Share dividends are added to Cash Flow from Operations in determining Free Cash Flow. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #127 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Memory

128. The sale of a firm's preferred shares is a source of funds, whereas the payment of preferred dividends is a use of funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #128 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-14 Determining Cash Flows from Financing Activities Type: Memory

129. What is an income statement and what is its purpose as it relates to financial management? The income statement • Measures the profitability of a firm over a time period (month, year) • Assists financial decision making and analysis, utilizing past patterns for predicting the timing, uncertainty, and amount of future earnings and cash flows.

Block - Chapter 02 #129 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

130. What is the P/E ratio? Why is it an important ratio? List 3 factors that influence the P/E ratio. The P/E ratio is Market share price/Earnings per share. This ratio allows comparison of the relative market value of many companies on the basis of $1 of earnings per share. Firms expected to provide greater than average future returns often have P/E ratios higher than the market average P/E ratio. As investors' expectations for future returns change, a company's P/E ratio can shift substantially. The price/earnings ratio (P/E ratio) of a firm is influenced by • Earnings and sales growth • Risk (business performance and debt-equity structure) • Dividend payment policy • Quality of management • Many other factors

Block - Chapter 02 #130 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

131. In the text, the author said that "Earnings are flexible." What was meant by this? In efforts to meet earnings targets, accountants and managers had resorted to stretching accounting standards beyond their reasonable limits. Earnings can be managed or "manipulated" because professional accounting bodies allow latitude. Accruals, such as allowance for doubtful accounts or warranty expenses, and write-downs of assets (inventories and capital) are by their nature discretionary. Margins can also be managed, by classification of "overhead" as a cost of goods rather than administrative expenses. Management has this discretion due to its experience and the need to make estimates of many of the revenues and expenses that will flow through the firm.

Block - Chapter 02 #131 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Topic: 02-02 Return on Capital Topic: 02-03 Valuation Basics from the Income Statement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

132. Several theories have been suggested about the factors contributing to the management or "manipulation" of reported earnings. List and explain them. • Bonuses (Compensation is tied to reported earnings.) • Political considerations (High reported earnings attract societal attention.) • Smoothing (Less volatile earnings are viewed favourably by the market.) • Debt covenants (Debt contracts are often based on book value calculations.) • Big bath (New CEOs will look better in the future if assets are written down as they take over, avoiding future amortization charges.)

Block - Chapter 02 #132 Difficulty: Easy Learning Objective: 02-02 Examine the limitations of the income statement as a measure of a firms profitability. Topic: 02-04 Limitations of the Income Statement Type: Concept

133. Explain these terms found on a typical balance sheet. Provide examples of each if applicable. Marketable securities, Accounts receivable, Inventory, Prepaid expenses, Investments, Plant and equipment, Accumulated amortization, Accounts payable, Notes payable, Accrued expense, Shareholders' equity. Marketable securities are temporary investments of excess cash (lower of cost or current market value). Accounts receivable include an allowance for bad debts (based on historical evidence) to suggest their anticipated collection value. Inventory may be in the form of raw material, goods in process, or finished goods. Prepaid expenses represent future expenses that have already been paid (insurance premiums, rent). Investments, unlike marketable securities, are a longer-term commitment of funds, including stocks, bonds, or investments in other corporations (often for acquisition). Plant and equipment is identified as original cost minus accumulated amortization. Accumulated amortization is the sum of all past and present amortization charges on currently owned assets, whereas amortization expense is the current year's charge. Accounts payable represent amounts owed on open account to suppliers. Notes payable are generally short-term signed obligations to the banker or other creditors. Accrued expense is an obligation incurred but payment has not yet occurred (additional wages for services provided and owed workers). Shareholders' equity represents the total contribution and ownership interest of preferred and common shareholders.

Block - Chapter 02 #133 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

134. List and describe the limitations of the balance sheet. The values on the balance sheet are often subject to interpretation or revaluation. •Values are stated on a historical or original cost basis, not market values (some assets may be worth considerably more than their original cost or may require many times the original cost for replacement). • Accounting policy choice, which should be disclosed in the financial notes, will influence the recorded values. • Contingent liabilities omitted from the balance sheet, or items such as intangibles that are included, may have a hard-to-determine influence on economic value. Contingent liabilities should be disclosed in footnotes on the balance sheet, alerting us to their possible impact.

Block - Chapter 02 #134 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Memory

135. What is a cash flow statement? What information can it provide? Why is a cash flow statement important to small business? The cash flow statement reports changes in cash and cash equivalents (rather than working capital) resulting from the activities of the firm during a given period. For many internal and external users of a firm's financial information, cash flow information is critical. The cash flow statement allows an analyst to identify • Cash flow generated from the firm's assets • Financial obligations (interest and dividends) • Commitment to new assets The statement of cash flows can highlight • The relative build up in short-term and long-term assets • The means of financing used to support any growth in the firm's asset base • The appropriateness and the future implications of the financing used The cash flow statements for the small business are particularly important, as cash flow is more relevant to the firm's short-term survival than its reported income. One is likely to be concerned about the quality, timing, and amount of earnings, and hence the firm's ability to acquire assets and meet its obligations. In the very competitive corporate environment of today exacting cash flow analysis is essential for a firm's survival.

Block - Chapter 02 #135 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

136. List the 3 primary sections on the cash flow statement. These sections are: 1. Operating activities 2. Investing activities 3. Financing activities

Block - Chapter 02 #136 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept Type: Memory

137. Describe and briefly explain the steps used in the indirect method to compute cash flows from typical operating activities of a company. We follow these procedures to compute cash flows from operating activities using the indirect method. • Start with net income. • Recognize that noncash deductions in computing net income should be added back to net income to increase the cash balance. These include such items as amortization, deferred income taxes, restructuring charges, and foreign exchange losses. This produces cash flow from operations. • Next identify changes in noncash working capital. • Recognize that increases in current assets are a use of funds and reduce the cash balance (indirectly)—as an example, the firm spends more funds on inventory. • Recognize that decreases in current assets are a source of funds and increase the cash balance (indirectly)— that is, the firm reduces funds tied up in inventory. • Recognize that increases in current liabilities are a source of funds and increase the cash balance (indirectly)—that is, the firm gets more funds from creditors. • Recognize that decreases in current liabilities are a use of funds and decrease the cash balance (indirectly)— that is, the firm pays off creditors.

Block - Chapter 02 #137 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

138. Define free cash flow. Explain what it is equal to and why it is important a finance manager needs to know the value of free cash flow. Free cash flow is equal to: Cash flow from operating activities Minus: Capital expenditures (required to maintain the productive capacity of the firm) Minus: Dividends (needed to maintain the necessary payout on common stock and to cover any preferred stock obligation) The concept of free cash flow forces the stock analyst or banker not only to consider how much cash is generated from operating activities, but also to subtract out the necessary capital expenditures on plant and equipment to maintain normal activities. Similarly, dividend payments to shareholders must be subtracted out, as these dividends must generally be paid to keep shareholders satisfied. The balance, free cash flow, is then available for special financial activities. In the last decade, special financing activities have often been synonymous with leveraged buyouts, in which a firm borrows money to buy its stock and take itself private with the hope of restructuring its balance sheet and perhaps going public again in a few years at a higher price than it paid. The analyst or banker normally looks at free cash flow to determine whether there are sufficient excess funds to pay back loans associated with special financial activities.

Block - Chapter 02 #138 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Concept

139. What causes the after tax cash flow to the individuals to vary? The after tax cash flow to the individual varies depending on whether investment income is in the form of interest, dividends, or capital gain. (Highest to lowest marginal tax rate.)

Block - Chapter 02 #139 Difficulty: Easy Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable. Topic: 02-21 Personal Taxes Type: Memory

140. What is a tax savings? A tax savings is the reduction of taxes otherwise payable as a result of an allowable deduction of an expense from taxable income.

Block - Chapter 02 #140 Difficulty: Easy Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable. Topic: 02-21 Personal Taxes Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

141. Valley Home Improvements (VHI) earned $350,000 after taxes in its most recent fiscal year. If VHI's Board of Directors declared a total of $45,000 in preferred dividends what would be the total amount available to pay common shareholders? Earnings Available to Common Shareholders (EAT) = Earnings After Taxes - Preferred Dividends EAT = $350,000 - $45,000 = $305,000

Block - Chapter 02 #141 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Memory

P/E = 2 times For every $1 earned by TBF you would be paying $2 in price.

Block - Chapter 02 #142 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Memory

143. Jane is considering an investment in Fauna Flowers (FF). FF is trading at $33 a share. It the company's current dividend is $1.50 a share, what is FF's dividend yield?

Dividend Yield = ($1.50/$33) × 100 = 4.55%

Block - Chapter 02 #143 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Before Tax Interest Expense = $846,154

Block - Chapter 02 #144 Difficulty: Medium Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-22 Cost of a Tax-Deductible Expense Type: Concept

BV per Share = $265,000/37,000 = $7.16

Block - Chapter 02 #145 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

146. The following is the December 31, 2014 balance sheet for the Epics Corporation.

Block - Chapter 02 #146 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-01 Income Statement Topic: 02-02 Return on Capital Topic: 02-03 Valuation Basics from the Income Statement Topic: 02-22 Cost of a Tax-Deductible Expense Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

C) The 2015 value for retained earnings would decrease by $100,000. In addition, assets would have to decrease by $100,000 or other liabilities would have to increase by the same amount.

Foundations of Financial Management - 10th Canadian Edition by Block Block - Chapter 02 #147 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-01 Income Statement Topic: 02-02 Return on Capital Topic: 02-03 Valuation Basics from the Income Statement Topic: 02-11 Developing an Actual Statement Topic: 02-12 Determining Cash Flows from Operating Activities Topic: 02-13 Determining Cash Flows from Investing Activities Topic: 02-14 Determining Cash Flows from Financing Activities Topic: 02-15 Combining the Three Sections of the Statement Type: Concept

148. Calculate the tax bill for a corporation that earned $250,000 in 2015 in Manitoba as a manufacturer.

Block - Chapter 02 #148 Difficulty: Medium Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-19 Corporate Tax Rates Type: Concept

Block - Chapter 02 #149 Difficulty: Medium Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-20 Effective Tax Rate Examples Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 02 #150 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-01 Income Statement Topic: 02-02 Return on Capital Topic: 02-03 Valuation Basics from the Income Statement Topic: 02-20 Effective Tax Rate Examples Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Foundations of Financial Management - 10th Canadian Edition by Block Block - Chapter 02 #151 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-11 Developing an Actual Statement Topic: 02-12 Determining Cash Flows from Operating Activities Topic: 02-13 Determining Cash Flows from Investing Activities Topic: 02-14 Determining Cash Flows from Financing Activities Topic: 02-15 Combining the Three Sections of the Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 02 Summary Category

# of Questions

Accessibility: Keyboard Navigation

127

Block - Chapter 02

151

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 02-01 Prepare and analyze the four basic financial statements.

Learning Objective: 02-02 Examine the limitations of the income statement as a measure of a firms profitability.

Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position.

Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows.

Learning Objective: 0205 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis.

Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow.

Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable.

Learning Objective: 02-08 Explain the concept of tax savings for companies.

Topic: 02-01 Income Statement

Topic: 02-02 Return on Capital

Topic: 02-03 Valuation Basics from the Income Statement

Topic: 02-04 Limitations of the Income Statement

Topic: 02-05 Balance Sheet

Topic: 02-06 Effects of IFRS on Financial Analysis

Topic: 02-07 Interpretation of Balance Sheet Items

Topic: 02-08 Valuation Basics from the Balance Sheet

Topic: 02-09 Limitations of the Balance Sheet

Topic: 02-10 Statement of Cash Flows

Topic: 02-11 Developing an Actual Statement

Topic: 02-12 Determining Cash Flows from Operating Activities

Topic: 02-13 Determining Cash Flows from Investing Activities

Topic: 02-14 Determining Cash Flows from Financing Activities

Topic: 02-15 Combining the Three Sections of the Statement

Topic: 02-16 Amortization and Cash Flow

Topic: 02-17 Free Cash Flow

Topic: 02-19 Corporate Tax Rates

Topic: 02-20 Effective Tax Rate Examples

Topic: 02-21 Personal Taxes

Topic: 02-22 Cost of a Tax-Deductible Expense

Topic: 02-23 Amortization (Capital Cost Allowance) as a Tax Shield

Type: Concept

121

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 03 1. Ratio analysis is not useful for: A. historical trend analysis within a firm. B. comparison of ratios within a single industry. C. measuring the effects of financing. D. measuring employee satisfaction.

2. Industries most sensitive to inflation-induced profits are those with: A. seasonal products. B. cyclical products. C. consumer products. D. high-profit products.

3. The ______________ method of inventory costing is most likely to lead to inflation-induced profits. A. FIFO B. Specific item C. Weighted average D. Lower of cost or market

4. In addition to comparison with industry ratios, it is also helpful to analyze ratios using: A. ethical behaviour. B. comparison of industry benchmarks. C. focus groups. D. trend analysis.

5. In examining the liquidity ratios, the primary emphasis is the firm's: A. ability to effectively employ its resources. B. overall debt position. C. ability to pay short-term obligations on time. D. ability to earn an adequate return.

Foundations of Financial Management - 10th Canadian Edition by Block

6. Which of the following is not an asset utilization ratio? A. Inventory turnover B. Return on assets C. Capital asset turnover D. Average collection period

7. Which two ratios are used in the DuPont system to create return on assets? A. Return on assets and asset turnover B. Profit margin and asset turnover C. Return on total capital and the profit margin D. Inventory turnover and return on capital assets

8. Total asset turnover indicates the firm's: A. liquidity. B. debt position. C. ability to use its assets to generate sales. D. profitability.

9. A short-term creditor would be most interested in: A. profitability ratios. B. asset utilization ratios. C. liquidity ratios. D. debt utilization ratios.

10. If a firm has both interest expense and lease payments: A. times interest earned will be smaller than fixed charge coverage. B. times interest earned will be greater than fixed charge coverage. C. times interest earned will be the same as fixed charge coverage. D. fixed charge coverage cannot be computed.

11. ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,285,000. What is the balance in accounts receivable at year-end? (Use 365 days in a year.) A. $54,750 B. $109,500 C. $540,000 D. $547,500

Foundations of Financial Management - 10th Canadian Edition by Block

12. A firm has operating profit of $120,000 after deducting lease payments of $20,000. Interest expense is $40,000. What is the firm's fixed charge coverage? A. 6.00x B. 4.00x C. 3.50x D. 2.33x

13. A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are $900,000. The firm's capital asset turnover is: A. 3.0x. B. 12.0x. C. 2.4x. D. 5.0x.

14. Asset utilization ratios: A. relate the balance sheet assets to the income statement sales. B. measure how much cash is available for reinvestment into current assets. C. are most important to shareholders. D. measures the firm's ability to generate a profit on sales.

15. Which of the following is a potential problem of utilizing ratio analysis? A. Trends and industry averages are futuristic in nature B. Financial data is identical due to price-level changes C. Firms within an industry use similar accounting principles and application D. Firms within an industry may not use similar accounting methods

16. Replacement cost accounting (current cost method) will usually: A. increase assets, decrease net income before taxes, and lower the return on equity. B. increase assets, increase net income before taxes, and increase the return on equity. C. decrease assets, increase net income before taxes, and increase the return on equity. D. increase assets, increase net income before taxes, and lower the return on equity.

17. Income can be distorted by factors other than inflation. The most important causes of distortion for interindustry comparisons are: A. accounting trends. B. application of IFRS. C. timing of revenue receipts and nonrecurring gains or losses. D. cash reinvestment.

Foundations of Financial Management - 10th Canadian Edition by Block

18. Disinflation may cause: A. an increase in the value of gold, silver, and gems. B. a reduced required return demanded by investors on financial assets. C. increased return demanded by investors on non-financial assets. D. additional profits through rising inventory costs.

19. A quick ratio much smaller than the current ratio reflects: A. a small portion of current assets is in inventory. B. a large portion of current assets is in inventory. C. that the firm will have a high inventory turnover. D. that the firm will have a high return on assets.

20. During inflation, replacement cost accounting will: A. decrease the value of assets. B. raise the debt to asset ratio. C. increase incomes. D. reduce incomes.

21. A firm's long term assets = $75,000, total assets = $200,000, inventory = $25,000 and current liabilities = $50,000. Calculate the current ratio and quick ratio. A. Current ratio = 0.5; Quick ratio = 1.5 B. Current ratio = 1.0; Quick ratio = 2.0 C. Current ratio = 1.5; Quick ratio = 2.0 D. Current ratio = 2.5; Quick ratio = 2.0

22. The Bubba Corp. had net income before taxes of $200,000 and sales of $2,000,000. If it is in the 50% tax bracket its after tax profit margin is: A. 5% B. 12% C. 20% D. 25%

23. XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. What was the sales figure for the year? A. $60,000 B. $6,000,000 C. $7,200,000 D. $6,600,000

Foundations of Financial Management - 10th Canadian Edition by Block

24. A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The shareholders' equity is $900,000. What is the total debt to asset ratio? A. 45% B. 40% C. 55% D. 100%

25. A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is: A. 60% B. 15% C. 30% D. not enough information.

26. A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000. Calculate return on equity. A. 60% B. 20% C. 26% D. Not enough information

27. If government bonds pay 8.5% interest and CDIC insured savings accounts pay 5.5% interest, shareholders in a moderately risky firm would expect return-on-equity values of: A. 5.5%. B. 8.5%. C. 12.0%. D. above 8.5%, but the exact amount is uncertain.

28. The most rigorous test of a firm's ability to pay its short-term obligations is its: A. current ratio. B. quick ratio. C. debt-to-assets ratio. D. times-interest-earned ratio.

Foundations of Financial Management - 10th Canadian Edition by Block

29. Investors and financial analysts wanting to evaluate the operating efficiency of a firm's, managers would probably look primarily at the firm's: A. debt utilization ratios. B. liquidity ratios. C. asset utilization ratios. D. profitability ratios.

30. The higher a firm's debt utilization ratios, excluding debt-to-total assets, the: A. less risky the firm's financial position. B. more risky the firm's financial position. C. more easily the firm will be able to pay dividends. D. less easily the firm will be able to pay dividends.

31. For a given level of profitability as measured by profit margin, the firm's return on equity will: A. increase as its debt-to-assets ratio decreases. B. decrease as its current ratio increases. C. increase as its debt-to assets ratio increases. D. decrease as its times-interest-earned ratio decreases.

32. Which of the following is not considered to be a profitability ratio? A. Profit margin B. Times interest earned C. Return on equity D. Return on assets (investment)

33. Which industry places the most value on intangible assets? A. Professional services B. Manufacturing industry C. Production facility D. Assembly facility

Foundations of Financial Management - 10th Canadian Edition by Block

34. Using the DuPont method, return on assets (investment) for Megaframe Computer is approximately: A. 15%. B. 25%. C. 29%. D. 20%.

Foundations of Financial Management - 10th Canadian Edition by Block

35. The firm's average collection period is: (Use 365 days in a year.) A. 31 days. B. 25 days. C. 12 days. D. 20 days.

36. Times interest earned for Megaframe Computer is: A. 2x. B. 5x. C. 4x. D. 10x.

37. Megaframe's quick ratio is: A. 1:1. B. 1:2. C. 1.6:1. D. 3:1.

38. Megaframe's current ratio is: A. 1.9:1. B. 0.6:1. C. 1:1. D. 0.86:1.

39. Megaframe's debt to asset ratio is: A. 56.1%. B. 75.61%. C. 80.49%. D. 90.62%

40. What is Megaframe Computer's total asset turnover? A. 3.68x. B. 3.18x. C. 2.00x. D. 1.71x.

Foundations of Financial Management - 10th Canadian Edition by Block

41. Compute Megaframe's after tax profit margin. A. 10.0% B. 14.29% C. 11.43% D. 46.34%

42. Megaframe's return on equity is: A. 44.44%. B. 80.00%. C. 50.05%. D. 100.0%.

43. Megaframe's receivable turnover is: A. 4.4x. B. 10x. C. 11.67x. D. 14.4x.

44. If a company's accounts receivable turnover is increasing, the average collection period: A. is going up slightly. B. is going down. C. could be moving in either direction. D. is going up by a significant amount.

45. An increasing average collection period indicates: A. the firm is generating more income. B. accounts receivable is going down. C. the company is becoming more efficient in its collection policy. D. the company is becoming less efficient in its collection policy.

46. A decreasing average collection period could be associated with: A. increasing sales. B. decreasing sales. C. increasing accounts receivable. D. increasing profits.

Foundations of Financial Management - 10th Canadian Edition by Block

47. Disinflation as compared to inflation would normally be good for investments in: A. bonds. B. gold. C. collectible antiques. D. text books.

48. A non-Canadian company experiencing rapid price increases for its product would take the most conservative approach by using: A. FIFO accounting. B. LIFO accounting. C. average cost accounting. D. weighted average.

49. Historical cost based amortization tends to ________ immediately when there is inflation. A. lower taxes B. decrease profits C. increase profits D. increase assets

50. What happens if lease payments are reduced? A. Times interest earned goes up. B. Fixed charge coverage goes up. C. Fixed charge coverage stays the same. D. Fixed charge coverage goes down.

51. A large extraordinary loss has what effect on cost of goods sold? A. It raises it. B. It lowers it. C. It has no effect. D. Need more information.

52. If accounts receivable stays the same, and credit sales go up: A. the average collection period will go up. B. the average collection period will go down. C. accounts receivable turnover will decrease. D. no changes will occur.

Foundations of Financial Management - 10th Canadian Edition by Block

53. Which of the following is a profitability ratio? A. Quick ratio B. Return on assets C. Inventory turnover D. Capital asset turnover

54. Which of the following is an asset utilization ratio? A. Profit margin B. Inventory turnover C. Return on equity D. Return on assets

55. Which of the following is not a debt utilization ratio? A. Debt to total assets B. Times interest earned C. Current ratio D. Fixed charge coverage

56. According the DuPont system, which of the following is not a factor in achieving a satisfactory return on assets? A. Use of debt B. Low inventory levels C. Rapid turnover of assets D. High profit margins

57. A firm has current assets of $150,000 and total assets of $750,000. The firm's sales are $1,800,000. The firm's capital asset turnover is: A. 3.0x B. 12.0x C. 2.4x D. 5.0x

58. Return on assets (ROA) can be distorted by: A. current liabilities. B. noncurrent liabilities. C. bond principle payments. D. bond interest payments.

Foundations of Financial Management - 10th Canadian Edition by Block

59. In examining the debt utilization ratios, the primary purpose is to measure: A. ability to effectively employ its resources. B. overall debt position. C. ability to pay short-term obligations on time. D. ability to generate timely cash flows.

60. What do coverage ratios demonstrate? A. How a firm is expected to handle current asset balances. B. Debt management of the firm and ability to meet financial obligations. C. Profit margin of the firm. D. The return on assets of the firm.

61. Flounders Co. has an average collection period of 60 days. Total credit sales for the year were $9,855,000. What is the balance in accounts receivable at year-end? (Use 365 days in a year.) A. $164,250 B. $328,500 C. $1,620,000 D. $1,642,500

62. A firm has operating profit of $200,000 after deducting lease payments of $40,000. Interest expense is $60,000. What is the firm's fixed charge coverage? A. 5.00x B. 4.00x C. 3.33x D. 2.40x

63. A firm's long term assets = $150,000, total assets = $400,000, inventory = $50,000, and current liabilities = $100,000. Calculate the current ratio and quick ratio. A. Current ratio = 0.5; Quick ratio = 1.5 B. Current ratio = 1.0; Quick ratio = 2.0 C. Current ratio = 1.5; Quick ratio = 2.0 D. Current ratio = 2.5; Quick ratio = 2.0

64. If the company's accounts receivable turnover is decreasing, the average collection period: A. is going up. B. is going down. C. could be moving in either direction. D. is going down slightly.

Foundations of Financial Management - 10th Canadian Edition by Block

65. A decreasing average collection period indicates: A. the firm is generating more income. B. accounts receivable is going up. C. the company is becoming more efficient in its collection policy. D. the company is becoming less efficient in its collection policy.

66. An increasing average collection period could be associated with: A. decreasing average daily cash sales. B. increasing average daily credit sales. C. decreasing accounts receivable. D. increasing accounts receivable.

67. A firm has a Debt-to-Asset ratio of 35% and Total Assets of $350,000. What is the firm's Total Debt? A. $122,500 B. $650,000 C. $100,000 D. $60,000

68. Juniper, Ltd. report total sales of $10,000,000 in the prior year. If these sales were 15.50X total capital assets what was the company's capital asset position in the year? A. $15,000,000 B. $155,000,000 C. $645,161 D. $6,451,613

69. Jones and Co., reported average receivables of $550,000 in its most recent annual report. If total credit sales were $3,000,000 what was Jones and Co.'s average collection period? (Use 365 days in a year.) A. 67 days B. 29 days C. 82 days D. 21 days

70. If a company's profit margin was 32%, what were its reported sales if its reported net income was $650,000? A. $10,000,000 B. $9,758,982 C. $1,008,332 D. $2,031,250

Foundations of Financial Management - 10th Canadian Edition by Block

71. If a company has a return on investment of 17%, and its equity multiplier is 1.75, its ROE would be _______? A. 64.75% B. 29.75% C. 18.25% D. 16.50%

72. Absolute values taken from financial statements are more useful than relative values. True False

73. Heavy use of long-term debt can be of benefit to a firm. True False

74. The stock market tends to move up when inflation goes up. True False

75. Under International Financial Reporting Standards, two companies with identical operating results may not report identical net incomes. True False

76. A current ratio of 2 to 1 is always acceptable, for a company in any industry. True False

77. In analyzing ratios, the age of the firm's assets need not be considered. True False

78. As long as prices continue to rise faster than costs in an inflationary environment, reported profits will generally continue to rise. True False

79. To compute the quick ratio, accounts receivable are not included in current assets. True False

Foundations of Financial Management - 10th Canadian Edition by Block

80. Ratios are used to compare different firms in the same industry. True False

81. Liquidity ratios indicate how fast a firm can generate cash to pay bills. True False

82. Asset utilization ratios describe how capital is being utilized to buy assets. True False

83. Return on equity will be higher than return on assets if there is debt in the capital structure. True False

84. The DuPont system of profitability analysis emphasizes that profit generated by assets can be derived by various combinations of profit margins and asset turnover. True False

85. Ratios are not distorted by inflation. True False

86. Profitability ratios are distorted by inflation because profits are stated in current dollars and assets and equity are stated in historical dollars. True False

87. Higher debt utilization ratios will always increase a firm's return on equity given a positive return on assets. True False

88. The term "inventory profits" refers to profits made in the process of selling finished goods at prices higher than their cost of goods sold. True False

Foundations of Financial Management - 10th Canadian Edition by Block

89. Profitability ratios allow one to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital. True False

90. Asset utilization ratios measure the returns on various assets such as return on total assets. True False

91. A banker or trade creditor is most concerned about a firm's profitability ratios. True False

92. Ratios are only useful for those areas of business that involve investment decisions. True False

93. LIFO inventory pricing does a better job than FIFO in equating current costs with current revenue. True False

94. Financial ratios are used to weigh and evaluate the operational performance of the firm. True False

95. FIFO will cause inflated profits during deflation. True False

96. Fiercely competitive industries such as the computer industry have had lower profit margins and return on equity in recent years even though they are under extreme pressure to maintain high profitability. True False

97. Asset utilization ratios relate balance sheet assets to income statement sales. True False

Foundations of Financial Management - 10th Canadian Edition by Block

98. A firm with heavy long-term debt can benefit during inflationary times, as debt can be repaid with "cheaper" dollars. True False

99. During disinflation, stock prices tend to go up because the investor's required rate of return goes down. True False

100. Analysts agree that extraordinary gains/losses should be excluded from ratio analysis because they are onetime events, and do not measure annual operating performance. True False

101. Return on equity for a very risky firm should be higher than return on equity for a less risky firm. True False

102. The current ratio is a more severe test of a firm's liquidity than the quick ratio. True False

103. Asset utilization ratios can be used to measure the effectiveness of a firm's managers. True False

104. FIFO inventory valuation is responsible for much of the inventory profits caused by inflation. True False

105. Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset base and earning power. True False

106. Satisfactory return on assets may be achieved through high profit margins or rapid turnover of assets, but not a combination of both. True False

Foundations of Financial Management - 10th Canadian Edition by Block

107. Intangible assets are becoming an important part of the assets in company financial statements because accountants are recognizing the growing impact of brand names. True False

108. Industries most sensitive to inflation-induced profits are those with cyclical products such as lumber, copper, etc. True False

109. The use of capital assets will affect the equity multiplier. True False

110. Receivables turnover is the reciprocal of the collection period times 365. True False

111. Return on equity (ROE) will not change if the firm increases its use of debt. True False

112. Big Bath Accounting is the tendency of firms to write off significant portions of assets during "troubled" times with the effect of allowing management to start over when times get better. True False

113. "Big baths" are usually taken after a corporate reorganization. True False

114. Accrual accounting can result in wide variations in operating result within an industry. True False

115. FIFO is a system that includes inventory into cost of goods sold in which the items purchased first are written off first. True False

Foundations of Financial Management - 10th Canadian Edition by Block

116. What are the 3 main uses of financial ratios?

117. Return on equity (ROE) indicates a return to the owners of the firm and is closely followed by investment analysts. What 4 deficiencies does this ratio have?

118. As defined by the text, list each of the 3 profitability ratios and explain the information they provide about a firm.

119. As defined by the text, list each of the 8 asset utilization ratios and explain the information they provide about a firm.

120. As defined by the text, list each of the 2 liquidity ratios and explain the information they provide about a firm.

Foundations of Financial Management - 10th Canadian Edition by Block

121. As defined by the text, list each of the 3 debt utilization ratios and explain the information they provide about a firm.

122. Complete the following balance sheet for the Range Company using the following information: Debt to Assets = 60% Quick Ratio = 1.1 Asset Turnover = 5x Capital Asset Turnover = 12.037x Current Ratio = 2 Average Collection Period = 17.0708 days

Assume all sales are on credit.

Foundations of Financial Management - 10th Canadian Edition by Block

123. Given the balance sheet and income statement for Simmons Maintenance Company, compute the ratios below. The "right answer" refers to the question of whether a particular ratio for Simmons is better or worse than the industry average.

Foundations of Financial Management - 10th Canadian Edition by Block

124. Follies Bookstore, the only bookstore close to campus, had net income in 2015 of $90,000. Here are some of the financial ratios from the annual report.

Using these ratios, calculate the following for Follies Bookstore: A) Sales B) Total assets C) Total asset turnover D) Total debt E) Shareholders' equity F) Return on equity

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 03 Key

1. Ratio analysis is not useful for: A. historical trend analysis within a firm. B. comparison of ratios within a single industry. C. measuring the effects of financing. D. measuring employee satisfaction.

Accessibility: Keyboard Navigation Block - Chapter 03 #1 Difficulty: Easy Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-04 The Analysis Type: Concept

2. Industries most sensitive to inflation-induced profits are those with: A. seasonal products. B. cyclical products. C. consumer products. D. high-profit products.

Accessibility: Keyboard Navigation Block - Chapter 03 #2 Difficulty: Easy Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-09 Disinflation Effect Type: Memory

3. The ______________ method of inventory costing is most likely to lead to inflation-induced profits. A. FIFO B. Specific item C. Weighted average D. Lower of cost or market

Accessibility: Keyboard Navigation Block - Chapter 03 #3 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-08 Inflationary Impact Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

4. In addition to comparison with industry ratios, it is also helpful to analyze ratios using: A. ethical behaviour. B. comparison of industry benchmarks. C. focus groups. D. trend analysis.

Accessibility: Keyboard Navigation Block - Chapter 03 #4 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #5 Difficulty: Medium Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-03 Classification System Type: Concept

6. Which of the following is not an asset utilization ratio? A. Inventory turnover B. Return on assets C. Capital asset turnover D. Average collection period

Accessibility: Keyboard Navigation Block - Chapter 03 #6 Difficulty: Medium Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-03 Classification System Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #7 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Topic: 03-05 DuPont Analysis Type: Concept

8. Total asset turnover indicates the firm's: A. liquidity. B. debt position. C. ability to use its assets to generate sales. D. profitability.

Accessibility: Keyboard Navigation Block - Chapter 03 #8 Difficulty: Easy Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Topic: 03-05 DuPont Analysis Type: Memory

9. A short-term creditor would be most interested in: A. profitability ratios. B. asset utilization ratios. C. liquidity ratios. D. debt utilization ratios.

Accessibility: Keyboard Navigation Block - Chapter 03 #9 Difficulty: Medium Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-03 Classification System Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #10 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #11 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

12. A firm has operating profit of $120,000 after deducting lease payments of $20,000. Interest expense is $40,000. What is the firm's fixed charge coverage? A. 6.00x B. 4.00x C. 3.50x D. 2.33x

Accessibility: Keyboard Navigation Block - Chapter 03 #12 Difficulty: Hard Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

13. A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are $900,000. The firm's capital asset turnover is: A. 3.0x. B. 12.0x. C. 2.4x. D. 5.0x.

Accessibility: Keyboard Navigation Block - Chapter 03 #13 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #14 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #15 Difficulty: Medium Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-04 The Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #16 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-08 Inflationary Impact Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #17 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-07 Distortion in Financial Reporting Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #18 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-09 Disinflation Effect Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #19 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

20. During inflation, replacement cost accounting will: A. decrease the value of assets. B. raise the debt to asset ratio. C. increase incomes. D. reduce incomes.

Accessibility: Keyboard Navigation Block - Chapter 03 #20 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-08 Inflationary Impact Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #21 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

22. The Bubba Corp. had net income before taxes of $200,000 and sales of $2,000,000. If it is in the 50% tax bracket its after tax profit margin is: A. 5% B. 12% C. 20% D. 25%

Accessibility: Keyboard Navigation Block - Chapter 03 #22 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

23. XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. What was the sales figure for the year? A. $60,000 B. $6,000,000 C. $7,200,000 D. $6,600,000

Accessibility: Keyboard Navigation Block - Chapter 03 #23 Difficulty: Hard Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

24. A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The shareholders' equity is $900,000. What is the total debt to asset ratio? A. 45% B. 40% C. 55% D. 100%

Accessibility: Keyboard Navigation Block - Chapter 03 #24 Difficulty: Hard Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

25. A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is: A. 60% B. 15% C. 30% D. not enough information.

Accessibility: Keyboard Navigation Block - Chapter 03 #25 Difficulty: Hard Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

26. A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000. Calculate return on equity. A. 60% B. 20% C. 26% D. Not enough information

Accessibility: Keyboard Navigation Block - Chapter 03 #26 Difficulty: Hard Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #27 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

28. The most rigorous test of a firm's ability to pay its short-term obligations is its: A. current ratio. B. quick ratio. C. debt-to-assets ratio. D. times-interest-earned ratio.

Accessibility: Keyboard Navigation Block - Chapter 03 #28 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #29 Difficulty: Medium Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-03 Classification System Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #30 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #31 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

32. Which of the following is not considered to be a profitability ratio? A. Profit margin B. Times interest earned C. Return on equity D. Return on assets (investment)

Accessibility: Keyboard Navigation Block - Chapter 03 #32 Difficulty: Medium Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-04 The Analysis Type: Concept

33. Which industry places the most value on intangible assets? A. Professional services B. Manufacturing industry C. Production facility D. Assembly facility

Accessibility: Keyboard Navigation Block - Chapter 03 #33 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 03

Foundations of Financial Management - 10th Canadian Edition by Block

34. Using the DuPont method, return on assets (investment) for Megaframe Computer is approximately: A. 15%. B. 25%. C. 29%. D. 20%.

Block - Chapter 03 #34 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

35. The firm's average collection period is: (Use 365 days in a year.) A. 31 days. B. 25 days. C. 12 days. D. 20 days.

Block - Chapter 03 #35 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

36. Times interest earned for Megaframe Computer is: A. 2x. B. 5x. C. 4x. D. 10x.

Block - Chapter 03 #36 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

37. Megaframe's quick ratio is: A. 1:1. B. 1:2. C. 1.6:1. D. 3:1.

Block - Chapter 03 #37 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

38. Megaframe's current ratio is: A. 1.9:1. B. 0.6:1. C. 1:1. D. 0.86:1.

Block - Chapter 03 #38 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

39. Megaframe's debt to asset ratio is: A. 56.1%. B. 75.61%. C. 80.49%. D. 90.62%

Block - Chapter 03 #39 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

40. What is Megaframe Computer's total asset turnover? A. 3.68x. B. 3.18x. C. 2.00x. D. 1.71x.

Block - Chapter 03 #40 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

41. Compute Megaframe's after tax profit margin. A. 10.0% B. 14.29% C. 11.43% D. 46.34%

Block - Chapter 03 #41 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

42. Megaframe's return on equity is: A. 44.44%. B. 80.00%. C. 50.05%. D. 100.0%.

Block - Chapter 03 #42 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

43. Megaframe's receivable turnover is: A. 4.4x. B. 10x. C. 11.67x. D. 14.4x.

Block - Chapter 03 #43 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #44 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #45 Difficulty: Easy Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

46. A decreasing average collection period could be associated with: A. increasing sales. B. decreasing sales. C. increasing accounts receivable. D. increasing profits.

Accessibility: Keyboard Navigation Block - Chapter 03 #46 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

47. Disinflation as compared to inflation would normally be good for investments in: A. bonds. B. gold. C. collectible antiques. D. text books.

Accessibility: Keyboard Navigation Block - Chapter 03 #47 Difficulty: Easy Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-10 Valuation Basics with Changing Prices Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #48 Difficulty: Easy Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-11 Accounting Discretion Type: Concept

49. Historical cost based amortization tends to ________ immediately when there is inflation. A. lower taxes B. decrease profits C. increase profits D. increase assets

Accessibility: Keyboard Navigation Block - Chapter 03 #49 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-07 Distortion in Financial Reporting Type: Concept

50. What happens if lease payments are reduced? A. Times interest earned goes up. B. Fixed charge coverage goes up. C. Fixed charge coverage stays the same. D. Fixed charge coverage goes down.

Accessibility: Keyboard Navigation Block - Chapter 03 #50 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

51. A large extraordinary loss has what effect on cost of goods sold? A. It raises it. B. It lowers it. C. It has no effect. D. Need more information.

Accessibility: Keyboard Navigation Block - Chapter 03 #51 Difficulty: Easy Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-11 Accounting Discretion Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #52 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

53. Which of the following is a profitability ratio? A. Quick ratio B. Return on assets C. Inventory turnover D. Capital asset turnover

Accessibility: Keyboard Navigation Block - Chapter 03 #53 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

54. Which of the following is an asset utilization ratio? A. Profit margin B. Inventory turnover C. Return on equity D. Return on assets

Accessibility: Keyboard Navigation Block - Chapter 03 #54 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Memory

55. Which of the following is not a debt utilization ratio? A. Debt to total assets B. Times interest earned C. Current ratio D. Fixed charge coverage

Accessibility: Keyboard Navigation Block - Chapter 03 #55 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 03 #56 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

57. A firm has current assets of $150,000 and total assets of $750,000. The firm's sales are $1,800,000. The firm's capital asset turnover is: A. 3.0x B. 12.0x C. 2.4x D. 5.0x

Accessibility: Keyboard Navigation Block - Chapter 03 #57 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

58. Return on assets (ROA) can be distorted by: A. current liabilities. B. noncurrent liabilities. C. bond principle payments. D. bond interest payments.

Accessibility: Keyboard Navigation Block - Chapter 03 #58 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #59 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #60 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #61 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

62. A firm has operating profit of $200,000 after deducting lease payments of $40,000. Interest expense is $60,000. What is the firm's fixed charge coverage? A. 5.00x B. 4.00x C. 3.33x D. 2.40x

Accessibility: Keyboard Navigation Block - Chapter 03 #62 Difficulty: Hard Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #63 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

64. If the company's accounts receivable turnover is decreasing, the average collection period: A. is going up. B. is going down. C. could be moving in either direction. D. is going down slightly.

Accessibility: Keyboard Navigation Block - Chapter 03 #64 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #65 Difficulty: Easy Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #66 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

67. A firm has a Debt-to-Asset ratio of 35% and Total Assets of $350,000. What is the firm's Total Debt? A. $122,500 B. $650,000 C. $100,000 D. $60,000

Accessibility: Keyboard Navigation Block - Chapter 03 #67 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 03 #68 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #69 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

70. If a company's profit margin was 32%, what were its reported sales if its reported net income was $650,000? A. $10,000,000 B. $9,758,982 C. $1,008,332 D. $2,031,250

Accessibility: Keyboard Navigation Block - Chapter 03 #70 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

71. If a company has a return on investment of 17%, and its equity multiplier is 1.75, its ROE would be _______? A. 64.75% B. 29.75% C. 18.25% D. 16.50%

Accessibility: Keyboard Navigation Block - Chapter 03 #71 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

72. Absolute values taken from financial statements are more useful than relative values. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #72 Difficulty: Easy Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-04 The Analysis Type: Concept

73. Heavy use of long-term debt can be of benefit to a firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #73 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

74. The stock market tends to move up when inflation goes up. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #74 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-08 Inflationary Impact Type: Concept

75. Under International Financial Reporting Standards, two companies with identical operating results may not report identical net incomes. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #75 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

76. A current ratio of 2 to 1 is always acceptable, for a company in any industry. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #76 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

77. In analyzing ratios, the age of the firm's assets need not be considered. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #77 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

78. As long as prices continue to rise faster than costs in an inflationary environment, reported profits will generally continue to rise. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #78 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-08 Inflationary Impact Type: Concept

79. To compute the quick ratio, accounts receivable are not included in current assets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #79 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

80. Ratios are used to compare different firms in the same industry. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #80 Difficulty: Easy Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

81. Liquidity ratios indicate how fast a firm can generate cash to pay bills. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #81 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Memory

82. Asset utilization ratios describe how capital is being utilized to buy assets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #82 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

83. Return on equity will be higher than return on assets if there is debt in the capital structure. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #83 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

84. The DuPont system of profitability analysis emphasizes that profit generated by assets can be derived by various combinations of profit margins and asset turnover. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #84 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

85. Ratios are not distorted by inflation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #85 Difficulty: Easy Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-08 Inflationary Impact Type: Concept

86. Profitability ratios are distorted by inflation because profits are stated in current dollars and assets and equity are stated in historical dollars. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #86 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-08 Inflationary Impact Type: Concept

87. Higher debt utilization ratios will always increase a firm's return on equity given a positive return on assets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #87 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

88. The term "inventory profits" refers to profits made in the process of selling finished goods at prices higher than their cost of goods sold. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #88 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-08 Inflationary Impact Type: Concept

89. Profitability ratios allow one to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #89 Difficulty: Medium Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-02 Ratios for Comparative Purposes Type: Concept

90. Asset utilization ratios measure the returns on various assets such as return on total assets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #90 Difficulty: Medium Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-02 Ratios for Comparative Purposes Type: Concept

91. A banker or trade creditor is most concerned about a firm's profitability ratios. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #91 Difficulty: Medium Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-03 Classification System Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

92. Ratios are only useful for those areas of business that involve investment decisions. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #92 Difficulty: Easy Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-02 Ratios for Comparative Purposes Type: Concept

93. LIFO inventory pricing does a better job than FIFO in equating current costs with current revenue. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #93 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-11 Accounting Discretion Type: Concept

94. Financial ratios are used to weigh and evaluate the operational performance of the firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #94 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-11 Accounting Discretion Type: Concept

95. FIFO will cause inflated profits during deflation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #95 Difficulty: Hard Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-11 Accounting Discretion Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 03 #96 Difficulty: Easy Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-04 The Analysis Type: Concept

97. Asset utilization ratios relate balance sheet assets to income statement sales. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #97 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

98. A firm with heavy long-term debt can benefit during inflationary times, as debt can be repaid with "cheaper" dollars. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #98 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-08 Inflationary Impact Type: Concept

99. During disinflation, stock prices tend to go up because the investor's required rate of return goes down. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #99 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-09 Disinflation Effect Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

100. Analysts agree that extraordinary gains/losses should be excluded from ratio analysis because they are onetime events, and do not measure annual operating performance. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #100 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-11 Accounting Discretion Type: Concept

101. Return on equity for a very risky firm should be higher than return on equity for a less risky firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #101 Difficulty: Medium Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

102. The current ratio is a more severe test of a firm's liquidity than the quick ratio. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #102 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

103. Asset utilization ratios can be used to measure the effectiveness of a firm's managers. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #103 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

104. FIFO inventory valuation is responsible for much of the inventory profits caused by inflation. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #104 Difficulty: Medium Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-08 Inflationary Impact Type: Concept

105. Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset base and earning power. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #105 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

106. Satisfactory return on assets may be achieved through high profit margins or rapid turnover of assets, but not a combination of both. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #106 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

107. Intangible assets are becoming an important part of the assets in company financial statements because accountants are recognizing the growing impact of brand names. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #107 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

108. Industries most sensitive to inflation-induced profits are those with cyclical products such as lumber, copper, etc. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #108 Difficulty: Easy Learning Objective: 03-03 Examine the ratios in comparison to industry averages. Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis. Topic: 03-06 Interpretation of Ratios by Trend Analysis Type: Concept

109. The use of capital assets will affect the equity multiplier. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #109 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

110. Receivables turnover is the reciprocal of the collection period times 365. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #110 Difficulty: Easy Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Memory

111. Return on equity (ROE) will not change if the firm increases its use of debt. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #111 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

112. Big Bath Accounting is the tendency of firms to write off significant portions of assets during "troubled" times with the effect of allowing management to start over when times get better. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #112 Difficulty: Easy Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-11 Accounting Discretion Type: Concept

113. "Big baths" are usually taken after a corporate reorganization. FALSE

Accessibility: Keyboard Navigation Block - Chapter 03 #113 Difficulty: Easy Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-11 Accounting Discretion Type: Concept

114. Accrual accounting can result in wide variations in operating result within an industry. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #114 Difficulty: Easy Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-11 Accounting Discretion Type: Concept

115. FIFO is a system that includes inventory into cost of goods sold in which the items purchased first are written off first. TRUE

Accessibility: Keyboard Navigation Block - Chapter 03 #115 Difficulty: Easy Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results. Learning Objective: 03-06 Identify sources of distortion in reported income. Topic: 03-11 Accounting Discretion Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

116. What are the 3 main uses of financial ratios? Financial ratios are used to • Weigh and evaluate the operating performance of the firm now and for its past • Judge comparative performance between firms • Determine relative as opposed to absolute performance

Block - Chapter 03 #116 Difficulty: Easy Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-01 Ratio Analysis Type: Memory

117. Return on equity (ROE) indicates a return to the owners of the firm and is closely followed by investment analysts. What 4 deficiencies does this ratio have? Focuses on past results not future expected results • Does not focus on share price, the goal of the firm • Relies on book value and not the actual market value of the investment • Doesn't capture the firm's assumed risk to generate earnings

Block - Chapter 03 #117 Difficulty: Medium Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-01 Ratio Analysis Type: Memory

118. As defined by the text, list each of the 3 profitability ratios and explain the information they provide about a firm. Profitability ratios: Profit margin, return on assets (investment), return on equity (common shareholders) Profitability ratios measure return (profit) on sales, total assets, and shareholders' capital • Examine the effective employment of resources • Are usually dependent on an adequate sales level • Influence share price performance, and thus are important to equity investors and security analysts

Block - Chapter 03 #118 Difficulty: Hard Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-03 Classification System Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

119. As defined by the text, list each of the 8 asset utilization ratios and explain the information they provide about a firm. Asset utilization ratios: Receivable turnover, average collection period (days sales outstanding), inventory turnover, inventory holding period, accounts payable turnover, accounts payable period, capital asset turnover, total asset turnover • Measure the speed or efficiency of turning over assets constructing the cash conversion cycle • Identify the times per year inventory is sold, the accounts receivable collected, or the productivity of capital assets in generating sales • Are a primary responsibility of management

Block - Chapter 03 #119 Difficulty: Hard Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-03 Classification System Type: Memory

120. As defined by the text, list each of the 2 liquidity ratios and explain the information they provide about a firm. Current ratio, quick ratio • Emphasize the ability to pay off short-term obligations as they fall due • Quickly impact day-to-day operations • Focus bankers and creditors on the ability to generate timely cash flows

Block - Chapter 03 #120 Difficulty: Hard Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-03 Classification System Type: Memory

121. As defined by the text, list each of the 3 debt utilization ratios and explain the information they provide about a firm. Debt utilization ratios. Debt to total assets, times interest earned, fixed charge coverage • Evaluate the overall debt position of the firm in light of the asset base and earning power • Are examined by debt holders in light of security behind debt obligations

Block - Chapter 03 #121 Difficulty: Hard Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization. Topic: 03-03 Classification System Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Assume all sales are on credit.

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 03 #122 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

CALCULATIONS

Block - Chapter 03 #123 Difficulty: Hard Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

124. Follies Bookstore, the only bookstore close to campus, had net income in 2015 of $90,000. Here are some of the financial ratios from the annual report.

Using these ratios, calculate the following for Follies Bookstore: A) Sales B) Total assets C) Total asset turnover D) Total debt E) Shareholders' equity F) Return on equity

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 03 #124 Difficulty: Medium Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis. Topic: 03-05 DuPont Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 03 Summary Category

# of Questions

Accessibility: Keyboard Navigation

105

Block - Chapter 03

125

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 03-01 Calculate 13 financial ratios that measure profitability; asset utilization; liquidity; and debt utilization.

Learning Objective: 03-02 Assess a companys source of profitability using the DuPont system of analysis.

Learning Objective: 03-03 Examine the ratios in comparison to industry averages.

Learning Objective: 03-04 Examine the ratios and company performance by means of trend analysis.

Learning Objective: 03-05 Interpret ratios and identify corrective action for abnormal results.

Learning Objective: 03-06 Identify sources of distortion in reported income.

Topic: 03-01 Ratio Analysis

Topic: 03-02 Ratios for Comparative Purposes

Topic: 03-03 Classification System

Topic: 03-04 The Analysis

Topic: 03-05 DuPont Analysis

Topic: 03-06 Interpretation of Ratios by Trend Analysis

Topic: 03-07 Distortion in Financial Reporting

Topic: 03-08 Inflationary Impact

Topic: 03-09 Disinflation Effect

Topic: 03-10 Valuation Basics with Changing Prices

Topic: 03-11 Accounting Discretion

Type: Concept

109

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 04 1. In using a systems approach to financial planning, it is not necessary to develop a: A. pro forma income statement. B. cash budget. C. pro forma balance sheet. D. contingent liability plan.

2. The key initial element in developing pro forma statements is: A. a cash budget. B. an income statement. C. a sales forecast. D. a collections schedule.

3. Ideally, sales projections should be derived from: A. an external viewpoint. B. an internal viewpoint. C. both internal and external viewpoints. D. the marketing department.

4. Required production during a planning period will depend on the: A. cost of beginning inventory of products. B. credit sales during the period. C. desired level of beginning inventory. D. desired level of ending inventory.

5. A firm has forecasted sales of $4,000 in January, $6,000 in February, and $5,500 in March. All sales are on credit. 40% is collected the month of sale and the remainder the following month. How much is collected from accounts receivable in February? A. $5,400 B. $4,800 C. $6,000 D. $3,000

Foundations of Financial Management - 10th Canadian Edition by Block

6. A firm has forecasted sales of $3,000 in April, $4,500 in May, and $6,500 in June. All sales are on credit. 30% is collected the month of sale and the remainder the following month. What will be the balance in accounts receivable at the end of June? A. $1,950 B. $6,500 C. $4,550 D. $5,100

7. XYZ Co. has forecasted June sales of 600 units and July sales of 1000 units. The company maintains ending inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's required production? A. 1,100 units B. -0- units C. 500 units D. 400 units

8. In the construction of the cash payments schedule, the major cash payment is generally: A. the general and administrative expense. B. costs associated with inventory manufactured. C. interest and dividends. D. payments for new plant and equipment.

9. A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)? A. $9,000 B. $8,000 C. $7,700 D. $8,100

10. A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the value of the ending inventory using FIFO? A. $2,750 B. $3,000 C. $3,300 D. $2,550

Foundations of Financial Management - 10th Canadian Edition by Block

11. The difference between total receipts and total payments is referred to as: A. cumulative cash flow. B. beginning cash flow. C. net cash flow. D. cash balance.

12. The percent-of-sales method of financial forecasting: A. is more detailed than a cash budget approach. B. requires more time than a cash budget approach. C. assumes that balance sheet accounts maintain a constant relationship to sales. D. provides a month-to-month breakdown of data.

13. In the percent-of-sales method: A. as the dividend payout ratio goes up, the required new funds also rise. B. as the dividend payout ratio rises, required new funds decline. C. the dividend payout ratio does not affect new funds. D. a change to the ex-dividend date causes the required new funds to change.

14. In forecasting a firm's cash needs for some future period: A. the percent-of-sales method is a detailed approach. B. cash budgets are less exact than the percent-of-sales method. C. a cash budget approach cannot deal effectively with both level and seasonal production schedules. D. a cash budget approach can deal effectively with both level and seasonal production schedules.

15. When using the percent-of-sales method in forecasting funds needed, which of the following is not true? A. As the dividend payout ratio decreases, the required new funds also decrease. B. Required new funds decrease as profits margins increase. C. Required new funds increase as accumulated amortization increases. D. As the tax rate increases, the required new funds increase.

16. BHS Inc. determines that sales will rise from $300,000 to $500,000 next year. Spontaneous assets are 70% of sales and spontaneous liabilities are 30% of sales. BHS has a 10% profit margin and a 40% dividend payout ratio. What is the level of required new funds? A. $50,000 B. $20,000 C. $100,000 D. BHS is in balance and no new funds are needed.

Foundations of Financial Management - 10th Canadian Edition by Block

17. In developing the pro forma income statement we follow four important steps: 1) compute other expenses, 2) determine a production schedule, 3) establish a sales projection, 4) determine profit by completing the actual pro forma statement. What is the correct order for these four steps? A. 1, 2, 3, 4 B. 4, 3, 2, 1 C. 2, 1, 3, 4 D. 3, 2, 1, 4

18. In order to estimate production requirements, we: A. add beginning inventory to projected sales in units and subtract desired ending inventory. B. add projected sales in units to desired ending inventory and subtract beginning inventory. C. add beginning inventory to desired ending inventory and divide by two. D. add beginning inventory to desired ending inventory and subtract projected sales in units.

19. In general, the larger the portion of a firm's sales that are on credit, the: A. lower will be the firm's need to borrow. B. higher will be the firm's need to borrow. C. more rapidly credit sales will be paid off. D. more the firm can buy raw materials on credit.

20. Pro forma financial statements are not: A. the most comprehensive means of financial forecasting. B. often required by prospective creditors. C. projections of financial statements for a future period. D. part of the year end filing with the securities regulator.

21. The need for an increase or decrease in short-term borrowing can be predicted by: A. ratio analysis. B. trend analysis. C. a cash budget. D. an income statement.

22. A firm utilizing FIFO inventory accounting would, in calculating gross profits, assume that: A. all sales were from current production. B. all sales were from beginning inventory. C. sales were from beginning inventory until it was depleted, and then use sales from current production. D. all sales were for cash.

Foundations of Financial Management - 10th Canadian Edition by Block

23. A firm has targeted a 40% growth in sales this year. Last year's cash as a percent of sales was 15%, accounts receivable 30%, and inventory 35%. What percentage growth in current assets is required to support the growth in sales under the percent-of-sales forecasting method? A. 32% B. 26% C. 18% D. Not enough information to tell.

24. A rapid rate of growth in sales and profits may require: A. higher dividend payments to shareholders. B. increased borrowing by the firm to support the sales increase. C. the firm to be less lenient with credit customers. D. sales forecasts to be made less frequently.

25. Firms that successfully increase their rates of inventory turnover will, among other things,: A. be able to reduce their borrowing needs. B. be able to reduce their dividend payments to shareholders. C. find it more difficult to be given credit by their resource suppliers. D. have a greater need for high balances in their cash accounts.

26. In financial statements, the number of units shown in cost of goods sold as compared to the number of the units actually produced: A. is always higher. B. is always lower. C. is always the same. D. can be either higher or lower.

27. The pro forma income statement is important to the overall process of constructing pro forma statements because it allows us to determine a value for: A. change in retained earnings. B. gross profit. C. interest expense. D. prepaid expenses.

28. Net cash flow is equal to: A. income after taxes minus amortization. B. income after taxes minus dividends. C. cash receipts minus cash payments. D. cash receipts minus cash payments minus amortization.

Foundations of Financial Management - 10th Canadian Edition by Block

29. In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the: A. pro forma income statement. B. cash budget. C. prior balance sheet. D. statement of retained earnings.

30. Which of the following is most likely to increase the final number for notes payable in the pro forma balance sheet? A. Decrease in inventory. B. Increase in retained earnings. C. Decrease in accounts payable. D. Decrease in accounts receivable.

31. In the development of the pro forma financial statements, the last step in the process is the development of the: A. cash budget. B. pro forma balance sheet. C. pro forma income statement. D. capital budget.

32. In a cash budget, the cumulative cash balance is equal to: A. net cash flow minus the beginning cash balance. B. net cash flow plus the beginning cash balance. C. cumulative loan balance minus the ending cash balance. D. cumulative loan balance plus the ending cash balance.

33. In the percent-of-sales method, an increase in dividends: A. will increase required new funds. B. will decrease required new funds. C. has no effect on required new funds. D. more information is needed.

34. In the percent-of-sales method if (A/S1) and L/S1) both increase, then: A. RNF stays the same. B. RNF goes down. C. RNF goes up. D. more information is needed.

Foundations of Financial Management - 10th Canadian Edition by Block

35. In using a systems approach to financial planning, it is necessary to develop everything except: A. pro forma income statement. B. cash budget. C. pro forma balance sheet. D. a collection schedule.

36. A firm has forecasted sales of $8,000 in January, $12,000 in February, and $11,000 in March. All sales are on credit. 40% is collected the month of sale and the remainder the following month. How much is collected from accounts receivable in February? A. $10,800 B. $9,600 C. $12,000 D. $6,000

37. A firm has forecasted sales of $3,000 in April, $4,500 in May, and $12,000 in June. All sales are on credit. 30% is collected the month of sale and the remainder the following month. What will be the balance in accounts receivable at the end of June? A. $1,950 B. $6,500 C. $8,400 D. $5,100

38. ABC Co. has forecasted June sales of 600 units and July sales of 900 units. The company maintains ending inventory equal to 130% of next month's sales. June beginning inventory reflects this policy. What is June's required production? A. 990 units B. -0- units C. 1,000 units D. 800 units

39. A firm has beginning inventory of 400 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)? A. $9,000 B. $8,000 C. $7,700 D. $8,100

Foundations of Financial Management - 10th Canadian Edition by Block

40. A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 800 units, what is the value of the ending inventory using FIFO? A. $1,800 B. $3,250 C. $3,600 D. $7,800

41. BHS Inc. determines that sales will rise from $300,000 to $700,000 next year. Spontaneous assets are 70% of sales and spontaneous liabilities are 30% of sales. BHS has a 10% profit margin and a 40% dividend payout ratio. What is the level of required new funds? A. $118,000 B. $40,000 C. $70,000 D. BHS is in balance and no new funds are needed.

42. Firms that decrease their rates of inventory turnover will, among other things,: A. have to increase their borrowing needs. B. be able to reduce their dividend payments to shareholders. C. find it easier to be given credit by their resource suppliers. D. have a lesser need for high balances in their cash accounts.

43. Which of the following is most likely to decrease the final number for notes payable in the pro forma balance sheet? A. Increase in inventory. B. Decrease in retained earnings. C. Increase in accounts payable. D. Increase in accounts receivable.

44. In the development of the pro forma financial statements, the second step in the process is the development of the: A. cash budget. B. pro forma balance sheet. C. pro forma income statement. D. capital budget.

Foundations of Financial Management - 10th Canadian Edition by Block

45. In the percent-of-sales method, a decrease in dividends: A. will increase required new funds. B. will decrease required new funds. C. has no effect on required new funds. D. more information is needed.

46. If the actual December 31st A/R balance was $12,000; projected sales in March are $50,000; 70% of sales are on credit; 60% of credit sales are collected in the month of sale and 40% are collected in the month after the sale, what is the projected A/R balance on the pro forma balance sheet for the end of March? A. $26,000 B. $14,000 C. $20,000 D. $35,000

47. If projected net cash flow for November is ($10,000); beginning cash balance is $4,000; minimum cash balance is $3,000; beginning loan balance is $8,000, what will be the cumulative loan balance at the end of November? A. $14,000 B. $5,000 C. $17,000 D. $22,000

48. If projected net cash flow for January is ($6,500); beginning cash balance is $16,000; minimum cash balance is $5,000; beginning loan balance is $4,500, what will be the cash balance on the pro forma cash budget at the end of January? A. $5,000 B. $10,000 C. $12,000 D. $4,500

49. An increase in sales and/or profits means there is also an increase in cash on the balance sheet. True False

50. An increase in sales and profits generates the necessary cash required for economic growth. True False

Foundations of Financial Management - 10th Canadian Edition by Block

51. Profit is generally adequate to finance significant growth. True False

52. Growth in sales volume precludes a shortage of funds. True False

53. The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding. True False

54. The primary purpose of the cash budget is to plan accounts payable payments. True False

55. Pro forma income statements follow a sales forecast and production plan. True False

56. Pro forma statements are generally prepared six months to a year into the future. True False

57. Internal analysis for sales projections involves examining economic and industry conditions. True False

58. Companies generally prefer to maintain some minimum cash balance. True False

59. The main consideration in constructing the pro forma income statement is the costs specifically associated with the units sold during the period. True False

60. The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold. True False

Foundations of Financial Management - 10th Canadian Edition by Block

61. If inventory turnover is equal to 3, that means that the company keeps a three-month supply of inventory on hand. True False

62. Level production schedules usually have the advantage of reducing overall production costs. True False

63. The percent-of-sales method for financial forecasting assumes that balance sheet accounts maintain a constant relationship to sales. True False

64. The percent-of-sales forecast is likely to be most accurate when used with cyclical companies. True False

65. As the dividend payout ratio declines more external funds are required. True False

66. The percent-of-sales method would be more accurate under a steady sales assumption than cyclical sales. True False

67. A cash budget is unnecessary under level production since we know how much will be produced every month. True False

68. It is helpful to break down the income statement into smaller monthly periods to enable evaluation of seasonal patterns of cash inflows and outflows. True False

69. When sales volume varies from month to month it is not advisable to use level production. True False

Foundations of Financial Management - 10th Canadian Edition by Block

70. Pro forma income statements and balance sheets refer to projected financial statements. True False

71. A pro forma balance sheet needs data from the prior balance sheet, pro forma income statement and the cash budget. True False

72. When a financial manager calculates production requirements they add Projected Sales to desired ending inventory then subtract beginning inventory. True False

73. The process of preparing a cash budget requires the financial manager translate the pro forma income statement into cash flows. True False

74. The primary purpose of the cash budget is to forecast income. True False

75. A firm's cash borrowing needs can be reduced if its inventory turnover rate can be increased. True False

76. An increase in sales accompanied by an increase in accounts payable will reduce the amount of new external funds required. True False

77. A lower dividend payout ratio will decrease the firm's need for borrowing. True False

78. Lower profit margins resulting from increased competition would mean a lower need for external funds. True False

Foundations of Financial Management - 10th Canadian Edition by Block

79. A higher growth rate in sales will require more external funds. True False

80. The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due. True False

81. Sales projections and the ability to accurately predict the future have a large impact on cash flow targets. True False

82. Pro forma income statements anticipate sales, expenses, income and cost of goods sold. True False

83. Strategic planning and the financial planning process usually involve 4 steps. List in order and briefly describe these 4 steps.

84. Without realistic financial forecasts, the small business in particular will likely experience which 4 problems?

85. What are the 4 steps in developing a pro forma income statement?

Foundations of Financial Management - 10th Canadian Edition by Block

86. Explain how to best derive a sales projection.

88. The following is the balance sheet for 2015 for Marbell Inc.

Sales for 2015 were $500,000. Sales for 2016 have been projected to increase by 10%. Assuming that Marbell Inc. is operating below capacity, calculate the amount of new funds required to finance this growth. Marbell has an 8% return on sales and 80% is paid out as dividends.

Foundations of Financial Management - 10th Canadian Edition by Block

89. The Amber Magic Shoppe has forecast its sales revenues and purchases for the last 5 months of 200x to be as follows:

65% of sales are on credit. On the basis of past experience, 50% of the accounts receivable are collected the month after the sale and the remainder are collected 2 months after the sale. Purchases are paid 30 days after they are incurred. The firm had a cash balance of $5,000 as of September 30th, and its minimum required cash balance is $4,000. It had no beginning loan balance. Prepare a cash budget for October, November and December.

90. Ellis Sport Shop projects the following sales:

Ninety percent of Ellis' sales are on credit with 60 percent of receivables collected in the month after the sale and the rest of receivables collected in the second month after the sale. February sales were $60,000 and March sales were $70,000. In the past Ellis' bad debt percentage has been 0 and this rate is expected to continue. A) Prepare a monthly schedule of cash receipts for April-June. B) What is the balance of Receivables at the end of June?

Foundations of Financial Management - 10th Canadian Edition by Block

91. Eddie's Bar and Restaurant Supplies expects its revenues and payments for the first part of the year to be:

Seventy percent of the firm's sales are on credit. Past experience shows that 40 percent of accounts receivable are collected in the month after sale, and the remainder are collected in the second month after sale. Prepare a schedule of cash receipts for March, April, and May. Eddie's pays its payments in the following month. Eddie's had a cash balance of $2,000 on March 1, which is also its minimum required cash balance. There is an outstanding loan of $2,000 on March 1. Prepare a cash budget for March, April, and May.

92. Frank's Sporting Goods projects sales for the second quarter of 2015 to be as follows: April $100,000 May $120,000 June $110,000 Ten percent of Frank's sales are for cash, 70% of accounts receivable are collected one month following the sale, and the rest are collected two months following the sale. January sales were $40,000, February sales were $60,000, and March sales were $80,000. A) Prepare a monthly schedule of cash receipts for the second quarter of 2015. B) What is the balance in accounts receivable at the end of June?

Foundations of Financial Management - 10th Canadian Edition by Block

93. During 2015, Baker Company and Baumer Company made the following identical purchases: 100 units @ $10.00 200 units @ $10.50 200 units @ $11.50 100 units @ $12.00 Each company sold 400 units, but Baker uses LIFO inventory valuation and Baumer uses FIFO inventory valuation. Assume there was no beginning inventory. Calculate cost of goods sold and ending inventory for each company. How will the difference in cost of goods sold affect net income?

94. The Amber Magick Shoppe has forecast its sales revenues and purchases for the last 5 months of 2005 to be as follows:

Sixty percent of sales are on credit. On the basis of past experience, 50% of the accounts receivable are collected the month after the sale and the remainder are collected 2 months after the sale. Purchases are paid 30 days after they are incurred. The firm has a cash balance of $5,000 on hand as of October 31, but its minimum required cash balance is $4,000 A) Prepare a schedule of cash receipts for October, November, and December. B) Prepare a cash budget for the same period.

Foundations of Financial Management - 10th Canadian Edition by Block

95. The following is the balance sheet for 2015 for Marbell Inc.

Sales for 2015 were $300,000. Sales for 2016 have been projected to increase by 20%. Assuming that Marbell Inc. is operating below capacity, calculate the amount of new funds required to finance this growth. Marbell has an 8% return on sales and 70% is paid out as dividends.

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 04 Key

1. In using a systems approach to financial planning, it is not necessary to develop a: A. pro forma income statement. B. cash budget. C. pro forma balance sheet. D. contingent liability plan.

Accessibility: Keyboard Navigation Block - Chapter 04 #1 Difficulty: Easy Learning Objective: 04-02 Prepare the four financial statements for forecasting—the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet. Topic: 04-02 Constructing Pro Forma Statements Type: Memory

2. The key initial element in developing pro forma statements is: A. a cash budget. B. an income statement. C. a sales forecast. D. a collections schedule.

Accessibility: Keyboard Navigation Block - Chapter 04 #2 Difficulty: Easy Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-03 Pro Forma Income Statement Type: Concept

3. Ideally, sales projections should be derived from: A. an external viewpoint. B. an internal viewpoint. C. both internal and external viewpoints. D. the marketing department.

Accessibility: Keyboard Navigation Block - Chapter 04 #3 Difficulty: Easy Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-03 Pro Forma Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #4 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #5 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-09 Cash Receipts Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #6 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-09 Cash Receipts Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #7 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #8 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-10 Cash Payments Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #9 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #10 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

11. The difference between total receipts and total payments is referred to as: A. cumulative cash flow. B. beginning cash flow. C. net cash flow. D. cash balance.

Accessibility: Keyboard Navigation Block - Chapter 04 #11 Difficulty: Easy Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #12 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #13 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #14 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #15 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #16 Difficulty: Hard Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #17 Difficulty: Easy Learning Objective: 04-02 Prepare the four financial statements for forecasting—the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet. Topic: 04-03 Pro Forma Income Statement Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #18 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #19 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-14 Analysis of Pro Forma Statement Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #20 Difficulty: Medium Learning Objective: 04-02 Prepare the four financial statements for forecasting—the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet. Topic: 04-02 Constructing Pro Forma Statements Type: Concept

21. The need for an increase or decrease in short-term borrowing can be predicted by: A. ratio analysis. B. trend analysis. C. a cash budget. D. an income statement.

Accessibility: Keyboard Navigation Block - Chapter 04 #21 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #22 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-03 Pro Forma Income Statement Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #23 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #24 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #25 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #26 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #27 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-07 Actual Pro Forma Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #28 Difficulty: Easy Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #29 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #30 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-12 Pro Forma Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #31 Difficulty: Easy Learning Objective: 04-02 Prepare the four financial statements for forecasting—the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet. Topic: 04-02 Constructing Pro Forma Statements Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #32 Difficulty: Hard Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 04 #33 Difficulty: Easy Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

34. In the percent-of-sales method if (A/S1) and L/S1) both increase, then: A. RNF stays the same. B. RNF goes down. C. RNF goes up. D. more information is needed.

Accessibility: Keyboard Navigation Block - Chapter 04 #34 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #35 Difficulty: Easy Learning Objective: 04-02 Prepare the four financial statements for forecasting—the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet. Topic: 04-02 Constructing Pro Forma Statements Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 04 #36 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #37 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #38 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #39 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #40 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #41 Difficulty: Hard Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #42 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 04 #43 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #44 Difficulty: Easy Learning Objective: 04-02 Prepare the four financial statements for forecasting—the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet. Topic: 04-02 Constructing Pro Forma Statements Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 04 #45 Difficulty: Easy Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 04 #46 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-13 Explanation of Pro Forma Balance Sheet Type: Concept

Block - Chapter 04 #47 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 04 #48 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Concept

49. An increase in sales and/or profits means there is also an increase in cash on the balance sheet. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #49 Difficulty: Easy Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Concept

50. An increase in sales and profits generates the necessary cash required for economic growth. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #50 Difficulty: Easy Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

51. Profit is generally adequate to finance significant growth. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #51 Difficulty: Easy Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-14 Analysis of Pro Forma Statement Type: Concept

52. Growth in sales volume precludes a shortage of funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #52 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

53. The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #53 Difficulty: Easy Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

54. The primary purpose of the cash budget is to plan accounts payable payments. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #54 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

55. Pro forma income statements follow a sales forecast and production plan. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #55 Difficulty: Easy Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-03 Pro Forma Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

56. Pro forma statements are generally prepared six months to a year into the future. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #56 Difficulty: Easy Learning Objective: 04-02 Prepare the four financial statements for forecasting—the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet. Topic: 04-02 Constructing Pro Forma Statements Type: Memory

57. Internal analysis for sales projections involves examining economic and industry conditions. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #57 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-03 Pro Forma Income Statement Type: Concept

58. Companies generally prefer to maintain some minimum cash balance. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #58 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Concept

59. The main consideration in constructing the pro forma income statement is the costs specifically associated with the units sold during the period. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #59 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-03 Pro Forma Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

60. The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #60 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-06 Other Expense Items Type: Concept

61. If inventory turnover is equal to 3, that means that the company keeps a three-month supply of inventory on hand. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #61 Difficulty: Easy Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

62. Level production schedules usually have the advantage of reducing overall production costs. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #62 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

63. The percent-of-sales method for financial forecasting assumes that balance sheet accounts maintain a constant relationship to sales. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #63 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

64. The percent-of-sales forecast is likely to be most accurate when used with cyclical companies. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #64 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

65. As the dividend payout ratio declines more external funds are required. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #65 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

66. The percent-of-sales method would be more accurate under a steady sales assumption than cyclical sales. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #66 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

67. A cash budget is unnecessary under level production since we know how much will be produced every month. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #67 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

68. It is helpful to break down the income statement into smaller monthly periods to enable evaluation of seasonal patterns of cash inflows and outflows. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #68 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

69. When sales volume varies from month to month it is not advisable to use level production. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #69 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-10 Cash Payments Type: Concept

70. Pro forma income statements and balance sheets refer to projected financial statements. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #70 Difficulty: Easy Learning Objective: 04-02 Prepare the four financial statements for forecasting—the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet. Topic: 04-02 Constructing Pro Forma Statements Type: Concept

71. A pro forma balance sheet needs data from the prior balance sheet, pro forma income statement and the cash budget. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #71 Difficulty: Easy Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-12 Pro Forma Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

72. When a financial manager calculates production requirements they add Projected Sales to desired ending inventory then subtract beginning inventory. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #72 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

73. The process of preparing a cash budget requires the financial manager translate the pro forma income statement into cash flows. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #73 Difficulty: Easy Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

74. The primary purpose of the cash budget is to forecast income. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #74 Difficulty: Easy Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

75. A firm's cash borrowing needs can be reduced if its inventory turnover rate can be increased. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #75 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

76. An increase in sales accompanied by an increase in accounts payable will reduce the amount of new external funds required. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #76 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

77. A lower dividend payout ratio will decrease the firm's need for borrowing. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #77 Difficulty: Easy Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

78. Lower profit margins resulting from increased competition would mean a lower need for external funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #78 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

79. A higher growth rate in sales will require more external funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #79 Difficulty: Easy Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

80. The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due. FALSE

Accessibility: Keyboard Navigation Block - Chapter 04 #80 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

81. Sales projections and the ability to accurately predict the future have a large impact on cash flow targets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #81 Difficulty: Easy Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-03 Pro Forma Income Statement Type: Memory

82. Pro forma income statements anticipate sales, expenses, income and cost of goods sold. TRUE

Accessibility: Keyboard Navigation Block - Chapter 04 #82 Difficulty: Easy Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-03 Pro Forma Income Statement Type: Memory

83. Strategic planning and the financial planning process usually involve 4 steps. List in order and briefly describe these 4 steps. • Thinking. Consideration of the firm's current businesses, as well as its challenges and opportunities. Careful collection of data and analysis is required. • Decisions. Key directions, strategic resource commitments, and business models evolve. Finance should play an important role evaluating alternatives by modelling asset values and risk with long-term objectives. • Planning. Priorities, objectives, and outcomes are established. Financial plans and budgets are developed with short-term objectives. • Performance. Work plans and monitoring.

Block - Chapter 04 #83 Difficulty: Medium Learning Objective: 04-01 Explain why financial forecasting is essential for the healthy growth of the firm. Topic: 04-01 The Financial Planning Process Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

84. Without realistic financial forecasts, the small business in particular will likely experience which 4 problems? • Have liquidity problems • Demonstrate poor management planning and control measures • Have difficulty securing business loans • Face possible business failure

Block - Chapter 04 #84 Difficulty: Medium Learning Objective: 04-02 Prepare the four financial statements for forecasting—the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet. Topic: 04-02 Constructing Pro Forma Statements Type: Memory

85. What are the 4 steps in developing a pro forma income statement? 1. Establish a sales projection. 2. Determine a production schedule and the associated use of new material, direct labour, and overhead to arrive at gross profit. 3. Compute other expenses. 4. Determine profit by completing the actual pro forma statement.

Block - Chapter 04 #85 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-03 Pro Forma Income Statement Type: Memory

86. Explain how to best derive a sales projection. Sales projections are best derived from both an external and an internal viewpoint. Using the former, we analyze our prospective sales in light of economic conditions affecting our industry and our company. Statistical techniques such as regression and time series analysis may be employed in the process. Internal analysis calls for the sales department to survey our own salespeople within their territories. Ideally, we would proceed along each of those paths in isolation of the other and then assimilate the results into one meaningful projection.

Block - Chapter 04 #86 Difficulty: Hard Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-03 Pro Forma Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

87. The cost of oil is very important in projecting manufacturing, transportation, and production costs of a company. How would you propose reducing reliance on variable oil prices to improve financial forecasting? Answers will vary but could include seeking alternative sources (natural gas, propane, solar, geothermal, hybrid vehicles), long-term oil price contracts, hedging funds for future oil purchases.

Block - Chapter 04 #87 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-09 Cash Receipts Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

88. The following is the balance sheet for 2015 for Marbell Inc.

Increased sales = 10% (500,000) = $50,000 New Sales level = 500,000 + 50,000 = $550,000

Block - Chapter 04 #88 Difficulty: Hard Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

89. The Amber Magic Shoppe has forecast its sales revenues and purchases for the last 5 months of 200x to be as follows:

Block - Chapter 04 #89 Difficulty: Hard Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-09 Cash Receipts Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

90. Ellis Sport Shop projects the following sales:

B) Receivables End of June:

Block - Chapter 04 #90 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-09 Cash Receipts Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

91. Eddie's Bar and Restaurant Supplies expects its revenues and payments for the first part of the year to be:

Block - Chapter 04 #91 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-11 Actual Budget Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

B) Accounts receivable at end of June:

Block - Chapter 04 #92 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-09 Cash Receipts Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Lower cost of goods sold under FIFO generates a higher gross margin and net income, other things being equal.

Block - Chapter 04 #93 Difficulty: Medium Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis. Topic: 04-05 Determine a Production Schedule and the Gross Profit Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

94. The Amber Magick Shoppe has forecast its sales revenues and purchases for the last 5 months of 2005 to be as follows:

Block - Chapter 04 #94 Difficulty: Medium Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements. Topic: 04-08 Cash Budget Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

95. The following is the balance sheet for 2015 for Marbell Inc.

Block - Chapter 04 #95 Difficulty: Medium Learning Objective: 04-04 Determine the need for new funding resulting from sales growth. Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR). Topic: 04-15 Percent-of-Sales Method Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 04 Summary Category

# of Que stions

Accessibility: Keyboard Navigation

Block - Chapter 04

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 04-01 Explain why financial forecasting is essential for the healthy growth of the firm.

Learning Objective: 04-02 Prepare the four financial statements for forecasting— the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet.

Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method of forecasting on a less-precise basis.

Learning Objective: 04-04 Determine the need for new funding resulting from sales growth.

Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).

Learning Objective: 04-06 Assess and consider the effects of IFRS on forecasting financial statements.

Topic: 04-01 The Financial Planning Process

Topic: 04-02 Constructing Pro Forma Statements

Topic: 04-03 Pro Forma Income Statement

Topic: 04-05 Determine a Production Schedule and the Gross Profit

Topic: 04-06 Other Expense Items

Topic: 04-07 Actual Pro Forma Income Statement

Topic: 04-08 Cash Budget

Topic: 04-09 Cash Receipts

Topic: 04-10 Cash Payments

Topic: 04-11 Actual Budget

Topic: 04-12 Pro Forma Balance Sheet

Topic: 04-13 Explanation of Pro Forma Balance Sheet

Topic: 04-14 Analysis of Pro Forma Statement

Topic: 04-15 Percent-of-Sales Method

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 05 1. The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation. A. fixed costs B. variable costs C. marginal costs D. semi-variable costs

2. In break-even analysis the contribution margin is defined as: A. sales minus variable costs. B. sales minus fixed costs. C. variable costs minus fixed costs. D. fixed costs minus variable costs.

3. At the break-even point, a firm's profits are: A. greater than zero. B. less than zero. C. equal to zero. D. not enough information to tell.

4. If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is $3.00 per unit and fixed costs are $60,000, what will the firm's net income be at sales of 30,000 units? A. $90,000 B. $30,000 C. $15,000 D. $45,000

5. If sales volume exceeds the break-even point, the firm will experience: A. an operating loss. B. an operating profit. C. an increase in plant and equipment. D. an increase in share price.

Foundations of Financial Management - 10th Canadian Edition by Block

6. The break-even point can be calculated as: A. variable costs divided by contribution margin. B. total costs divided by contribution margin. C. variable cost times contribution margin. D. fixed cost divided by contribution margin.

7. A highly automated plant would generally have: A. more variable costs than fixed costs. B. more fixed costs than variable costs. C. all fixed costs. D. all variable costs.

8. Which of the following is concerned with the change in operating profit as a result of a change in volume? A. Financial leverage B. Break-even point C. Operating leverage D. Combined leverage

9. The degree of operating leverage is computed as: A. percent change in operating profit divided by percent change in net income. B. percent change in volume divided by percent change in operating profit. C. percent change in EPS divided by percent change in operating income. D. percent change in operating income divided by percent change in volume.

10. Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true? A. A has a lower break-even point than B, but A's profit grows faster after the break-even. B. A has a higher break-even point than B, but A's profit grows slower after the break-even. C. B has a lower break-even point than A, but A's profit grows faster after the break-even. D. B has a lower break-even point than A, and profit grows the same rate for both companies after the breakeven point.

11. Firms with a high degree of operating leverage are: A. easily capable of surviving large changes in sales volume. B. usually trading off lower levels of risk for higher profits. C. significantly affected by changes in interest rates. D. trading off higher fixed costs for lower per-unit variable costs.

Foundations of Financial Management - 10th Canadian Edition by Block

12. If EBIT equals $140,000 and interest equals $21,000, with a tax rate of 31%, what is the degree of financial leverage? A. 6.67x B. 5.67x C. 3.91x D. 1.18x

13. Financial leverage is concerned with the relation between: A. changes in volume and changes in EPS. B. changes in volume and changes in EBIT. C. changes in EBIT and changes in EPS. D. changes in EBIT and changes in operating income.

14. Heavy use of long-term debt may be beneficial in an inflationary economy because: A. the debt may be repaid in more "expensive" dollars. B. nominal interest rates exceed real interest rates. C. inflation is associated with the peak of a business cycle. D. the debt may be repaid in "cheaper" dollars.

15. A conservative financing plan involves: A. heavy reliance on debt. B. heavy reliance on equity. C. high degree of financial leverage. D. high degree of combined leverage.

16. Combined leverage is concerned with the relationship between: A. changes in EBIT and changes in EPS. B. changes in volume and changes in EPS. C. changes in volume and changes in EBIT. D. changes in EBIT and changes in net income.

17. A firm would be indifferent between financing plans when: A. debt is equal to equity. B. return on assets equals return on equity. C. the cost of borrowed funds equals the return on equity. D. the cost of borrowed funds equals the return on assets.

Foundations of Financial Management - 10th Canadian Edition by Block

18. If the business cycle were just beginning its upswing, which firm would you anticipate would be likely to show the best growth in EPS over the next year? Firm A has high combined leverage and Firm B has low combined leverage. A. Firm A B. Firm B C. Indifferent between the two. D. It depends on how much financial leverage each firm has.

19. If fixed costs rise while other variables stay constant: A. the break-even point decreases. B. degree of operating leverage decreases. C. total profit increases. D. total profit decreases.

20. Under which of the following conditions could the overuse of financial leverage be detrimental to the firm? A. Stable industry. B. Cyclical demand for the firm's products. C. Upswing of business cycle. D. Low interest cost compared to return on assets.

21. Cash break-even analysis: A. is helpful in analyzing the short-term outlook of the firm, particularly when it is in trouble financially. B. is important when analyzing long-term profitability. C. includes amortization expense as a fixed cost when calculating the degree of financial leverage. D. includes the amount of liabilities.

22. The degree of operating leverage may be defined as: A. the change in operating income divided by the change in unit volume. B. Q (P + VC) divided by Q (P + VC) - FC. C. S + TVC divided by S + TVC - FC. D. S - TVC divided by S - TVC - FC.

23. Conservatively leveraged Firm C and highly leveraged Firm H operate at the same level of earnings before interest and taxes where the return on assets is greater than the cost of debt. A. Firm C will have a higher return on equity than H. B. Firm H will have a higher return on equity than C. C. The return on equity will not be affected by financial leverage. D. The return on equity will be the same at an equal level of earnings.

Foundations of Financial Management - 10th Canadian Edition by Block

24. Which of the following is not true about leverage? A. Operating leverage influences the top half of the income statement, determining EBIT. B. Financial leverage deals with the bottom half of the income statement, determining EPS. C. Combined leverage utilizes the entire income statement, showing the impact of change in volume on EBIT. D. Combined leverage utilizes the percentage change in EPS and percentage change in sales.

25. When a firm employs no debt: A. it has a financial leverage of one. B. it has a financial leverage of zero. C. its operating leverage is equal to its financial leverage. D. it will not be profitable.

26. If the price per unit decreases because of competition but the cost structure remains the same: A. the break-even point increases. B. the break-even point decreases. C. the degree of financial leverage declines. D. the degree of combined leverage declines.

27. Which of the following is true about the concept of leverage? A. At the break-even point, operating leverage is equal to zero. B. Combined leverage measures the impact of operating and financial leverage on EBIT. C. Financial leverage measures the impact of fixed costs on earnings. D. Combined leverage measures the impact of operating and financial leverage on EPS.

28. A firm's indifference point between debt and equity financing plans would occur when the: A. amount of debt used is equal to the amount of equity. B. cost of borrowing is low. C. cost of borrowed funds equals return on equity. D. current level of EBIT generates the same EPS under both plans.

Foundations of Financial Management - 10th Canadian Edition by Block

29. The Degree of Operating Leverage is: A. 1.43x. B. 1.56x. C. 3.33x. D. 2.22x.

30. The Degree of Financial Leverage is: A. 1.29x. B. 4.50x. C. 3.50x. D. 1.32x.

31. The Degree of Combined Leverage is: A. 2.1x. B. 1.9x. C. 2.9x. D. 2.0x.

Foundations of Financial Management - 10th Canadian Edition by Block

32. This firm's break-even point is: A. 4,800 units. B. 14,634 units. C. 7,142 units. D. 18,000 units.

33. The Degree of Operating Leverage (DOL) is: A. 1.58x. B. 1.95x. C. 3.50x. D. 1.40x.

34. The Degree of Financial Leverage (DFL) is: A. 3.50x. B. 1.40x. C. 1.95x. D. 1.58x.

35. The Degree of Combined Leverage (DCL) is: A. 3.08x. B. 5.45x. C. 2.73x. D. 6.83x.

36. Which of the following questions does break-even analysis not attempt to address? A. How much do changes in volume affect costs and profits? B. At what point does the firm break even? C. What is the most efficient level of capital assets to employ? D. Percentage change in earnings per share.

37. If a firm has fixed costs of $30,000, a price of $4.00, and a break-even point of 15,000 units, the variable cost per unit is: A. $5.00. B. $2.00. C. $0.50. D. $4.00.

Foundations of Financial Management - 10th Canadian Edition by Block

38. If a firm has fixed costs of $20,000, variable cost per unit of $0.50, and a break-even point of 5,000 units, the price is: A. $2.50. B. $5.00. C. $4.00. D. $4.50.

39. If a firm has a price of $4.00, variable cost per unit of $2.50, and a break-even point of 20,000 units, fixed costs are equal to: A. $13,333. B. $10,000. C. $30,000. D. $50,000.

40. Financial leverage primarily affects the _________ while operating leverage primarily affects the __________. A. left-hand side of the balance sheet; the right-hand side of the balance sheet B. right-hand side of the balance sheet; the upper part of the income statement C. lower part of the income statement; the right-hand side of the balance sheet D. the upper part of the income statement; the left-hand side of the balance sheet

41. Operating leverage primarily affects the __________ while financial leverage primarily affects the __________. A. left-hand side of the balance sheet; the lower part of the income statement B. right-hand side of the balance sheet; the upper part of the income statement C. the lower part of the income statement; the right-hand part of the balance sheet D. the upper part of the income statement; the left-hand side of the balance sheet

42. Financial leverage is determined to a large extent by the firm's: A. working capital choice. B. capital budgeting choice. C. capital structure choice. D. dividend policy choice.

43. A weakness of break-even analysis is that it assumes: A. revenue and costs are a linear (constant) function of volume. B. prices and costs increase when the economy is strong and confidence is high. C. cost of goods sold goes up as revenue increase. D. there is no weakness.

Foundations of Financial Management - 10th Canadian Edition by Block

44. Financial leverage deals with: A. the relationship of fixed and variable costs. B. the relationship of debt and equity in the capital structure. C. the entire income statement. D. the entire balance sheet.

45. A high DOL means: A. there are high labour costs. B. there is high debt. C. there is a large amount of equity. D. there are high fixed costs.

46. In break-even analysis the contribution margin is defined as: A. sales minus variable costs. B. sales minus fixed costs. C. fixed costs minus variable costs. D. fixed costs minus amortization.

47. If the contribution margin on the firm's single product is $2.00 per unit and fixed costs are $60,000, what will the firm's net income be at sales of 30,000 units? A. $90,000 B. $30,000 C. $15,000 D. $0

48. If sales volume is less than the break-even point, the firm will experience: A. an operating loss. B. an operating profit. C. an increase in plant and equipment. D. an increase in share price.

49. A plant relying mostly on manual labour would generally have: A. more variable than fixed costs. B. more fixed than variable costs. C. all fixed costs. D. all variable costs.

Foundations of Financial Management - 10th Canadian Edition by Block

50. If EBIT equals $280,000 and interest equals $20,000, with a tax rate of 31%, what is the degree of financial leverage? A. 14.00x B. 9.66x C. 3.91x D. 1.88x

51. Heavy use of long-term debt may be detrimental in a deflationary economy because: A. the debt may be repaid in more "expensive" dollars. B. nominal interest rates exceed real interest rates. C. inflation is associated with the peak of a business cycle. D. the debt may be repaid in "cheaper" dollars.

52. If fixed costs decreases while other variables stay constant: A. the break-even point increases. B. degree of operating leverage increases. C. total profit decrease. D. total profit increases.

53. If the price per unit increases but the cost structure remains the same: A. the break-even point rises. B. the degree of combined leverage increases. C. the degree of financial leverage increases. D. the break-even point falls.

Foundations of Financial Management - 10th Canadian Edition by Block

54. The Degree of Operating Leverage is: A. 1.79x. B. 1.56x. C. 2.22x. D. 2.33x.

55. The Degree of Financial Leverage is: A. 1.56x. B. 1.79x. C. 7.50x. D. 1.15x.

56. The Degree of Combined Leverage is: A. 2.79x. B. 1.90x. C. 1.79x. D. 3.46x.

57. Lever Products (LP) is considering the elimination of a press machine. The new press machine should reduce depreciation expenses by $80,000 annually. If LP's total fixed costs were $420,000 last year, what would LP's new break-even point in units if the contribution margin is 3.75 per unit? A. 68,000 units B. 90,667 units C. 100,800 units D. 50,667 units

58. If a firm has a 30% change in operating income, and its Degree of Operating Leverage is 3.63, what was its percentage change in unit volume, all other things considered? A. 36.5% B. 12.52% C. 8.26% D. 360%

59. Sales volumes lower than the break-even point result in a firm having ___________________. A. operating losses B. operating profits C. break even cash flows D. a gain of potential leverage and bank financing

Foundations of Financial Management - 10th Canadian Edition by Block

60. ECG has a contribution margin of $196,000. If ECG earned $87,000 before taxes in the year, what is the firm's Degree of Combined Leverage? A. 2.26x B. 1.27x C. 0.44x D. 1.29x

61. Operating Leverage is the use of fixed costs to magnify returns at high levels of operation. True False

62. Operating Leverage works best when volume is increasing. True False

63. Linear break-even analysis assumes that costs are linear functions of volume. True False

64. The closer a firm is to its break-even point, the lower the degree of operating leverage will be. True False

65. The degree of operating leverage is a number indicating the relationship between the percentage changes in sales to the percentage change in earnings per share. True False

66. Operating leverage is concerned with the use of capital assets in the business. True False

67. Operating leverage determines how income from operations is to be divided between debt holders and shareholders. True False

68. Financial leverage is concerned with the use of debt in the business. True False

Foundations of Financial Management - 10th Canadian Edition by Block

69. The degree of financial leverage measures the percentage change in EPS for every 1 percent move in EBIT. True False

70. Financial leverage primarily affects the left-hand side of the balance sheet. True False

71. If a firm has a DFL of 2.0, EPS will change 2% for every 1% change in volume. True False

72. Operating income is not the same thing as EBIT. True False

73. Operating leverage influences the bottom half of the income statement while financial leverage deals with the top half. True False

74. The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage. True False

75. Firms with cyclical sales should employ a high degree of leverage. True False

76. If economic conditions were expected to be favourable, an investor would likely prefer a firm with a low degree of leverage. True False

77. The contribution margin is equal to price per unit minus total costs per unit. True False

Foundations of Financial Management - 10th Canadian Edition by Block

78. As the contribution margin rises, the break-even point goes down. True False

79. Managers who are risk averse and uncertain about the future would most likely minimize combined leverage. True False

80. Cash break-even analysis eliminates the amortization expense and other non-cash charges from capital costs. True False

81. The analysis of operating leverage assumes that relationships between revenues and costs are constant. True False

82. Linear break-even analysis and operating leverage are only valid within a relevant range of production. True False

83. Operating leverage primarily affects the left hand side of the balance sheet while financial leverage affects the right hand side of the balance sheet. True False

84. The degree of financial leverage is not influenced by the interest rate on debt, only the amount borrowed. True False

85. Use of financial leverage must consider risk, not just maximizing profit. True False

86. A lower price for the firm's product will reduce the firm's break-even point. True False

Foundations of Financial Management - 10th Canadian Edition by Block

87. Operating leverage will change when a firm alters the mix of capital resources and labour that it uses. True False

88. A firm with a high degree of combined leverage will, other things being equal, experience higher earnings in the expansionary part of the business cycle. True False

89. A firm with a high degree of financial leverage could face financial difficulty even though it is in a stable industry. True False

90. Management should tailor the use of leverage to meet its own risk-taking desires. True False

91. For firms in industries that offer some degree of stability, are in a positive stage of growth, and are operating in favourable economic conditions, the use of debt is not needed or recommended. True False

92. The interwoven boundaries of banks and different trading companies in Japan make it easier to acquire credit in Japan than in Canada. True False

93. For Japanese firms that have high levels of operating and financial leverage, maintaining sales volume is of critical importance even at the cost of price cuts. True False

94. Greater leverage can be used by firms in periods of strong economic growth? True False

95. Raw materials used in the manufacturing process are generally classified as fixed costs. In contrast, property taxes are classified as variable costs. True False

Foundations of Financial Management - 10th Canadian Edition by Block

96. Break even in dollars is calculated by dividing sales by the contribution margin in percentage terms. True False

97. Leverage is a strategic choice made by management based on assessment of risk and potential positive cash flows and the availability of financing True False

98. The combined leverage is the result of the reduction in earnings from fixed costs and from amortization expense. True False

99. Nonlinear break-even analysis is the use of break-even analysis based on the assumption that cost and revenue relationships to quantity sold may vary at different levels of sales. True False

Foundations of Financial Management - 10th Canadian Edition by Block

100. From the following income statement for 2005, calculate: A) Degree of financial leverage B) Degree of operating leverage C) Degree of combined leverage

101. Heister Corporation produces class rings to sell to college and high school students. These rings sell for $75 each, and cost $35 each to produce. Heister has fixed costs of $50,000. A) Calculate Heister's break-even point. B) How much profit (loss) will Heister have if it sells 1,000 rings? 8,000 rings? C) Heister's president, J. R. D'Angelo, expects an annual profit of $100,000. How many rings must be sold to attain this profit?

Foundations of Financial Management - 10th Canadian Edition by Block

102. A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while fixed cost will be $450,000. The first year's sales estimates are $1,250,000. The cost to start up this restaurant will be $2,000,000. Two financing alternatives are being considered: (a) 50% equity financing and 50% debt at 12%, or (b) all equity financing. Common stock can be sold at $5 per share. A) Compute break-even point. B) Compute DOL. C) Compute DFL and DCL for both financing plans. D) Include an explanation of what your computations mean.

103. Jim Wilson is considering the possibility of opening his own machine shop. He expects first-year sales to be $600,000, and he feels that his variable costs will be approximately 50% of sales. His fixed costs in the first year will be $250,000. Jim is considering two ways of financing the firm: (a) 60% equity financing and 40% debt at 14%, or (b) 100% equity financing. He can sell common stock to his relatives for $10 per share. Either way, he will need to raise $800,000. A) Compute his break-even point in dollars. B) Calculate the Degree of Operating Leverage at the expected first-year sales volume. C) Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans. D) Explain the implications of your answers if the machine shop business is highly cyclical.

Doug Robinson is considering the possibility of opening his own manufacturing facility. He expects first-year sales to be $800,000, and he feels that his variable costs will be approximately 40% of sales. His fixed costs in the first year will be $200,000. Doug is considering two ways of financing the firm: (a) 40% equity financing and 60% debt at 10%, or (b) 100% equity financing. He can sell common stock to his relatives for $10 per share. Either way, he will need to raise $1,000,000.

Foundations of Financial Management - 10th Canadian Edition by Block

104. Compute his break-even point in dollars.

105. Calculate the Degree of Operating Leverage at the expected first-year sales volume.

106. Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans.

107. Explain the implications of your answers if the machine shop business is highly cyclical.

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 05 Key

1. The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation. A. fixed costs B. variable costs C. marginal costs D. semi-variable costs

Accessibility: Keyboard Navigation Block - Chapter 05 #1 Difficulty: Easy Learning Objective: 05-02 Define leverage as a method to magnify earnings available to the firms common shareholders. Topic: 05-01 Leverage in a Business Type: Concept

2. In break-even analysis the contribution margin is defined as: A. sales minus variable costs. B. sales minus fixed costs. C. variable costs minus fixed costs. D. fixed costs minus variable costs.

Accessibility: Keyboard Navigation Block - Chapter 05 #2 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Memory

3. At the break-even point, a firm's profits are: A. greater than zero. B. less than zero. C. equal to zero. D. not enough information to tell.

Accessibility: Keyboard Navigation Block - Chapter 05 #3 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #4 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

5. If sales volume exceeds the break-even point, the firm will experience: A. an operating loss. B. an operating profit. C. an increase in plant and equipment. D. an increase in share price.

Accessibility: Keyboard Navigation Block - Chapter 05 #5 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #6 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

7. A highly automated plant would generally have: A. more variable costs than fixed costs. B. more fixed costs than variable costs. C. all fixed costs. D. all variable costs.

Accessibility: Keyboard Navigation Block - Chapter 05 #7 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-04 A More Conservative Approach Type: Concept

8. Which of the following is concerned with the change in operating profit as a result of a change in volume? A. Financial leverage B. Break-even point C. Operating leverage D. Combined leverage

Accessibility: Keyboard Navigation Block - Chapter 05 #8 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #9 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #10 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #11 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-05 The Risk Factor Type: Concept

12. If EBIT equals $140,000 and interest equals $21,000, with a tax rate of 31%, what is the degree of financial leverage? A. 6.67x B. 5.67x C. 3.91x D. 1.18x

Accessibility: Keyboard Navigation Block - Chapter 05 #12 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-09 Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #13 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-09 Financial Leverage Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #14 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-10 Impact on Earnings Type: Concept

15. A conservative financing plan involves: A. heavy reliance on debt. B. heavy reliance on equity. C. high degree of financial leverage. D. high degree of combined leverage.

Accessibility: Keyboard Navigation Block - Chapter 05 #15 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-10 Impact on Earnings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #16 Difficulty: Easy Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-16 Degree of Combined Leverage Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 05 #17 Difficulty: Medium Learning Objective: 05-05 Calculate the indifference point between financing plans using EBIT/EPS analysis. Topic: 05-12 The Indifference Point Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #18 Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-16 Degree of Combined Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

19. If fixed costs rise while other variables stay constant: A. the break-even point decreases. B. degree of operating leverage decreases. C. total profit increases. D. total profit decreases.

Accessibility: Keyboard Navigation Block - Chapter 05 #19 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #20 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-09 Financial Leverage Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #21 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-06 Cash Break-Even Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #22 Difficulty: Hard Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #23 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-04 A More Conservative Approach Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #24 Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-16 Degree of Combined Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #25 Difficulty: Easy Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #26 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #27 Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-15 Combining Operating and Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #28 Difficulty: Medium Learning Objective: 05-05 Calculate the indifference point between financing plans using EBIT/EPS analysis. Topic: 05-12 The Indifference Point Type: Concept

Block - Chapter 05

29. The Degree of Operating Leverage is: A. 1.43x. B. 1.56x. C. 3.33x. D. 2.22x.

Block - Chapter 05 #29 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

30. The Degree of Financial Leverage is: A. 1.29x. B. 4.50x. C. 3.50x. D. 1.32x.

Block - Chapter 05 #30 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

31. The Degree of Combined Leverage is: A. 2.1x. B. 1.9x. C. 2.9x. D. 2.0x.

Block - Chapter 05 #31 Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-16 Degree of Combined Leverage Type: Concept

Block - Chapter 05

Foundations of Financial Management - 10th Canadian Edition by Block

32. This firm's break-even point is: A. 4,800 units. B. 14,634 units. C. 7,142 units. D. 18,000 units.

Block - Chapter 05 #32 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

33. The Degree of Operating Leverage (DOL) is: A. 1.58x. B. 1.95x. C. 3.50x. D. 1.40x.

Block - Chapter 05 #33 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

34. The Degree of Financial Leverage (DFL) is: A. 3.50x. B. 1.40x. C. 1.95x. D. 1.58x.

Block - Chapter 05 #34 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

35. The Degree of Combined Leverage (DCL) is: A. 3.08x. B. 5.45x. C. 2.73x. D. 6.83x.

Block - Chapter 05 #35 Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-15 Combining Operating and Financial Leverage Topic: 05-16 Degree of Combined Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #36 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

37. If a firm has fixed costs of $30,000, a price of $4.00, and a break-even point of 15,000 units, the variable cost per unit is: A. $5.00. B. $2.00. C. $0.50. D. $4.00.

Accessibility: Keyboard Navigation Block - Chapter 05 #37 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

38. If a firm has fixed costs of $20,000, variable cost per unit of $0.50, and a break-even point of 5,000 units, the price is: A. $2.50. B. $5.00. C. $4.00. D. $4.50.

Accessibility: Keyboard Navigation Block - Chapter 05 #38 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

39. If a firm has a price of $4.00, variable cost per unit of $2.50, and a break-even point of 20,000 units, fixed costs are equal to: A. $13,333. B. $10,000. C. $30,000. D. $50,000.

Accessibility: Keyboard Navigation Block - Chapter 05 #39 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #40 Difficulty: Medium Learning Objective: 05-02 Define leverage as a method to magnify earnings available to the firms common shareholders. Topic: 05-01 Leverage in a Business Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #41 Difficulty: Medium Learning Objective: 05-02 Define leverage as a method to magnify earnings available to the firms common shareholders. Topic: 05-01 Leverage in a Business Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

42. Financial leverage is determined to a large extent by the firm's: A. working capital choice. B. capital budgeting choice. C. capital structure choice. D. dividend policy choice.

Accessibility: Keyboard Navigation Block - Chapter 05 #42 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-09 Financial Leverage Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 05 #43 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-08 Limitations of Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #44 Difficulty: Easy Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-09 Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

45. A high DOL means: A. there are high labour costs. B. there is high debt. C. there is a large amount of equity. D. there are high fixed costs.

Accessibility: Keyboard Navigation Block - Chapter 05 #45 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

46. In break-even analysis the contribution margin is defined as: A. sales minus variable costs. B. sales minus fixed costs. C. fixed costs minus variable costs. D. fixed costs minus amortization.

Accessibility: Keyboard Navigation Block - Chapter 05 #46 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-06 Cash Break-Even Analysis Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 05 #47 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

48. If sales volume is less than the break-even point, the firm will experience: A. an operating loss. B. an operating profit. C. an increase in plant and equipment. D. an increase in share price.

Accessibility: Keyboard Navigation Block - Chapter 05 #48 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

49. A plant relying mostly on manual labour would generally have: A. more variable than fixed costs. B. more fixed than variable costs. C. all fixed costs. D. all variable costs.

Accessibility: Keyboard Navigation Block - Chapter 05 #49 Difficulty: Medium Learning Objective: 05-03 Define and calculate operating leverage and assess its opportunities and limitations. Topic: 05-02 Operating Leverage Type: Concept

50. If EBIT equals $280,000 and interest equals $20,000, with a tax rate of 31%, what is the degree of financial leverage? A. 14.00x B. 9.66x C. 3.91x D. 1.88x

Accessibility: Keyboard Navigation Block - Chapter 05 #50 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #51 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-10 Impact on Earnings Type: Concept

52. If fixed costs decreases while other variables stay constant: A. the break-even point increases. B. degree of operating leverage increases. C. total profit decrease. D. total profit increases.

Accessibility: Keyboard Navigation Block - Chapter 05 #52 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #53 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-06 Cash Break-Even Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 05

54. The Degree of Operating Leverage is: A. 1.79x. B. 1.56x. C. 2.22x. D. 2.33x.

Block - Chapter 05 #54 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

55. The Degree of Financial Leverage is: A. 1.56x. B. 1.79x. C. 7.50x. D. 1.15x.

Block - Chapter 05 #55 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

56. The Degree of Combined Leverage is: A. 2.79x. B. 1.90x. C. 1.79x. D. 3.46x.

Block - Chapter 05 #56 Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-15 Combining Operating and Financial Leverage Topic: 05-16 Degree of Combined Leverage Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #57 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-06 Cash Break-Even Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 05 #58 Difficulty: Hard Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #59 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

60. ECG has a contribution margin of $196,000. If ECG earned $87,000 before taxes in the year, what is the firm's Degree of Combined Leverage? A. 2.26x B. 1.27x C. 0.44x D. 1.29x

Accessibility: Keyboard Navigation Block - Chapter 05 #60 Difficulty: Easy Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-15 Combining Operating and Financial Leverage Type: Concept

61. Operating Leverage is the use of fixed costs to magnify returns at high levels of operation. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #61 Difficulty: Easy Learning Objective: 05-02 Define leverage as a method to magnify earnings available to the firms common shareholders. Topic: 05-01 Leverage in a Business Type: Concept

62. Operating Leverage works best when volume is increasing. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #62 Difficulty: Easy Learning Objective: 05-02 Define leverage as a method to magnify earnings available to the firms common shareholders. Topic: 05-01 Leverage in a Business Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

63. Linear break-even analysis assumes that costs are linear functions of volume. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #63 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

64. The closer a firm is to its break-even point, the lower the degree of operating leverage will be. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #64 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

65. The degree of operating leverage is a number indicating the relationship between the percentage changes in sales to the percentage change in earnings per share. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #65 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

66. Operating leverage is concerned with the use of capital assets in the business. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #66 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

67. Operating leverage determines how income from operations is to be divided between debt holders and shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #67 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

68. Financial leverage is concerned with the use of debt in the business. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #68 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

69. The degree of financial leverage measures the percentage change in EPS for every 1 percent move in EBIT. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #69 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

70. Financial leverage primarily affects the left-hand side of the balance sheet. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #70 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

71. If a firm has a DFL of 2.0, EPS will change 2% for every 1% change in volume. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #71 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

72. Operating income is not the same thing as EBIT. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #72 Difficulty: Easy Learning Objective: 05-02 Define leverage as a method to magnify earnings available to the firms common shareholders. Topic: 05-01 Leverage in a Business Type: Concept

73. Operating leverage influences the bottom half of the income statement while financial leverage deals with the top half. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #73 Difficulty: Medium Learning Objective: 05-02 Define leverage as a method to magnify earnings available to the firms common shareholders. Topic: 05-01 Leverage in a Business Type: Concept

74. The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #74 Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-15 Combining Operating and Financial Leverage Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

75. Firms with cyclical sales should employ a high degree of leverage. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #75 Difficulty: Medium Learning Objective: 05-05 Calculate the indifference point between financing plans using EBIT/EPS analysis. Topic: 05-13 Valuation Basics with Financial Leverage Type: Concept

76. If economic conditions were expected to be favourable, an investor would likely prefer a firm with a low degree of leverage. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #76 Difficulty: Medium Learning Objective: 05-05 Calculate the indifference point between financing plans using EBIT/EPS analysis. Topic: 05-13 Valuation Basics with Financial Leverage Type: Concept

77. The contribution margin is equal to price per unit minus total costs per unit. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #77 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Memory

78. As the contribution margin rises, the break-even point goes down. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #78 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

79. Managers who are risk averse and uncertain about the future would most likely minimize combined leverage. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #79 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-05 The Risk Factor Type: Concept

80. Cash break-even analysis eliminates the amortization expense and other non-cash charges from capital costs. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #80 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-06 Cash Break-Even Analysis Type: Concept

81. The analysis of operating leverage assumes that relationships between revenues and costs are constant. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #81 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

82. Linear break-even analysis and operating leverage are only valid within a relevant range of production. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #82 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

83. Operating leverage primarily affects the left hand side of the balance sheet while financial leverage affects the right hand side of the balance sheet. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #83 Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-15 Combining Operating and Financial Leverage Type: Concept

84. The degree of financial leverage is not influenced by the interest rate on debt, only the amount borrowed. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #84 Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage Type: Concept

85. Use of financial leverage must consider risk, not just maximizing profit. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #85 Difficulty: Medium Learning Objective: 05-02 Define leverage as a method to magnify earnings available to the firms common shareholders. Topic: 05-01 Leverage in a Business Type: Concept

86. A lower price for the firm's product will reduce the firm's break-even point. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #86 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

87. Operating leverage will change when a firm alters the mix of capital resources and labour that it uses. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #87 Difficulty: Medium Learning Objective: 05-03 Define and calculate operating leverage and assess its opportunities and limitations. Topic: 05-02 Operating Leverage Type: Concept

88. A firm with a high degree of combined leverage will, other things being equal, experience higher earnings in the expansionary part of the business cycle. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #88 Difficulty: Hard Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-16 Degree of Combined Leverage Type: Concept

89. A firm with a high degree of financial leverage could face financial difficulty even though it is in a stable industry. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #89 Difficulty: Hard Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-09 Financial Leverage Type: Concept

90. Management should tailor the use of leverage to meet its own risk-taking desires. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #90 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-05 The Risk Factor Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 05 #91 Difficulty: Medium Learning Objective: 05-05 Calculate the indifference point between financing plans using EBIT/EPS analysis. Topic: 05-13 Valuation Basics with Financial Leverage Type: Concept

92. The interwoven boundaries of banks and different trading companies in Japan make it easier to acquire credit in Japan than in Canada. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #92 Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-17 A Word of Caution Type: Concept

93. For Japanese firms that have high levels of operating and financial leverage, maintaining sales volume is of critical importance even at the cost of price cuts. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #93 Difficulty: Hard Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-17 A Word of Caution Type: Concept

94. Greater leverage can be used by firms in periods of strong economic growth? TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #94 Difficulty: Easy Learning Objective: 05-05 Calculate the indifference point between financing plans using EBIT/EPS analysis. Topic: 05-13 Valuation Basics with Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

95. Raw materials used in the manufacturing process are generally classified as fixed costs. In contrast, property taxes are classified as variable costs. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #95 Difficulty: Easy Learning Objective: 05-02 Define leverage as a method to magnify earnings available to the firms common shareholders. Topic: 05-01 Leverage in a Business Type: Concept

96. Break even in dollars is calculated by dividing sales by the contribution margin in percentage terms. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #96 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept Type: Memory

97. Leverage is a strategic choice made by management based on assessment of risk and potential positive cash flows and the availability of financing TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #97 Difficulty: Easy Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-09 Financial Leverage Type: Concept

98. The combined leverage is the result of the reduction in earnings from fixed costs and from amortization expense. FALSE

Accessibility: Keyboard Navigation Block - Chapter 05 #98 Difficulty: Easy Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-16 Degree of Combined Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

99. Nonlinear break-even analysis is the use of break-even analysis based on the assumption that cost and revenue relationships to quantity sold may vary at different levels of sales. TRUE

Accessibility: Keyboard Navigation Block - Chapter 05 #99 Difficulty: Easy Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

100. From the following income statement for 2005, calculate: A) Degree of financial leverage B) Degree of operating leverage C) Degree of combined leverage

Block - Chapter 05 #100 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-07 Degree of Operating Leverage Topic: 05-09 Financial Leverage Topic: 05-15 Combining Operating and Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 05 #101 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

C) PLAN A

PLAN B

D) Subjective.

Foundations of Financial Management - 10th Canadian Edition by Block Block - Chapter 05 #102 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-07 Degree of Operating Leverage Topic: 05-09 Financial Leverage Topic: 05-15 Combining Operating and Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

C) 60% Equity/40% Debt

100% Equity

D) The leveraged plan is highly risky if the machine shop business is very cyclical.

Block - Chapter 05 #103 Difficulty: Hard Learning Objective: 05-01 Calculate break-even in units and in dollars. Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-07 Degree of Operating Leverage Topic: 05-09 Financial Leverage Topic: 05-15 Combining Operating and Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 05

104. Compute his break-even point in dollars.

Block - Chapter 05 #104 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-03 Break-Even Analysis Type: Concept

105. Calculate the Degree of Operating Leverage at the expected first-year sales volume. Degree of Operating Leverage

Block - Chapter 05 #105 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Topic: 05-07 Degree of Operating Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

106. Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans. 40% Equity/60% Debt

DCL = DOL × DFL = 1.71 × 1.27 = 2.17x 100% Equity

DCL = DOL × DFL = 1.71 × 1.0 = 1.71x

Block - Chapter 05 #106 Difficulty: Medium Learning Objective: 05-01 Calculate break-even in units and in dollars. Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-07 Degree of Operating Leverage Topic: 05-09 Financial Leverage Topic: 05-15 Combining Operating and Financial Leverage Type: Concept

107. Explain the implications of your answers if the machine shop business is highly cyclical. As the amount of leverage is not high for this scenario, the leveraged plan is not very risky.

Block - Chapter 05 #107 Difficulty: Hard Learning Objective: 05-01 Calculate break-even in units and in dollars. Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-07 Degree of Operating Leverage Topic: 05-09 Financial Leverage Topic: 05-15 Combining Operating and Financial Leverage Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 05 Summary Category

# of Questions

Accessibility: Keyboard Navigation

Block - Chapter 05

111

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 05-01 Calculate break-even in units and in dollars.

Learning Objective: 05-02 Define leverage as a method to magnify earnings available to the firms common shareholders.

Learning Objective: 05-03 Define and calculate operating leverage and assess its opportunities and limitations.

Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations.

Learning Objective: 05-05 Calculate the indifference point between financing plans using EBIT/EPS analysis.

Learning Objective: 05-06 Define and calculate combined leverage.

Topic: 05-01 Leverage in a Business

Topic: 05-02 Operating Leverage

Topic: 05-03 Break-Even Analysis

Topic: 05-04 A More Conservative Approach

Topic: 05-05 The Risk Factor

Topic: 05-06 Cash Break-Even Analysis

Topic: 05-07 Degree of Operating Leverage

Topic: 05-08 Limitations of Analysis

Topic: 05-09 Financial Leverage

Topic: 05-10 Impact on Earnings

Topic: 05-11 Degree of Financial Leverage

Topic: 05-12 The Indifference Point

Topic: 05-13 Valuation Basics with Financial Leverage

Topic: 05-15 Combining Operating and Financial Leverage

Topic: 05-16 Degree of Combined Leverage

Topic: 05-17 A Word of Caution

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 06 1. Working capital management is primarily concerned with the management and financing of: A. cash and inventory. B. current assets and current liabilities. C. current assets. D. receivables and payables.

2. A financial executive devotes the most time to: A. long-range planning. B. capital budgeting. C. short-term financing. D. working capital management.

3. Pressure for current asset buildup often results from: A. decline in sales growth. B. rapidly expanding sales. C. increased demands of short-term creditors. D. decreased demands of short-term creditors.

4. Ideally, all current assets will be: A. financed by short-term debt. B. long-term in nature. C. self-liquidating. D. internally financed.

5. The term "permanent current assets" implies: A. the same thing as capital assets. B. nonmarketable assets. C. some minimum level of current assets that is not self-liquidating. D. inventory.

Foundations of Financial Management - 10th Canadian Edition by Block

6. Normally, permanent current assets should be financed by: A. long-term funds. B. short-term funds. C. borrowed funds. D. internally generated funds.

7. Ideally, which of the following types of assets should be financed with long-term financing? A. Capital assets only B. Capital assets and temporary current assets C. Capital assets and permanent current assets D. Temporary and permanent current assets

8. Generally, more use is made of short-term financing because: A. short-term financing is usually more predictable than long-term financing. B. most firms do have easy access to the capital markets. C. short-term interest rates are generally higher than long-term interest rates. D. short-term interest rates are generally lower than long-term interest rates.

9. During tight money periods: A. long-term rates are higher than short-term rates. B. short-term rates are higher than long-term rates. C. short-term rates are equal to long-term rates. D. the relationship between short and long-term rates remains unchanged.

10. A "normal" term structure of interest rates would depict: A. short-term rates higher than long-term rates. B. long-term rates higher than short-term rates. C. no general relationship between short-and long-term rates. D. medium rates (1-5 years) lower than both short-term and long-term rates.

11. Which of the following is a reason for diminishing liquidity in modern corporations? A. Low interest rates. B. Lower utilization of cash via computers. C. Greater utilization of cash via information systems. D. Inflation pushes more cash into inventory.

Foundations of Financial Management - 10th Canadian Edition by Block

12. An aggressive, risk-oriented firm will likely: A. borrow long-term and carry low levels of liquidity. B. borrow short-term and carry low levels of liquidity. C. borrow long-term and carry high levels of liquidity. D. borrow short-term and carry high levels of liquidity.

13. Which of the following is not a condition under which a prudent manager would accept some risk in financing? A. Predictable cash-flow patterns B. Inventory is highly perishable C. Price of inventory is stable D. Easy access to capital markets

14. Risk exposure due to heavy short-term borrowing can be compensated for by: A. carrying highly liquid assets. B. carrying illiquid assets. C. carrying longer term, more profitable current assets. D. carrying more receivables to increase cash flow.

15. Which of the following combinations of asset structures and financing patterns is likely to create the least volatile earnings? A. Illiquid assets and heavy short-term borrowing B. Illiquid assets and heavy long-term borrowing C. Liquid assets and heavy long-term borrowing D. Liquid assets and no debt

16. Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings? A. Illiquid assets and heavy short-term borrowing B. Illiquid assets and heavy long-term borrowing C. Liquid assets and heavy long-term borrowing D. Liquid assets and heavy short-term borrowing

17. An aggressive working capital policy would have which of the following characteristics? A. A high ratio of long-term debt to capital assets B. A low ratio of short-term debt to total debt C. A high ratio of short-term debt to long-term sources of funds D. A short average collection period

Foundations of Financial Management - 10th Canadian Edition by Block

18. Which of the following techniques allows explicit consideration of more than one possible outcome? A. Operating leverage B. Present value C. Least-squares regression D. Expected value

19. Under normal conditions (70% probability), Financing Plan A will produce $24,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $40,000 less than Plan B. What is the expected value of return for Plan A over Plan B? A. $28,800 B. $4,000 C. $4,800 D. $35,200

20. The term structure of interest rates is not: A. an indication of investors' expectations about inflation and future interest rates. B. downward sloping if short-term interest rates are higher than long-term rates. C. upward sloping under normal conditions. D. upward sloping if long-term interest rates are lower than short-term rates.

21. The term structure of interest rates: A. changes daily to reflect current competitive conditions in the money and capital markets. B. plots returns for securities of different risk. C. shows the relative interest spread between bonds with different risk ratings such as AAA, AA, A, BBB, etc. D. depicts interest rates for T-bills over the last year.

22. The term structure of interest rates is not influenced by: A. inflation. B. money supply. C. Bank of Canada activities. D. the normal yield curve.

23. A firm will usually increase the ratio of short-term debt to long-term debt when: A. short-term debt has a lower cost than long-term equity. B. the term structure is inverted and expected to shift down. C. the term structure is upward sloping and expected to shift up. D. the firm is undertaking a large capital budgeting project.

Foundations of Financial Management - 10th Canadian Edition by Block

24. When actual sales are greater than forecasted sales: A. inventory will increase. B. production schedules might have to be revised downward. C. accounts receivable will decrease. D. inventory will decrease and accounts receivable will increase.

25. If a firm uses level production with seasonal sales: A. as sales decline inventory will increase. B. as sales decline inventory will decrease. C. as sales decline accounts receivable will increase. D. as sales decline accounts receivable will remain unchanged.

26. One advantage of level production is that: A. manpower and equipment are used efficiently at lower cost. B. current assets fluctuate more than with seasonal production. C. seasonal bulges and sharp declines in current assets occur. D. the risk of obsolete inventory increases.

27. The use of cash budgeting procedures: A. increases revenue for a given production plan. B. makes managing inventory harder under seasonal production. C. reduces the need for temporary permanent assets. D. illustrates fluctuating levels of current assets for a given production plan.

28. When the term structure of interest rates is downward sloping and interest rates are expected to decline, the: A. financial manager generally borrows short-term. B. financial manager borrows at the lower long-term rates. C. corporation's ratio of short-term to long-term debt is low. D. financial managers view short-term rates as high risk.

29. Which of the following is a true statement concerning interest rates? A. Short-term rates are not influenced by inflation B. Long-term rates are influenced by current demands for money. C. During 1990 the term structure of interest rates formed an inverted yield curve. D. During 2014 the term structure of interest rates formed an inverted yield curve.

Foundations of Financial Management - 10th Canadian Edition by Block

30. The term structure of interest rates or the yield curve: A. is normal when short-term rates are higher than long-term rates. B. is inverted when short-term rates are lower than long-term rates. C. shows the yield to maturity for securities of equal risk over time. D. is always flat in the short-term.

31. A conservatively financed firm would: A. use long-term financing for all capital assets and short-term financing for all other assets. B. finance a portion of permanent assets and short-term assets with short-term debt. C. use equity to finance capital assets, long-term debt to finance permanent assets, and short-term debt to finance fluctuating current assets. D. use long-term financing for permanent assets and capital assets and a portion of the short-term fluctuating assets and use short-term financing for all other short-term assets.

32. The term structure of interest rates: A. is based on historical yields. B. is based on current yields. C. is based on future yields. D. is based on current and future prices.

33. Which of the following yield curves would be characteristic at peak periods of economic expansions? A. Upward sloping B. Downward sloping C. Horizontal D. Humped

34. An inverted yield curve would suggest that: A. interest rates are expected to rise. B. interest rates are expected to fall. C. inflation is expected to rise in the future. D. long-term rates are being pushed up by the Bank of Canada's monetary policy.

35. Publishing companies are characterized by: A. flat production to match sales. B. seasonal sales. C. low inventories due to computer inventory management. D. short term financing choices.

Foundations of Financial Management - 10th Canadian Edition by Block

36. The belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of the: A. the expectations hypothesis. B. segmentation theory. C. the liquidity premium theory. D. market credit crunch theory.

37. The theory of the term structure of interest rates, which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the: A. expectations hypothesis. B. segmentation theory. C. liquidity premium theory. D. market average rate theory.

38. Some analysts believe that the term structure of interest rates is determined by the behaviour of various types of financial institutions. This theory is called the: A. expectations hypothesis. B. segmentation theory. C. liquidity premium theory. D. theory of industry supply and demand for bonds.

39. The term structure of interest rates: A. is not referred to as the yield curve. B. depicts the only long-term interest rates. C. depicts the only short-term interest rates. D. is usually constructed with Government of Canada securities of varying maturities.

40. Yield curves change daily to reflect: A. static conditions in the capital markets. B. static conditions in the money markets. C. historical inflation rates. D. changing conditions in the overall economy.

41. Government of Canada securities are used to construct yield curves because: A. they are rated as high risk. B. the small number of securities are all short term. C. they are free of default risk. D. the small number of maturities forms a flat line.

Foundations of Financial Management - 10th Canadian Edition by Block

42. The concept of a self-liquidating asset implies that: A. the working capital associated with a product will be liquidated within a one year period. B. all the product will be sold, receivables collected, and bills paid over the time period specified. C. assets associated with the production of a product will be liquidated over the amortized life of the assets. D. self-liquidating assets will be financed by long-term sources of capital.

43. The cash flow cycle has a major bearing on the firm's: A. dividend policy. B. liquidity. C. cash management efficiency. D. risk.

44. Retail companies like Sears and Chapters exhibit sales patterns that are mostly influenced by: A. cyclical economic indicators. B. competitive prices. C. seasonality. D. sales promotions.

45. The cash conversion cycle is equal to: A. the cash flow cycle. B. inventory holding period less the average collection period less the accounts payable period. C. inventory holding period less the average collection period plus the accounts payable period. D. inventory holding period plus the average collection period less the accounts payable period.

46. As the economy moves through a business cycle, which of the following term structure of interest rates theories describe the shape of the yield curve? A. Expectations theory, agency theory and segmentation theory. B. Market segmentation theory, agency theory and liquidity premium theory. C. Liquidity preference theory, segmentation theory and agency theory. D. Liquidity premium theory, segmentation theory and expectation hypothesis.

47. Under normal conditions (80% probability), Financing Plan A will produce $25,000 higher return than Plan B. Under tight money conditions (20% probability), Plan A will produce $50,000 less than Plan B. What is the expected value of return for Plan A over Plan B? A. $25,000 B. $20,000 C. $15,000 D. $10,000

Foundations of Financial Management - 10th Canadian Edition by Block

48. The term structure of interest rates: A. is not an indication of investors' expectations about inflation and future interest rates. B. will be upward sloping if short-term interest rates are higher than long-term rates. C. will be downward sloping under normal conditions. D. is referred to as the yield curve.

49. When actual sales are greater than forecasted sales: A. inventory will increase. B. production schedules remain constant. C. accounts receivable will decrease. D. production schedules might have to be revised upward.

50. Hedging is: A. matching assets and liabilities to measure risk. B. a risk measurement system. C. possible to achieve perfectly in practice. D. matching the maturities of assets and liabilities to reduce risk.

51. It is difficult to construct a perfectly hedged financial plan because: A. it is easy to determine which part of assets is temporary and which part is permanent. B. it is difficult to liquidate current assets. C. a financial manager is sure how much short or long-term financing is available at a given time. D. exact timing of asset liquidation is difficult.

52. If a firm uses long-term financing to cover short-term needs it is: A. assuring itself of having adequate capital at all times. B. is taking a profitable approach to financing. C. is taking a relatively risky approach to financing. D. incurring a lower overall interest cost in comparison with short-term financing.

53. The finance manager at Ruthless Manufacturing Inc (RMI) was comparing plans for financing inventory. Under normal conditions (60% probability), Financing Plan A will produce $60,000 higher return than Plan B. Under tight money conditions (40% probability), Plan A will produce $50,000 less than Plan B. Which finance plan should RMI choose and why? A. Plan A because it will produce $36,000 higher expected value than Plan B. B. Plan B because it will produce $50,000 higher expected value than Plan A. C. Plan A because it will produce $16,000 higher expected value than Plan B. D. Either, as both expected values are equal.

Foundations of Financial Management - 10th Canadian Edition by Block

54. The term structure of interest rates: A. is not an indication of investors' expectations about inflation. B. will be upward sloping if short-term interest rates are higher than long-term rates. C. will be downward sloping under normal conditions. D. is an indication of investors' expectations about inflation and future interest rates.

55. The expected yield on a 2 year security is 7.8%. If the yield on a T-bill maturing in 1 year is 7.2%, what is the yield on a T-bill maturing in 2 years? A. 7.2% B. 9.8% C. 15% D. 7.8%

56. Working capital management is relatively unimportant to the small businessperson. True False

57. The financial manager generally needs to devote little time to management of working capital. True False

58. Self-liquidating current assets are really capital assets since they have lives greater than one year. True False

59. Ideally, permanent current assets should be financed with short-term borrowings. True False

60. As a general rule, it is desirable to finance the permanent assets, including "permanent current assets," with long-term debt and equity. True False

61. Increased use of long-term financing is generally a more conservative approach to current asset financing. True False

Foundations of Financial Management - 10th Canadian Edition by Block

62. Short-term interest rates are generally lower than long-term interest rates. True False

63. The "term structure of interest rates" refers to the relationship between yields on debt and their maturities. True False

64. The "term structure of interest rates" depicts the competitive cost of funds for the various types of shortterm sources of funds such as Treasury bills, commercial paper, and bankers' acceptances. True False

65. The "term structure of interest rates" is a schedule that tells when a company's bonds mature and shows how many dollars a firm must pay in interest payments. True False

66. In periods of tight money, long-term rates are often higher than short-term rates. True False

67. During tight money periods, short-term financing may be difficult to find. True False

68. Heavy use of long-term financing generally leads to lower financing costs. True False

69. Heavy risk exposure due to short-term borrowing can be compensated for by carrying illiquid assets. True False

70. Heavy use of long-term debt will allow a firm to carry less liquid, more profitable assets. True False

71. Use of long-term financing and the carrying of highly liquid assets is a high-risk combination. True False

Foundations of Financial Management - 10th Canadian Edition by Block

72. Firms with predictable cash-flow patterns should assume relatively low levels of risk. True False

73. Firms with highly volatile and perishable inventory should assume relatively low levels of risk. True False

74. Immediate access to capital markets allows greater risk-taking capability. True False

75. A risky financial plan will use long-term financing for capital assets, permanent current assets, and a portion of temporary current assets. True False

76. The more short-term financing relative to long-term financing, the more risky the financial structure. True False

77. Short-term financing is risky because of the possibility of rising short-term rates and the inability of always being able to refund short-term debt. True False

78. If a firm uses a conservative financial plan, it will usually have marketable securities at the bottom of a cyclical sales swing. True False

79. The expected value is the sum of the probabilities of all expected events. True False

80. Expected value techniques allow consideration of more than one possible outcome. True False

Foundations of Financial Management - 10th Canadian Edition by Block

81. Over the last several decades, most business firms have increased their liquidity. True False

82. One reason for long-term diminishing liquidity is more efficient cash management. True False

83. The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales forecast. True False

84. The use of on-line point-of-sale terminals has made it easier for many retail store managers to manage their inventory. True False

85. Short-term interest rates are more dependent upon inflation than on current demand for money. True False

86. A humped yield curve has lower medium-term rates than both short-term and long-term rates. True False

87. Inventory remains a significant percentage of current assets for non-financial Canadian corporations. True False

88. Generally speaking, during the past two decades corporations were relying more and more on short-term borrowing to carry less liquid assets. True False

89. When using level production, inventory will peak in the month where unit sales trend above the production level. True False

Foundations of Financial Management - 10th Canadian Edition by Block

90. Cash, accounts receivables, and inventory all move monthly in the same direction under level production. True False

91. During an economic "boom" period, a shortage of low-cost financing alternatives exists. True False

92. The ratio of long-term financing to short-term financing at any point in time will be greatly influenced by the term structure of interest rates and common stock prices. True False

93. Yield curves change very little in the short run (3 months). True False

94. Inflation and interest rates (yields) are inversely related. True False

95. Humped yield curves have higher intermediate term rates (4-7 year maturities) than either short-term or long-term rates. True False

96. If the liquidity premium theory was correct, yield curves would be upward-sloping. True False

97. The behaviour of various kinds of financial institutions determines the shape of the yield curve, according to the segmentation theory. True False

98. According to the expectations hypothesis, short-term rates would be expected to rise if they were far below long-term rates. True False

Foundations of Financial Management - 10th Canadian Edition by Block

99. Only the segmentation theory has any significant impact on interest rates. True False

100. Short-term interest rates have historically been more volatile than long-term rates. True False

101. The successful financial manager is very interested in the term structure of interest rates but is not concerned with the relative volatility or historical level of interest rates. True False

102. The faster a firm's growth in sales, the more likely it is that an increasing percentage of financing will be internally generated. True False

103. Level production methods smooth production schedules and utilize manpower and equipment more efficiently than seasonal production methods. True False

104. The cash budget combines the cash receipts and cash payments schedules in determining cash flow. True False

105. By using long-term capital to cover short-term needs, the firm is virtually assured of becoming technically insolvent. True False

106. The ratio of long-term financing to short-term financing at any given time will be greatly influenced by the term structure of interest rates. True False

107. It is not necessary to understand interest rate movements thoroughly when deciding upon short and longterm debt structure. True False

Foundations of Financial Management - 10th Canadian Edition by Block

108. Hedging is matching the maturities of assets and liabilities to reduce risk. True False

109. The cash conversion cycle is the time that is taken to collect accounts receivable. True False

110. The current ratio for non-financial corporations reveals a steady increase in liquidity over time. True False

111. A yield curve is also referred to as the term structure of interest rates. True False

112. A normal yield curve is downward sloping to the right. True False

113. Normally, short-term assets are financed using long-term financing, such as, bank loans greater than 1 year or mortgages. True False

114. Liquidity premium theory states that securities are segmented into markets by various financial institutions. True False

115. Expected value is a representative quantity from a probability distribution arrived at by multiplying each outcome times the associated probability and summing up the products. True False

116. Define working capital management. Why is it important to a firm?

Foundations of Financial Management - 10th Canadian Edition by Block

117. What influences the amount of liquidity in the firm?

118. List the 5 considerations a financial manager should balance between short-term versus long-term financing.

119. Explain why short-term financing is less expensive but riskier than long-term financing.

120. Explain why long-term financing is more expensive but less risky than short-term financing.

121. What is the cash conversion cycle? What does the cash conversion cycle consist of?

Foundations of Financial Management - 10th Canadian Edition by Block

122. Three basic theories describe the term structure of interest rates, or shape of the yield curve. List end explain these theories.

123. King, Inc., a successful Midwest firm, is considering opening a branch office on the west coast. Under normal economic conditions, with a 45% probability of occurring, King can expect to earn a net income of $50,000 per year. In a mini-recession, at 25% probability, King will earn $20,000. In a severe recession, at a 20% probability, King will lose $10,000. There is also a slight probability (10%) that King will lose $300,000 if the expansion fails and the branch office must be closed. Should King open a branch office in British Columbia?

124. Using the expectations hypothesis for the term structure of interest rates, calculate the expected yields for securities with maturities of two and three years on the basis of the following data:

Foundations of Financial Management - 10th Canadian Edition by Block

125. Christensen & Assoc. is developing an asset financing plan. Christensen has $500,000 in current assets, of which 15% are permanent, and $700,000 in capital assets. The current long-term rate is 11%, and the current short-term rate is 8.5%. Christensen's tax rate is 40%. A) Construct two financing plans—one conservative, with 80% of assets financed by long-term sources, and the other aggressive, with only 60% of assets financed by long-term sources. B) If Christensen's earnings before interest and taxes are $325,000, calculate net income under each alternative. C) What are some of the risks associated with each plan? D) Which plan would you recommend to Christensen? Why?

126. McKinsee Inc. is developing a plan to finance its asset base. The firm has $5,000,000 in current assets, of which 20% are permanent, and $12,000,000 in capital assets. Long-term rates are currently 9.5%, while shortterm rates are at 7%. McKinsee's tax rate is 30%. A) Construct a conservative financing plan with 80% of assets financed by long-term sources. If McKinsee's earnings before interest and taxes are $6,000,000, what will their net income be? B) An alternative and more aggressive plan would be to finance 60% of total assets with long-term financing. Assuming that EBIT was again $6,000,000, what will net income be under this alternative? C) If interest rates were expected to increase, which plan would you recommend? Why?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 06 Key

1. Working capital management is primarily concerned with the management and financing of: A. cash and inventory. B. current assets and current liabilities. C. current assets. D. receivables and payables.

Accessibility: Keyboard Navigation Block - Chapter 06 #1 Difficulty: Easy Learning Objective: 06-01 Define working capital management. Topic: Introduction Type: Concept

2. A financial executive devotes the most time to: A. long-range planning. B. capital budgeting. C. short-term financing. D. working capital management.

Accessibility: Keyboard Navigation Block - Chapter 06 #2 Difficulty: Medium Learning Objective: 06-01 Define working capital management. Topic: Introduction Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #3 Difficulty: Medium Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-01 The Nature of Asset Growth Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

4. Ideally, all current assets will be: A. financed by short-term debt. B. long-term in nature. C. self-liquidating. D. internally financed.

Accessibility: Keyboard Navigation Block - Chapter 06 #4 Difficulty: Easy Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-01 The Nature of Asset Growth Type: Concept

5. The term "permanent current assets" implies: A. the same thing as capital assets. B. nonmarketable assets. C. some minimum level of current assets that is not self-liquidating. D. inventory.

Accessibility: Keyboard Navigation Block - Chapter 06 #5 Difficulty: Easy Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-01 The Nature of Asset Growth Type: Concept

6. Normally, permanent current assets should be financed by: A. long-term funds. B. short-term funds. C. borrowed funds. D. internally generated funds.

Accessibility: Keyboard Navigation Block - Chapter 06 #6 Difficulty: Easy Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-05 Patterns of Financing Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #7 Difficulty: Easy Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-05 Patterns of Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #8 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-08 Short-Term Financing (Risky) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #9 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-13 A Decision Process Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #10 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 06 #11 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-16 Shifts in Asset Structure Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #12 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #13 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-05 Patterns of Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #14 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-16 Shifts in Asset Structure Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #15 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #16 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #17 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

18. Which of the following techniques allows explicit consideration of more than one possible outcome? A. Operating leverage B. Present value C. Least-squares regression D. Expected value

Accessibility: Keyboard Navigation Block - Chapter 06 #18 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-15 An Expected Value Approach Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #19 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-15 An Expected Value Approach Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #20 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 06 #21 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

22. The term structure of interest rates is not influenced by: A. inflation. B. money supply. C. Bank of Canada activities. D. the normal yield curve.

Accessibility: Keyboard Navigation Block - Chapter 06 #22 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #23 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #24 Difficulty: Medium Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-01 The Nature of Asset Growth Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #25 Difficulty: Medium Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-02 Controlling Assets—Matching Sales and Production Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #26 Difficulty: Easy Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-02 Controlling Assets—Matching Sales and Production Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #27 Difficulty: Medium Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-02 Controlling Assets—Matching Sales and Production Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #28 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #29 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 06 #30 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #31 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-07 Long-Term Financing (Conservative) Type: Concept

32. The term structure of interest rates: A. is based on historical yields. B. is based on current yields. C. is based on future yields. D. is based on current and future prices.

Accessibility: Keyboard Navigation Block - Chapter 06 #32 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

33. Which of the following yield curves would be characteristic at peak periods of economic expansions? A. Upward sloping B. Downward sloping C. Horizontal D. Humped

Accessibility: Keyboard Navigation Block - Chapter 06 #33 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #34 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-12 Interest Rate Volatility Type: Concept

35. Publishing companies are characterized by: A. flat production to match sales. B. seasonal sales. C. low inventories due to computer inventory management. D. short term financing choices.

Accessibility: Keyboard Navigation Block - Chapter 06 #35 Difficulty: Medium Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-02 Controlling Assets—Matching Sales and Production Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #36 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #37 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #38 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #39 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #40 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #41 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #42 Difficulty: Easy Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-01 The Nature of Asset Growth Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

43. The cash flow cycle has a major bearing on the firm's: A. dividend policy. B. liquidity. C. cash management efficiency. D. risk.

Accessibility: Keyboard Navigation Block - Chapter 06 #43 Difficulty: Easy Learning Objective: 06-04 Identify the cash flow cycle of the firm. Topic: 06-04 Cash Flow Cycle Type: Concept

44. Retail companies like Sears and Chapters exhibit sales patterns that are mostly influenced by: A. cyclical economic indicators. B. competitive prices. C. seasonality. D. sales promotions.

Accessibility: Keyboard Navigation Block - Chapter 06 #44 Difficulty: Easy Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-02 Controlling Assets—Matching Sales and Production Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #45 Difficulty: Medium Learning Objective: 06-04 Identify the cash flow cycle of the firm. Topic: 06-04 Cash Flow Cycle Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #46 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #47 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-15 An Expected Value Approach Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #48 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #49 Difficulty: Medium Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-01 The Nature of Asset Growth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #50 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-05 Patterns of Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #51 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-06 Alternative Plans Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 06 #52 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-07 Long-Term Financing (Conservative) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #53 Difficulty: Hard Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-15 An Expected Value Approach Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #54 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

55. The expected yield on a 2 year security is 7.8%. If the yield on a T-bill maturing in 1 year is 7.2%, what is the yield on a T-bill maturing in 2 years? A. 7.2% B. 9.8% C. 15% D. 7.8%

Accessibility: Keyboard Navigation Block - Chapter 06 #55 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

56. Working capital management is relatively unimportant to the small businessperson. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #56 Difficulty: Easy Learning Objective: 06-01 Define working capital management. Topic: Introduction Type: Concept

57. The financial manager generally needs to devote little time to management of working capital. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #57 Difficulty: Medium Learning Objective: 06-01 Define working capital management. Topic: Introduction Type: Concept

58. Self-liquidating current assets are really capital assets since they have lives greater than one year. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #58 Difficulty: Easy Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-01 The Nature of Asset Growth Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

59. Ideally, permanent current assets should be financed with short-term borrowings. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #59 Difficulty: Easy Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-01 The Nature of Asset Growth Type: Concept

60. As a general rule, it is desirable to finance the permanent assets, including "permanent current assets," with long-term debt and equity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #60 Difficulty: Easy Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-05 Patterns of Financing Type: Concept

61. Increased use of long-term financing is generally a more conservative approach to current asset financing. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #61 Difficulty: Easy Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-07 Long-Term Financing (Conservative) Type: Concept

62. Short-term interest rates are generally lower than long-term interest rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #62 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

63. The "term structure of interest rates" refers to the relationship between yields on debt and their maturities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #63 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 06 #64 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

65. The "term structure of interest rates" is a schedule that tells when a company's bonds mature and shows how many dollars a firm must pay in interest payments. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #65 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Memory

66. In periods of tight money, long-term rates are often higher than short-term rates. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #66 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

67. During tight money periods, short-term financing may be difficult to find. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #67 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

68. Heavy use of long-term financing generally leads to lower financing costs. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #68 Difficulty: Easy Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

69. Heavy risk exposure due to short-term borrowing can be compensated for by carrying illiquid assets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #69 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

70. Heavy use of long-term debt will allow a firm to carry less liquid, more profitable assets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #70 Difficulty: Easy Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

71. Use of long-term financing and the carrying of highly liquid assets is a high-risk combination. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #71 Difficulty: Easy Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

72. Firms with predictable cash-flow patterns should assume relatively low levels of risk. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #72 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

73. Firms with highly volatile and perishable inventory should assume relatively low levels of risk. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #73 Difficulty: Hard Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

74. Immediate access to capital markets allows greater risk-taking capability. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #74 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

75. A risky financial plan will use long-term financing for capital assets, permanent current assets, and a portion of temporary current assets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #75 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

76. The more short-term financing relative to long-term financing, the more risky the financial structure. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #76 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

77. Short-term financing is risky because of the possibility of rising short-term rates and the inability of always being able to refund short-term debt. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #77 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

78. If a firm uses a conservative financial plan, it will usually have marketable securities at the bottom of a cyclical sales swing. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #78 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

79. The expected value is the sum of the probabilities of all expected events. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #79 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-15 An Expected Value Approach Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

80. Expected value techniques allow consideration of more than one possible outcome. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #80 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-15 An Expected Value Approach Type: Concept

81. Over the last several decades, most business firms have increased their liquidity. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #81 Difficulty: Easy Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-02 Controlling Assets—Matching Sales and Production Type: Memory

82. One reason for long-term diminishing liquidity is more efficient cash management. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #82 Difficulty: Easy Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-02 Controlling Assets—Matching Sales and Production Type: Concept

83. The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales forecast. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #83 Difficulty: Easy Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-02 Controlling Assets—Matching Sales and Production Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

84. The use of on-line point-of-sale terminals has made it easier for many retail store managers to manage their inventory. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #84 Difficulty: Easy Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-02 Controlling Assets—Matching Sales and Production Type: Concept

85. Short-term interest rates are more dependent upon inflation than on current demand for money. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #85 Difficulty: Hard Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-08 Short-Term Financing (Risky) Type: Concept

86. A humped yield curve has lower medium-term rates than both short-term and long-term rates. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #86 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

87. Inventory remains a significant percentage of current assets for non-financial Canadian corporations. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #87 Difficulty: Medium Learning Objective: 06-04 Identify the cash flow cycle of the firm. Topic: 06-04 Cash Flow Cycle Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

88. Generally speaking, during the past two decades corporations were relying more and more on short-term borrowing to carry less liquid assets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #88 Difficulty: Medium Learning Objective: 06-04 Identify the cash flow cycle of the firm. Topic: 06-04 Cash Flow Cycle Type: Memory

89. When using level production, inventory will peak in the month where unit sales trend above the production level. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #89 Difficulty: Easy Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-03 Temporary Assets Under Level Production—An Example Type: Concept

90. Cash, accounts receivables, and inventory all move monthly in the same direction under level production. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #90 Difficulty: Medium Learning Objective: 06-04 Identify the cash flow cycle of the firm. Topic: 06-04 Cash Flow Cycle Type: Concept

91. During an economic "boom" period, a shortage of low-cost financing alternatives exists. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #91 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-09 The Financing Decision Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

92. The ratio of long-term financing to short-term financing at any point in time will be greatly influenced by the term structure of interest rates and common stock prices. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #92 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-09 The Financing Decision Type: Concept

93. Yield curves change very little in the short run (3 months). FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #93 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

94. Inflation and interest rates (yields) are inversely related. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #94 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Memory

95. Humped yield curves have higher intermediate term rates (4-7 year maturities) than either short-term or long-term rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #95 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

96. If the liquidity premium theory was correct, yield curves would be upward-sloping. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #96 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

97. The behaviour of various kinds of financial institutions determines the shape of the yield curve, according to the segmentation theory. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #97 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

98. According to the expectations hypothesis, short-term rates would be expected to rise if they were far below long-term rates. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #98 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

99. Only the segmentation theory has any significant impact on interest rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #99 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

100. Short-term interest rates have historically been more volatile than long-term rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #100 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-12 Interest Rate Volatility Type: Memory

101. The successful financial manager is very interested in the term structure of interest rates but is not concerned with the relative volatility or historical level of interest rates. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #101 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

102. The faster a firm's growth in sales, the more likely it is that an increasing percentage of financing will be internally generated. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #102 Difficulty: Medium Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-02 Controlling Assets—Matching Sales and Production Type: Concept

103. Level production methods smooth production schedules and utilize manpower and equipment more efficiently than seasonal production methods. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #103 Difficulty: Medium Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-03 Temporary Assets Under Level Production—An Example Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

104. The cash budget combines the cash receipts and cash payments schedules in determining cash flow. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #104 Difficulty: Medium Learning Objective: 06-04 Identify the cash flow cycle of the firm. Topic: 06-04 Cash Flow Cycle Type: Concept

105. By using long-term capital to cover short-term needs, the firm is virtually assured of becoming technically insolvent. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #105 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-07 Long-Term Financing (Conservative) Type: Concept

106. The ratio of long-term financing to short-term financing at any given time will be greatly influenced by the term structure of interest rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #106 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

107. It is not necessary to understand interest rate movements thoroughly when deciding upon short and longterm debt structure. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #107 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

108. Hedging is matching the maturities of assets and liabilities to reduce risk. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #108 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-05 Patterns of Financing Type: Concept

109. The cash conversion cycle is the time that is taken to collect accounts receivable. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #109 Difficulty: Medium Learning Objective: 06-04 Identify the cash flow cycle of the firm. Topic: 06-04 Cash Flow Cycle Type: Concept

110. The current ratio for non-financial corporations reveals a steady increase in liquidity over time. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #110 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-16 Shifts in Asset Structure Type: Memory

111. A yield curve is also referred to as the term structure of interest rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #111 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

112. A normal yield curve is downward sloping to the right. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #112 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure Shapes Type: Concept

113. Normally, short-term assets are financed using long-term financing, such as, bank loans greater than 1 year or mortgages. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #113 Difficulty: Easy Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

114. Liquidity premium theory states that securities are segmented into markets by various financial institutions. FALSE

Accessibility: Keyboard Navigation Block - Chapter 06 #114 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

115. Expected value is a representative quantity from a probability distribution arrived at by multiplying each outcome times the associated probability and summing up the products. TRUE

Accessibility: Keyboard Navigation Block - Chapter 06 #115 Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-15 An Expected Value Approach Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

116. Define working capital management. Why is it important to a firm? Working capital management entails arranging short-term financing (current liabilities) to facilitate investment in the current assets of the firm. With increasing sales there will be growth in the firm's inventories and receivables, representing more and more cash (capital) tied up in current assets. The current asset investment must be sufficiently liquid and achieve appropriate returns.

Block - Chapter 06 #116 Difficulty: Easy Learning Objective: 06-01 Define working capital management. Topic: Introduction Type: Memory

117. What influences the amount of liquidity in the firm? Liquidity in the firm is influenced by asset growth, the sales and production schedule and the cash flow cycle.

Block - Chapter 06 #117 Difficulty: Easy Learning Objective: 06-01 Define working capital management. Topic: Introduction Type: Memory

118. List the 5 considerations a financial manager should balance between short-term versus long-term financing. 1. the composition of the firm's assets 2. the firm's willingness to accept risk 3. the risks and potential payoffs from each financing alternative 4. the term structure of interest rates 5. the volatility of interest rates

Block - Chapter 06 #118 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-09 The Financing Decision Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

119. Explain why short-term financing is less expensive but riskier than long-term financing. 1. lower interest rates (usually) 2. short-term rates are volatile 3. risk of default if sales slow down 4. risk that bank may not extend/renew loans

Block - Chapter 06 #119 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-08 Short-Term Financing (Risky) Type: Concept

120. Explain why long-term financing is more expensive but less risky than short-term financing. 1 usually higher interest rates 2 you may pay interest on funds you don't always need 3 you have capital at all times

Block - Chapter 06 #120 Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-07 Long-Term Financing (Conservative) Type: Concept

121. What is the cash conversion cycle? What does the cash conversion cycle consist of? The time it takes from the initial outlay of funds for raw materials until the firm collects funds from its clients for the finished product, offset to some degree by the firm's purchases bought on credit, is referred to as the cash conversion cycle. Basically, the cash conversion cycle will consist of: 1. The time materials are in inventory (calculated as the inventory holding period) 2. Plus the time it takes to collect sales from clients (calculated as the average collection period) 3. Less the time the firm is allowed to delay payment to its suppliers (calculated as the accounts payable period).

Block - Chapter 06 #121 Difficulty: Medium Learning Objective: 06-04 Identify the cash flow cycle of the firm. Topic: 06-04 Cash Flow Cycle Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

122. Three basic theories describe the term structure of interest rates, or shape of the yield curve. List end explain these theories. The liquidity premium theory states that long-term rates should be higher than short-term rates. This premium of long-term rates over short-term rates exists because short-term securities have greater liquidity, and therefore higher rates have to be offered to potential long-term bond buyers to entice them to hold these less liquid and more price-sensitive securities. The greater liquidity of short-term securities is partly because there is less uncertainty about their future payments. Short-term securities are less price sensitive because underlying yield changes in the economy do not affect their prices to the same extent as longer-term securities. The segmentation theory states that securities are divided into market segments by the various financial institutions investing in the market. Chartered banks prefer short-term securities of one year or less to match their short-term lending strategies. Mortgage-oriented financial institutions prefer the intermediate-length securities of between five and seven years, and life insurance companies prefer long-term, 20-to-30-year securities to offset the long-term nature of their commitments to policyholders. The changing needs, desires, and strategies of these investors tend to strongly influence the nature and relationship of short-term and longterm interest rates. The expectations hypothesis explains the yields on long-term securities as a function of the short-term rates. The expectations theory says long-term rates reflect the average of short-term expected rates over the time period that the long-term security is outstanding. The expectations hypothesis is especially useful in explaining the shape and movement of the yield curve.

Block - Chapter 06 #122 Difficulty: Hard Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

No, a branch office should not be opened.

Block - Chapter 06 #123 Difficulty: Hard Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

Expected yield on 2-year security = (7.2% + 7.8%)/2yr = 7.5% Expected yield on 3-year security = (7.2% + 7.8% + 8.4%)/3yr = 7.8%

Block - Chapter 06 #124 Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-10 Term Structure of Interest Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

C) Plan A: Interest rates could drop significantly, which would increase the effective cost of long-term financing at a future point in time. Plan B: Interest rates could increase, increasing the cost of short-term financing and possibly tightening the availability of short-term funds. Profit would decrease. D) (Subjective) It depends upon the interest rate forecast.

Block - Chapter 06 #125 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

C) Plan B produces slightly higher net income. However, since short-term rates are more volatile, a general increase in interest rates would probably raise the relative cost of short-term financing significantly and possibly make short-term credit difficult to obtain. The firm's net income could be significantly reduced.

Block - Chapter 06 #126 Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-17 Toward an Optimal Policy Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 06 Summary Category

# of Questi ons

Accessibility: Keyboard Navigation

115

Block - Chapter 06

126

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 06-01 Define working capital management.

Learning Objective: 06-02 Describe the effect asset growth has on working capital positions.

Learning Objective: 0603 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liqu idity versus risk.

Learning Objective: 06-04 Identify the cash flow cycle of the firm.

Learning Objective: 06-05 Explain financing of assets in terms of hedging.

Learning Objective: 0606 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financ ial manager.

Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets.

Topic: 06-01 The Nature of Asset Growth

Topic: 06-02 Controlling Assets—Matching Sales and Production

Topic: 06-03 Temporary Assets Under Level Production—An Example

Topic: 06-04 Cash Flow Cycle

Topic: 06-05 Patterns of Financing

Topic: 06-06 Alternative Plans

Topic: 06-07 Long-Term Financing (Conservative)

Topic: 06-08 Short-Term Financing (Risky)

Topic: 06-09 The Financing Decision

Topic: 06-10 Term Structure of Interest Rates

Topic: 06-11 Term Structure Shapes

Topic: 06-12 Interest Rate Volatility

Topic: 06-13 A Decision Process

Topic: 06-15 An Expected Value Approach

Topic: 06-16 Shifts in Asset Structure

Topic: 06-17 Toward an Optimal Policy

Topic: Introduction

Type: Concept

110

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 07 1. In managing cash and marketable securities, what should be the manager's primary concern? A. Maximization of profit B. Maximization of liquid assets C. Acceptable return on investment D. Liquidity and safety

2. One of the first considerations in cash management is: A. to have as much cash as possible on hand. B. synchronization of cash inflows and cash outflows. C. profitability. D. to put any excess cash into accounts receivable.

3. The difference between the amount of cash on the firm's books and the amount credited to it by the bank is: A. an overdraft. B. interest revenue. C. extended disbursement. D. float.

4. "Float" takes place because: A. a firm is early in paying its bills. B. the level of cash on the firm's books is equal to the level of cash in the bank. C. a lag exists between writing a cheque and it being debited to the bank account. D. a customer writes "hot" cheques.

5. The system whereby funds are moved between computer terminals without use of cheques is: A. electronic funds transfer. B. float. C. a lock-box system. D. magnetic character recognition.

Foundations of Financial Management - 10th Canadian Edition by Block

6. How would electronic funds transfer affect the use of "float"? A. Increase its use somewhat B. Decrease its use somewhat C. Virtually eliminate its use D. Have no effect on its use

7. Which of the following is not a method of speeding up collections? A. Lock-box system B. Use of local bank branches to deposit funds C. Extended disbursement float D. Electronic fund transfer

8. Deposited cheques may be cleared through: A. Stock exchange. B. trusted employees. C. a local dealer network. D. chartered banks.

9. Average daily remittances are $5 million, and "extended disbursement float" adds 3 days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 10% on excess funds. A. $500,000 B. $1,500,000 C. $1,000,000 D. $0

10. Probably the safest and most marketable instrument for short-term investment is: A. Commercial paper. B. Large denomination certificates. C. Bankers' acceptances. D. Treasury bills.

11. A firm that wishes to minimize risk when investing idle cash would be least likely to buy: A. commercial paper. B. long-term corporate bonds. C. negotiable certificates of deposit. D. Treasury bills of the Canadian government.

Foundations of Financial Management - 10th Canadian Edition by Block

12. Which of the following securities regularly trades on a discount basis? A. Government bonds B. Treasury bills C. Swap deposits D. Certificates of deposit

13. Which of the following securities represents an unsecured promissory note issued by a corporation? A. Certificates of deposit B. Savings accounts C. Commercial paper D. Money market fund

14. The problem in stretching out the maturity of marketable securities is that: A. you are legally locked in until the maturity date. B. longer term securities are often not available. C. there is greater possibility of loss. D. interest rates are generally lower.

15. The costs of carrying inventory do not include: A. the interest on funds tied up in inventory. B. the cost of warehouse space. C. ordering costs. D. insurance and handling costs.

16. For a given firm, holding other factors constant, ordering costs per unit generally: A. decline as average inventory increases. B. increase in proportion to increases in inventory. C. are considered fixed costs. D. are negotiated.

17. Characteristics of a money market mutual fund include: A. the purchase of shares by investors, the proceeds of which are reinvested into liquid short-term securities. B. a required minimum balance of $2,500. C. these funds cannot be easily marketable. D. secured by a promissory note.

Foundations of Financial Management - 10th Canadian Edition by Block

18. The economic order quantity: A. determines the reorder point. B. is the lowest cost amount to order considering all costs. C. determines the safety stock. D. requires the number of days to maturity.

19. A multinational company may prefer to hold sizeable cash balances in one currency rather than another because: A. of low interest rates existing in one country. B. one country's currency may be weaker relative to the dollar. C. of interest rate differentials on short term investments. D. both currencies are at parity.

20. A bankers' acceptance: A. is a draft drawn on a corporation. B. may be accepted by the corporation for future payment. C. is a long term investment accepted by the bank. D. is traded in a relatively liquid market until maturity.

21. Which of the following is not a valid quantitative measure of accounts receivable collection policies? A. Average collection period B. Aging of accounts receivables C. Ratio of debt to equity D. Ratio of bad debts to credit sales

22. Characteristics of money market securities include: A. a greater risk than money market funds. B. the rates offered for currency deposits in the London international banking market. C. the society for worldwide interbank financial telecommunication. D. bought and sold on the basis of their promissory yield (price).

23. The economic order quantity: A. assumes that inventory usage is seasonal. B. assumes that delivery times of each order are consistent. C. considers stock-outs. D. assumes that inventory needs are constant.

Foundations of Financial Management - 10th Canadian Edition by Block

24. Which of the following are characteristics of money market investments? A. Money market funds are quite risky. B. Money market funds are insured up to $60,000 by CDIC. C. The minimum balance for money market accounts is $5,000. D. Short term and most commonly issued for periods of up to one year.

25. Money market funds: A. are modelled after money market accounts. B. are insured up to $60,000. C. have a minimum balance of $2,500. D. earn competitive market rates of return.

26. Eurodollar (Canadian) certificates of deposits: A. are not marketable investments. B. are Canadian dollars held on deposit by foreign banks. C. pay interest rates usually lower than the rates on treasury bills. D. are European currencies deposited into international Canadian branch banks.

27. When using the economic order quantity model: A. ordering costs increase as the level of inventory increases. B. carrying costs decrease as the level of inventory increases. C. costs are minimized when total carrying costs and total ordering costs are equal. D. discounted prices are calculated.

28. Hedging: A. is a way to reduce your accounts receivable collection period. B. increases risk. C. is a non-binding agreement to buy or sell a financial futures contract. D. can be carried out with a futures contract.

29. Price Corp. is considering selling to a group of new customers and creating new annual sales of $70,000. 5% will be uncollectible. The collection cost on these accounts is 3.5%, the cost of producing and selling is 80% of sales and the firm is in the 31% tax bracket. What is the profit on new sales? A. $5,554.50 B. $9,660.00 C. $7,245.00 D. $5,959.50

Foundations of Financial Management - 10th Canadian Edition by Block

30. Waldron Inc. is considering selling to a group of new customers that will bring in sales of $15,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 5 to 1 between sales and accounts receivable. What is the return on investment? A. 3% B. 25% C. 5% D. 40%

31. Modos Company has deposited $2,000 in cheques received from customers. It has written $1,400 in cheques to its suppliers. The initial balance was $400. If $1,600 of its customers cheques have been cleared but only $600 of its own has been deposited, calculate its float. A. $200 B. $400 C. $300 D. $700

32. Massa Machine Tool expects total sales of $10,000. The price per unit is $5. The firm estimates an ordering cost of $7.50 per order, with an inventory carrying cost of $0.70 per unit. What is the optimum order size? A. 146 units B. 207 units C. 373 units D. 2,000 units

33. In comparison to securities issued by the federal government, securities issued by provincial governments: A. are significantly riskier. B. are much less liquid. C. yield slightly more than federal securities. D. usually require the payment of higher commissions when purchased than federal securities.

34. Eurodollar (Canadian) certificates of deposit: A. may be borrowed by anyone who wishes to hold dollars. B. are Canadian dollars which have been converted into several European currencies. C. can only be redeemed at Canadian banks or their branches in European countries. D. can only be redeemed at Canadian banks or their branches in any foreign country.

Foundations of Financial Management - 10th Canadian Edition by Block

35. Money market funds are: A. accounts that allow small investors to participate in buying large-denomination securities. B. extremely risky but high-yielding accounts used by large corporations to finance operations. C. accounts that allow small investors to buy shares in companies that then buy shares of common stock. D. pools of bonds held by large utility companies.

36. Assuming that we can earn a 13.5% return on accounts receivable, which of the following actions to finance an increase in our accounts receivable balance would be optimal? A. A reduction in marketable securities which are earning a return of 14.2% B. A decrease in inventories which are earning a 17.6% return C. An increase in bank loans that would cost us 11.5% D. An increase in accounts payable that would cost our firm 15%

37. Which of the following is not a valid reason for holding cash? A. To meet transaction requirements. B. To earn the highest return possible. C. To satisfy emergency needs for funds. D. To provide a compensating balance for a bank.

38. Cash flow does not rely on which of the following? A. The payment patterns of customers. B. The monetary policy of the Bank of Canada. C. The speed at which suppliers and creditors process cheques. D. The efficiency of the banking system.

39. A service provided around the clock by SWIFT is: A. International interest rate evaluation. B. foreign currency analysis. C. swift shipping of goods. D. international payments between banks.

40. Which of the following is not a factor influencing the selection of a marketable security? A. Yield B. Maturity C. Float D. Safety

Foundations of Financial Management - 10th Canadian Edition by Block

41. The three primary policy variables to consider when extending credit include all of the following except: A. credit standards. B. the level of interest rates. C. the terms of trade. D. collection policy.

42. Inventory is usually divided into three basic categories except: A. projected sales. B. work in progress. C. finished goods. D. raw materials.

43. The amount of safety stock that a firm carries depends upon: A. the unpredictability of inventory used. B. the supply chain costs. C. the riskiness of the storage facility. D. the time period necessary to fill inventory orders.

44. A Just-In-Time (JIT) inventory management program has all but which of the following requirements? A. Quality production B. Large safety stocks C. Close ties between suppliers, manufacturers, and customers D. Minimizing inventory levels

45. Cost savings from JIT inventory management include: A. lower transaction fees. B. lower raw material cost. C. lower productivity. D. lower inventory financing costs.

46. International cash management is more complex than domestic based cash management because of: A. difficult capital asset management. B. similarity in banking systems. C. exchange rate parity. D. currency risk fluctuations.

Foundations of Financial Management - 10th Canadian Edition by Block

47. The most subjective and also significant segment of the 4 C's of credit for giving final approval is: A. capacity B. collateral C. character D. conditions

48. Variables important to credit scoring models include: A. age of credit scoring company. B. negative private records. C. facility owned by competitors. D. age of company in years.

49. SWIFT's 'smart card technology': A. increases the likelihood of electronic fraud. B. adds additional security by sending secret information through mail. C. disguises the identity of the receiver. D. automates the process by which banks exchange authentication keys.

50. LIBOR is: A. a resource used in production. B. an interest rate paid on Eurodollar deposits between banks in the London market. C. an interest rate paid by European firms when they borrow Eurodollar deposits from Canadian banks. D. the interest rate paid by the British government on its long-term bonds.

51. An example of differences in International cash management systems includes: A. developed countries using cash payments and developing countries using electronic payments. B. Canadian companies uses cash payments more than United States Companies. C. the preference of Russian companies to use cash and United States Companies to use electronic payments. D. transaction costs are ignored when determining what cash management system to use.

52. International cash management systems often consider: A. the use of the gold standard. B. the similarity of interest rates across countries. C. the similarity of transaction costs. D. the risk involved in currency fluctuations.

Foundations of Financial Management - 10th Canadian Edition by Block

53. D&B is known for providing: A. interest rate information to cash managers. B. credit scoring reports that rank a company's payment habits relative to its peer group. C. cash management systems to corporate treasurers. D. consumer credit reports to credit card companies.

54. When developing a credit scoring report, many variables would be considered. Which of the following best represent the major factors D&B would examine? A. the age of the management team, the dollar amount of sales, net profits, and long-term debt B. the age of the company, the number of employees, the level of current assets C. the financial statements, satisfactory or slow payment experiences, negative public records (suits, liens, judgments, bankruptcies) D. the company's cash balances, return on equity, and its average tax rates

55. Companies that are mostly influenced by seasonal sales have to make a choice between: A. level production and inventory reduction. B. seasonal production and a stable workforce. C. a stable workforce and inventory build up. D. a stable workforce and a fluctuating workforce.

56. Effective cash management requires awareness of: A. production design. B. forecasting theory. C. security personnel. D. financial forecasting.

57. The Bank Rate is set based on: A. the target rate for overnight money. B. the yield on 98-day Treasury bills. C. the prime rate. D. U.S. fed funds rate.

58. All of the following are benefits of just-in-time inventory ordering systems except: A. reduces warehouse space. B. saves utility and manpower costs. C. reduces inventory financing costs. D. prevents stock-outs.

Foundations of Financial Management - 10th Canadian Edition by Block

59. Average daily remittances are $5 million, and "extended disbursement float" adds 5 days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 12% on excess funds. A. $3,000,000 B. $600,000 C. $1,000,000 D. $0

60. Laura's Furniture is considering selling to a group of new customers and creating new annual sales of $80,000. 7% will be uncollectible. The collection cost on these accounts is 2% of all sales, the cost of producing and selling is 75% of sales and the firm is in the 31% tax bracket. What is the profit on new sales? A. $9,936 B. $8,832 C. $12,696 D. $20,000

61. Van Bosch Inc. is considering selling to a group of new customers that will bring in sales of $20,000 with a return on sales of 7%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 4 to 1 between sales and accounts receivable. What is the return on investment? A. 28% B. 7% C. 1.75% D. cannot calculate with the information provided

62. Driveline Sprockets expects total sales of $20,000. The price per unit is $5. The firm estimates an ordering cost of $9.00 per order, with an inventory carrying cost of $1.20 per unit. What is the optimum order size? A. 173 units B. 1,852 units C. 245 units D. 2,000 units

63. Assuming that we can earn a 13.5% return on accounts receivable, which of the following actions to finance an increase in our accounts receivable balance would be optimal? A. a reduction in marketable securities that are earning a return of 12.2% B. a decrease in inventories that are earning a 17.6% return C. an increase in bank loans that would cost us 14.5% D. an increase in accounts payable that would cost our firm 15%

Foundations of Financial Management - 10th Canadian Edition by Block

The mechanical engineer at Robinson Manufacturing has developed a new gearbox. The local distributor expects to increase his sales by 30% over the past year due to this new development. Last year's sales were $70,000 at a selling price of $100 per unit. The manager would like to cut costs as much as possible and comes to you for advice. Relevant cost information includes:

64. What is the economic order quantity? A. 187 units B. 213 units C. 174 units D. 522 units

65. What is the amount of average inventory? A. 107 units B. 94 units C. 261 units D. cannot calculate with information provided.

66. How many orders will be made per year? A. 8.4 orders per year B. 12 orders per year C. 91 orders per year D. 4.27 orders per year

67. What is the total cost of this inventory decision? A. $640.85 B. $739.52 C. $1,279.85 D. $2,556.59

Foundations of Financial Management - 10th Canadian Edition by Block

68. You purchased a T-bill at $99.80. If held the T-bill to maturity and returned a .8038% yield how long did you hold the T-bill? A. 180 days B. 91 days C. 364 days D. 250 days

69. Banker's Acceptances (BA) are issued in the _____________. A BA is guaranteed by a bank for a _________________. A. Long term capital markets; discount fee B. Forex Market; stamping fee C. LIBOR Market; brokerage fee D. Money Market; stamping fee

70. The Grocery Chain (GC) reported an average inventory of $349,589 in its last annual report. If GC's annual Cost of Goods Sold was $5,800,000, approximately how many days did GC hold its inventory? A. 30 days B. 15 days C. 97 days D. 22 days

71. You anticipate selling 10,000 units of Wonder Soap in the next month. It cost $3.50 per order and total carrying costs are $1.50 per unit. What is the minimum order quantity for this new product? A. 216 units B. 342 units C. 1,000 units D. 100 units

72. Western Jet requires a minimum of 1,000,000 litres of jet fuel each month to keep its fleet of Airbus 380A passenger jets running. If Western Jet Operations Manager enters into a future contract to buy 750,000 litres of jet fuel in 90 days he is engaging in ____________. A. Speculation B. Swap options C. Selling Short D. Hedging

Foundations of Financial Management - 10th Canadian Edition by Block

73. If you bought a T-bill at $99.44 and held it for 180 days what would your return be? A. 1.14% B. .011419% C. .0056% D. 11.49%

Ardvark Corp. (AC) reported annual sales of $15,500,000. In the past AC's customers have paid within an average of 35 days. AC's management is considering allowing customers to pay in 40 days.

74. AC's average daily sales are ____________. A. $55,000 B. $67,890 C. $42,466 D. $87,650

75. AC's average AR is ______________. A. $3,238,999 B. $1,486,310 C. $1,698,640 D. $15,500,000

76. If AC increases it collection period to 40 days its average AR will increase to _______. A. $1,698,640 B. $567,000 C. $2,106,788 D. $3,238,999

77. If a firm has total accounts receivable of $6,000,000 and its average daily credit sales are $45,000 what is its collection period? A. 120 days B. 133 days C. 45 days D. 156 days

78. In the management of cash and marketable securities, the primary concern is profitability. True False

Foundations of Financial Management - 10th Canadian Edition by Block

79. For modern corporations, the more cash they have, the better off they are. True False

80. Cash management becomes more important as the level of short-term interest rates rise. True False

81. A goal of cash management is to insure that the inflows and outflows of cash are synchronized. True False

82. Float is the difference between the cash balance on the corporate books and the amount credited to the corporation by the bank. True False

83. "Float" is the name given for a short-term loan between suppliers and buyers. True False

84. It is possible for companies to operate with negative cash balances on their books. True False

85. A lockbox system is a method of extending disbursements. True False

86. Computerized cash management and electronic funds transfer allow firms to carry smaller cash balances. True False

87. A lockbox is used to safeguard the corporation's marketable securities. True False

88. A lockbox is used by the selling corporation to speed up the cheque collection and cheque-clearing process. True False

Foundations of Financial Management - 10th Canadian Edition by Block

89. "Extended disbursement float" has to do with the length of time a corporation takes to collect bills. True False

90. Electronic Data Interchange may be used to eliminate cheques. True False

91. Cost-benefit is not a consideration in development of cash management system; only safety and liquidity. True False

92. Electronic funds transfer will likely increase the use of float. True False

93. Stretching out the maturity of marketable securities can rarely result in a loss. True False

94. The investment of excess short-term funds is usually diversified between short-and long-term marketable securities. True False

95. Deposit receipts purchased in small denominations of $1,000 at the bank are readily marketable. True False

96. The "SWIFT" transfer system was developed to aid bank fund transfers within Canada. True False

97. If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance will be $120,000. True False

98. Return on investment is the major decision criteria in credit decisions. True False

Foundations of Financial Management - 10th Canadian Edition by Block

99. The Reference Book, published by D&B, is a book listing all the companies supplying certain types of products. True False

100. SWIFT has combated the growing issue of electronic fraud with smart card technology that no longer requires users to manually log in to the network and thus eliminates any paper trail. True False

101. The economic order quantity helps a firm determine the most efficient size order to place. True False

102. If we assume that inventory is used up at a constant rate and safety stock is zero, the average inventory will be 1/2 the order size. True False

103. The two basic costs associated with inventory are production cost and carrying cost. True False

104. Seasonal production allows for maximum efficiency in machinery and manpower use. True False

105. Multinational firms find it difficult to shift funds from one country to another. True False

106. Cash management at the international level employs the same techniques as domestic cash management. True False

107. Bankers' acceptances are short-term securities that arise from foreign trade. True False

Foundations of Financial Management - 10th Canadian Edition by Block

108. Bankers' acceptances rank behind treasury bills as a vehicle for short-term investments. True False

109. Eurodollars are Canadian dollars held on deposit by foreign banks. True False

110. The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit. True False

111. The market for Eurodollar deposits and loans is primarily centred in London. True False

112. Small-denomination certificates of deposit are usually more liquid than large-denomination CDs. True False

113. A reduction in production and selling costs as a percentage of sales would usually lead to a more liberal credit policy. True False

114. Inventories are usually the most liquid, but lowest-yielding, current asset of a firm. True False

115. A reduction in carrying costs would increase the economic order quantity. True False

116. Lower ordering costs would tend to increase a firm's economic order quantity. True False

117. Treasury bills are unique in that they trade on a premium basis. True False

Foundations of Financial Management - 10th Canadian Edition by Block

118. Because they generally run a surplus budget, Crown corporations are able to issue securities with slightly lower yields than direct Treasury issues. True False

119. Accounts receivable of industrial corporations has increased more than thirtyfold since 1962, indicating the willingness of firms to extend credit. True False

120. A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the product requested. True False

121. Maintaining a safety stock will guard against an EOQ from occurring. True False

122. Minimizing cash balances can improve overall corporate profitability. True False

123. For most firms, the primary motive for holding cash is the transaction motive. True False

124. Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis. True False

125. Sales, receivables, and inventory form the basis of cash flow. True False

126. Unfortunately, float is too complicated to be effectively managed through any combination of disbursement and collection strategies. True False

Foundations of Financial Management - 10th Canadian Edition by Block

127. The cash generating process for a firm is continuous, even though cash flow can be sporadic. True False

128. The 4 C's of credit include character, capital, capacity, and conditions. True False

129. One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future. True False

130. Because of changing economic conditions, it is difficult for companies such as D&B to devise models predicting payment problems and probability of bankruptcy 12 months in the future. True False

131. Finding out who is ultimately responsible for a bad debt can be helped by D&B's D-U-N-S (Data Universal Numbers System) that tracks relationships and ownership of businesses within D&B's information base. True False

132. SWIFT stands for the Society for Worldwide International Funds Transfer. True False

133. Every message routed through SWIFT is encrypted and every money transaction is authorized by another code for security purposes. True False

134. Just-in-time (JIT) inventory systems can leave manufacturers empty handed if suppliers can't keep up with product growth rates. True False

135. A compensating balance is a cash balance, typically held by the bank, to indirectly pay for certain bank services. True False

Foundations of Financial Management - 10th Canadian Edition by Block

136. Commercial paper is an unsecured promissory note issued by large corporations to investors. True False

137. Explain what a float is and what causes it to occur.

138. How can a firm achieve faster collection times? Why is this desirable?

139. What factors should a financial manager consider when choosing appropriate short-term securities?

140. Describe the 7 characteristics of most market securities.

141. List and explain the "4C's of credit" as discussed by the author.

Foundations of Financial Management - 10th Canadian Edition by Block

142. Describe the 3 basic requirements of Just-in-Time inventory management.

143. Describe and explain several benefits and downsides of a Just-in-Time inventory program.

144. Mountain Home Systems, Inc. is a well-known and reputable supplier of integrated circuits to manufacturers of telecommunications devices. The firm is currently debating whether to expand its sales to cartelephone manufacturers. While the firm expects an extra $2 million in sales if it enters this market, it also knows that 15% of its sales will ultimately be uncollectible. In addition, collection costs will be 2% on all new sales and the firm's production costs are 72% of sales. Selling expenses are 8% of sales and Mountain Home has an opportunity cost of funds (before tax) of 20%. Mountain Home can turn its receivables 4 times per year. Should Mountain Home Systems Co. enter the car telephone manufacturer market?

145. Tanner Co. is a highly successful supplier of leather to manufacturers of leather goods. Tanner is considering expanding into the luxury auto seat market. It is estimated that although selling leather to auto manufacturers will bring additional annual sales of $700,000, a high 12% of those accounts will be uncollectible. The cost of conditioning and selling the leather is 70% of sales. Tanner has a receivables turnover of 5 times a year and its opportunity cost of funds (before-tax) is 15%. Should Tanner expand into the auto market?

Foundations of Financial Management - 10th Canadian Edition by Block

146. Novelty Gifts, Inc. is experiencing some inventory control problems. The manager, Wanda LaRue, currently orders 5,000 units four times each year to handle annual demand of 20,000 units. Each order costs $15 and each unit costs $1.50 to carry. Ms. LaRue maintains a safety stock of 200 units. A) What is Novelty Gifts' current total annual inventory cost? B) Calculate the economic ordering quantity (EOQ). C) What is average inventory under EOQ if Ms. LaRue maintains a safety stock of 200 units? D) Calculate total annual inventory cost under EOQ.

147. The Milling Corp. has developed a new type of widget. The local distributor expects to increase his sales by 20% over the past year due to this new development. Last year's sales were $50,000 at a selling price of $100 per unit. The manager would like to cut costs as much as possible and comes to you for advice. Relevant cost information includes:

A) What is the economic order quantity? B) What is the amount of average inventory? C) How many orders will be made per year? D) What is the total cost of this inventory decision?

Foundations of Financial Management - 10th Canadian Edition by Block

148. Linkup Systems, which provides investors with computerized information about stock prices, is considering the establishment of a lockbox system with its bank. The firm receives daily remittances of $1.5 million, and could earn 9% on any funds freed up through faster collections. If the lockbox system can save 2 days in the collection process, and the firm's bankers will charge $200,000 per year to operate the lockbox system, is it worth it to establish the system?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 07 Key

1. In managing cash and marketable securities, what should be the manager's primary concern? A. Maximization of profit B. Maximization of liquid assets C. Acceptable return on investment D. Liquidity and safety

Accessibility: Keyboard Navigation Block - Chapter 07 #1 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #2 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management Topic: 07-04 Collections and Disbursements Type: Concept

3. The difference between the amount of cash on the firm's books and the amount credited to it by the bank is: A. an overdraft. B. interest revenue. C. extended disbursement. D. float.

Accessibility: Keyboard Navigation Block - Chapter 07 #3 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #4 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float Type: Memory

5. The system whereby funds are moved between computer terminals without use of cheques is: A. electronic funds transfer. B. float. C. a lock-box system. D. magnetic character recognition.

Accessibility: Keyboard Navigation Block - Chapter 07 #5 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-07 Electronic Funds Transfer Type: Memory

6. How would electronic funds transfer affect the use of "float"? A. Increase its use somewhat B. Decrease its use somewhat C. Virtually eliminate its use D. Have no effect on its use

Accessibility: Keyboard Navigation Block - Chapter 07 #6 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-07 Electronic Funds Transfer Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

7. Which of the following is not a method of speeding up collections? A. Lock-box system B. Use of local bank branches to deposit funds C. Extended disbursement float D. Electronic fund transfer

Accessibility: Keyboard Navigation Block - Chapter 07 #7 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float Type: Concept

8. Deposited cheques may be cleared through: A. Stock exchange. B. trusted employees. C. a local dealer network. D. chartered banks.

Accessibility: Keyboard Navigation Block - Chapter 07 #8 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-06 Improving Collections and Extending Disbursements Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #9 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-08 Cash Management Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

10. Probably the safest and most marketable instrument for short-term investment is: A. Commercial paper. B. Large denomination certificates. C. Bankers' acceptances. D. Treasury bills.

Accessibility: Keyboard Navigation Block - Chapter 07 #10 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #11 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

12. Which of the following securities regularly trades on a discount basis? A. Government bonds B. Treasury bills C. Swap deposits D. Certificates of deposit

Accessibility: Keyboard Navigation Block - Chapter 07 #12 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

13. Which of the following securities represents an unsecured promissory note issued by a corporation? A. Certificates of deposit B. Savings accounts C. Commercial paper D. Money market fund

Accessibility: Keyboard Navigation Block - Chapter 07 #13 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #14 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Concept

15. The costs of carrying inventory do not include: A. the interest on funds tied up in inventory. B. the cost of warehouse space. C. ordering costs. D. insurance and handling costs.

Accessibility: Keyboard Navigation Block - Chapter 07 #15 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #16 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #17 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #18 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #19 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #20 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #21 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #22 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #23 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #24 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

25. Money market funds: A. are modelled after money market accounts. B. are insured up to $60,000. C. have a minimum balance of $2,500. D. earn competitive market rates of return.

Accessibility: Keyboard Navigation Block - Chapter 07 #25 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #26 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #27 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #28 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-19 Inventory Policy in Inflation (and Deflation) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #29 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-15 An Actual Credit Decision Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #30 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-19 Inventory Policy in Inflation (and Deflation) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #31 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #32 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #33 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #34 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #35 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #36 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-13 Accounts Receivable as an Investment Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #37 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-03 Reasons for Holding Cash Balances Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #38 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-06 Improving Collections and Extending Disbursements Type: Concept

39. A service provided around the clock by SWIFT is: A. International interest rate evaluation. B. foreign currency analysis. C. swift shipping of goods. D. international payments between banks.

Accessibility: Keyboard Navigation Block - Chapter 07 #39 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

40. Which of the following is not a factor influencing the selection of a marketable security? A. Yield B. Maturity C. Float D. Safety

Accessibility: Keyboard Navigation Block - Chapter 07 #40 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #41 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Concept

42. Inventory is usually divided into three basic categories except: A. projected sales. B. work in progress. C. finished goods. D. raw materials.

Accessibility: Keyboard Navigation Block - Chapter 07 #42 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-21 Safety Stock and Stockouts Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #43 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-21 Safety Stock and Stockouts Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #44 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-22 Just-in-Time Inventory Management Type: Concept

45. Cost savings from JIT inventory management include: A. lower transaction fees. B. lower raw material cost. C. lower productivity. D. lower inventory financing costs.

Accessibility: Keyboard Navigation Block - Chapter 07 #45 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-22 Just-in-Time Inventory Management Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #46 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Concept

47. The most subjective and also significant segment of the 4 C's of credit for giving final approval is: A. capacity B. collateral C. character D. conditions

Accessibility: Keyboard Navigation Block - Chapter 07 #47 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Concept

48. Variables important to credit scoring models include: A. age of credit scoring company. B. negative private records. C. facility owned by competitors. D. age of company in years.

Accessibility: Keyboard Navigation Block - Chapter 07 #48 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #49 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #50 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #51 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #52 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #53 Difficulty: Easy Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #54 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #55 Difficulty: Hard Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-18 Level Versus Seasonal Production Type: Concept

56. Effective cash management requires awareness of: A. production design. B. forecasting theory. C. security personnel. D. financial forecasting.

Accessibility: Keyboard Navigation Block - Chapter 07 #56 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management Type: Concept

57. The Bank Rate is set based on: A. the target rate for overnight money. B. the yield on 98-day Treasury bills. C. the prime rate. D. U.S. fed funds rate.

Accessibility: Keyboard Navigation Block - Chapter 07 #57 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #58 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-22 Just-in-Time Inventory Management Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #59 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-08 Cash Management Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #60 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-12 Management of Accounts Receivable Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #61 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-12 Management of Accounts Receivable Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #62 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #63 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-12 Management of Accounts Receivable Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 07

64. What is the economic order quantity? A. 187 units B. 213 units C. 174 units D. 522 units

Block - Chapter 07 #64 Difficulty: Hard Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

65. What is the amount of average inventory? A. 107 units B. 94 units C. 261 units D. cannot calculate with information provided.

Block - Chapter 07 #65 Difficulty: Hard Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

66. How many orders will be made per year? A. 8.4 orders per year B. 12 orders per year C. 91 orders per year D. 4.27 orders per year

Block - Chapter 07 #66 Difficulty: Hard Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

67. What is the total cost of this inventory decision? A. $640.85 B. $739.52 C. $1,279.85 D. $2,556.59

Block - Chapter 07 #67 Difficulty: Hard Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

68. You purchased a T-bill at $99.80. If held the T-bill to maturity and returned a .8038% yield how long did you hold the T-bill? A. 180 days B. 91 days C. 364 days D. 250 days

Accessibility: Keyboard Navigation Block - Chapter 07 #68 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #69 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #70 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-17 Inventory Management Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #71 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 07 #72 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-19 Inventory Policy in Inflation (and Deflation) Type: Concept

73. If you bought a T-bill at $99.44 and held it for 180 days what would your return be? A. 1.14% B. .011419% C. .0056% D. 11.49%

Accessibility: Keyboard Navigation Block - Chapter 07 #73 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Concept

Ardvark Corp. (AC) reported annual sales of $15,500,000. In the past AC's customers have paid within an average of 35 days. AC's management is considering allowing customers to pay in 40 days.

Block - Chapter 07

74. AC's average daily sales are ____________. A. $55,000 B. $67,890 C. $42,466 D. $87,650

Accessibility: Keyboard Navigation Block - Chapter 07 #74 Difficulty: Easy Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-13 Accounts Receivable as an Investment Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

75. AC's average AR is ______________. A. $3,238,999 B. $1,486,310 C. $1,698,640 D. $15,500,000

Accessibility: Keyboard Navigation Block - Chapter 07 #75 Difficulty: Easy Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-13 Accounts Receivable as an Investment Type: Concept

76. If AC increases it collection period to 40 days its average AR will increase to _______. A. $1,698,640 B. $567,000 C. $2,106,788 D. $3,238,999

Accessibility: Keyboard Navigation Block - Chapter 07 #76 Difficulty: Easy Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-13 Accounts Receivable as an Investment Type: Concept

77. If a firm has total accounts receivable of $6,000,000 and its average daily credit sales are $45,000 what is its collection period? A. 120 days B. 133 days C. 45 days D. 156 days

Accessibility: Keyboard Navigation Block - Chapter 07 #77 Difficulty: Easy Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-13 Accounts Receivable as an Investment Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

78. In the management of cash and marketable securities, the primary concern is profitability. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #78 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management Type: Concept

79. For modern corporations, the more cash they have, the better off they are. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #79 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management Type: Concept

80. Cash management becomes more important as the level of short-term interest rates rise. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #80 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management Type: Concept

81. A goal of cash management is to insure that the inflows and outflows of cash are synchronized. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #81 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-04 Collections and Disbursements Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

82. Float is the difference between the cash balance on the corporate books and the amount credited to the corporation by the bank. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #82 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-04 Collections and Disbursements Topic: 07-05 Float Type: Memory

83. "Float" is the name given for a short-term loan between suppliers and buyers. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #83 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float Type: Memory

84. It is possible for companies to operate with negative cash balances on their books. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #84 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float Type: Concept

85. A lockbox system is a method of extending disbursements. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #85 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-06 Improving Collections and Extending Disbursements Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

86. Computerized cash management and electronic funds transfer allow firms to carry smaller cash balances. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #86 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-07 Electronic Funds Transfer Type: Concept

87. A lockbox is used to safeguard the corporation's marketable securities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #87 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-06 Improving Collections and Extending Disbursements Type: Concept

88. A lockbox is used by the selling corporation to speed up the cheque collection and cheque-clearing process. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #88 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-06 Improving Collections and Extending Disbursements Type: Memory

89. "Extended disbursement float" has to do with the length of time a corporation takes to collect bills. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #89 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-06 Improving Collections and Extending Disbursements Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

90. Electronic Data Interchange may be used to eliminate cheques. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #90 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-07 Electronic Funds Transfer Type: Concept

91. Cost-benefit is not a consideration in development of cash management system; only safety and liquidity. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #91 Difficulty: Medium Learning Objective: 07-01 Extend Chapter 6 concepts of liquidity and risk to current asset management; recognizing that a firms investment in current assets should achieve an adequate return for its liquidity and risk. Topic: 07-01 Cost-Benefit Analysis Type: Concept

92. Electronic funds transfer will likely increase the use of float. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #92 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-07 Electronic Funds Transfer Type: Concept

93. Stretching out the maturity of marketable securities can rarely result in a loss. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #93 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

94. The investment of excess short-term funds is usually diversified between short-and long-term marketable securities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #94 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Concept

95. Deposit receipts purchased in small denominations of $1,000 at the bank are readily marketable. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #95 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Concept

96. The "SWIFT" transfer system was developed to aid bank fund transfers within Canada. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #96 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Concept

97. If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance will be $120,000. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #97 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-13 Accounts Receivable as an Investment Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

98. Return on investment is the major decision criteria in credit decisions. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #98 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-13 Accounts Receivable as an Investment Type: Concept

99. The Reference Book, published by D&B, is a book listing all the companies supplying certain types of products. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #99 Difficulty: Easy Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Memory

100. SWIFT has combated the growing issue of electronic fraud with smart card technology that no longer requires users to manually log in to the network and thus eliminates any paper trail. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #100 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Memory

101. The economic order quantity helps a firm determine the most efficient size order to place. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #101 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

102. If we assume that inventory is used up at a constant rate and safety stock is zero, the average inventory will be 1/2 the order size. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #102 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-21 Safety Stock and Stockouts Type: Concept

103. The two basic costs associated with inventory are production cost and carrying cost. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #103 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-17 Inventory Management Type: Concept

104. Seasonal production allows for maximum efficiency in machinery and manpower use. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #104 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-18 Level Versus Seasonal Production Type: Concept

105. Multinational firms find it difficult to shift funds from one country to another. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #105 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

106. Cash management at the international level employs the same techniques as domestic cash management. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #106 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Concept

107. Bankers' acceptances are short-term securities that arise from foreign trade. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #107 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Concept

108. Bankers' acceptances rank behind treasury bills as a vehicle for short-term investments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #108 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Concept

109. Eurodollars are Canadian dollars held on deposit by foreign banks. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #109 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

110. The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #110 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Concept

111. The market for Eurodollar deposits and loans is primarily centred in London. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #111 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

112. Small-denomination certificates of deposit are usually more liquid than large-denomination CDs. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #112 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Concept

113. A reduction in production and selling costs as a percentage of sales would usually lead to a more liberal credit policy. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #113 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-16 Another Example of a Credit Decision Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

114. Inventories are usually the most liquid, but lowest-yielding, current asset of a firm. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #114 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-17 Inventory Management Type: Concept

115. A reduction in carrying costs would increase the economic order quantity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #115 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

116. Lower ordering costs would tend to increase a firm's economic order quantity. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #116 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

117. Treasury bills are unique in that they trade on a premium basis. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #117 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

118. Because they generally run a surplus budget, Crown corporations are able to issue securities with slightly lower yields than direct Treasury issues. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #118 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Concept

119. Accounts receivable of industrial corporations has increased more than thirtyfold since 1962, indicating the willingness of firms to extend credit. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #119 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-12 Management of Accounts Receivable Type: Concept

120. A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the product requested. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #120 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-21 Safety Stock and Stockouts Type: Concept

121. Maintaining a safety stock will guard against an EOQ from occurring. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #121 Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-21 Safety Stock and Stockouts Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

122. Minimizing cash balances can improve overall corporate profitability. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #122 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management Type: Concept

123. For most firms, the primary motive for holding cash is the transaction motive. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #123 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-03 Reasons for Holding Cash Balances Type: Concept

124. Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #124 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management Type: Concept

125. Sales, receivables, and inventory form the basis of cash flow. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #125 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

126. Unfortunately, float is too complicated to be effectively managed through any combination of disbursement and collection strategies. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #126 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float Type: Concept

127. The cash generating process for a firm is continuous, even though cash flow can be sporadic. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #127 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management Type: Concept

128. The 4 C's of credit include character, capital, capacity, and conditions. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #128 Difficulty: Easy Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 07 #129 Difficulty: Easy Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

130. Because of changing economic conditions, it is difficult for companies such as D&B to devise models predicting payment problems and probability of bankruptcy 12 months in the future. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #130 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 07 #131 Difficulty: Easy Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Memory

132. SWIFT stands for the Society for Worldwide International Funds Transfer. FALSE

Accessibility: Keyboard Navigation Block - Chapter 07 #132 Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Memory

133. Every message routed through SWIFT is encrypted and every money transaction is authorized by another code for security purposes. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #133 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

134. Just-in-time (JIT) inventory systems can leave manufacturers empty handed if suppliers can't keep up with product growth rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #134 Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-22 Just-in-Time Inventory Management Type: Concept

135. A compensating balance is a cash balance, typically held by the bank, to indirectly pay for certain bank services. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #135 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-03 Reasons for Holding Cash Balances Type: Memory

136. Commercial paper is an unsecured promissory note issued by large corporations to investors. TRUE

Accessibility: Keyboard Navigation Block - Chapter 07 #136 Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

137. Explain what a float is and what causes it to occur. There are two cash balances of importance: • Corporation's recorded amount • Amount available for use by the corporation at the bank The difference between the two is float. Float exists as a result of the time lag between when a payment or receipt is recorded in the corporation's ledgers and the eventual acknowledgement that it has altered the corporate bank account. Float arises from payments or receipts that are • In the mail • Clearing the banking system • Being processed • Slow to be acknowledged by the firm's (bank's) information system

Block - Chapter 07 #137 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

138. How can a firm achieve faster collection times? Why is this desirable? A firm must be diligent in collecting monies owed to it, in depositing those monies into a bank account, and in holding on to monies as long as possible, so that the funds can be utilized efficiently by the corporate treasurer. Having monies in a bank account even one day longer can make a significant difference to the firm. Faster collections can be achieved by: • Encouraging customers to pay on a timely basis • Cutting down on the time monies take to arrive in the firm's possession • Accounting for and processing monies quickly upon receipt • Depositing monies quickly into the firm's bank accounts Once concentrated and administered centrally in the firm's bank accounts, the funds can be more efficiently deployed, because: • Treasury has better control of the funds. • Transaction and administration costs are lower. • Concentrated sums can earn better returns invested in marketable securities (e.g., $100,000 receives a higher rate than 20 x $5,000).

Block - Chapter 07 #138 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-06 Improving Collections and Extending Disbursements Type: Concept

139. What factors should a financial manager consider when choosing appropriate short-term securities? The financial manager in choosing short-term securities considers such factors as yield, maturity, minimum investment required, safety of the security, and marketability of the security.

Block - Chapter 07 #139 Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

140. Describe the 7 characteristics of most market securities. Most money market securities are: • Unsecured (no physical asset backing up pledge of payment) promissory notes. • Highly liquid with high trading volumes. • In either bearer (ownership resides with individual in possession) or street (investment dealer's name) form. This facilitates ease of trading. • Short-term (maturity or payback occurs in less than one year) and most commonly issued for periods of 1, 2, 3, 6 months, or 1 year. • Traded continuously, producing maturities of any period desired (a 3-month security sold one month later becomes a 2-month security). • Sold on a discount basis. The instrument is sold at less than the maturity value. The return (considered interest, not a capital gain, by the tax department) is the gain from the discounted price to the maturity value. • Bought and sold on the basis of their promised yield (price) with the best rates for transactions of $1,000,000 or more. Lower yields accompany lower-sized investments.

Block - Chapter 07 #140 Difficulty: Hard Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

141. List and explain the "4C's of credit" as discussed by the author. To establish the degree of credit risk of a potential customer, a firm should develop a credit profile. This profile establishes the customer's strengths and weaknesses. Most importantly, it questions if customers are able to pay and if they can buy enough. Companies that analyze credit risk tend to develop a system in some way related to the 4 Cs of credit. Character: An analyst attempts to determine the customer's willingness to pay. If things get rough, does the customer go into hiding or attempt to work things out? Clues as to the strength of corporate character come from information on fraudulent activities, legal disputes, union problems, dealings with other suppliers, and even the willingness to supply credit information. Capacity: The ability to pay. Capacity is built on marketing abilities, experience in the business, the management team, and overall, the ability to generate profits. To judge a customer's ability to generate profits is a difficult process. Financial ratio analysis can be of considerable assistance, as is an investigation of the customer's abilities based on past experience. Capital: Assets and net worth. Strong net worth is evidence of past success and a commitment by shareholders to the firm. Growing assets demonstrate an ongoing successful business. In difficult economic times when its ability to generate profits is diminished, a strong net worth helps a company survive. Conditions: The state of the economy and the industry in general. One's experience and knowledge best help an analyst in getting a fix on conditions. One tries to foresee how existing conditions affect the potential credit customer. How the customer adapts to changing conditions in the marketplace is also a consideration.

Block - Chapter 07 #141 Difficulty: Hard Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration Type: Concept

142. Describe the 3 basic requirements of Just-in-Time inventory management. Just-in-time inventory management is part of a total production concept that often interfaces with a total quality control program. A JIT program has several basic requirements: 1) quality production that continually satisfies customer requirements 2) close ties between suppliers, manufacturers, and customers 3) minimization of the level of inventory.

Block - Chapter 07 #142 Difficulty: Hard Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-22 Just-in-Time Inventory Management Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

143. Describe and explain several benefits and downsides of a Just-in-Time inventory program. Benefits of JIT: 1) Cost savings from lower levels of inventory and reduced financing cost are expected. 2) A JIT plant may use much less space than the standard plant and therefore saves construction costs and reduces its overhead expenses for utilities and manpower. 3) Computerized ordering systems and EDI systems between suppliers, production, and manufacturing reduce rekeying errors and duplication of forms for the accounting and finance functions. 4) Supplier lists may be reduced, creating savings in quality control programs. 5) JIT can reduce quality control costs as much as 60%, but these costs can often be overlooked by financial analysts because JIT prevents defects rather than detecting poor quality (therefore no cost savings are recognized). 6) Elimination of waste—one of the side benefits of a total quality control system coupled with JIT. The Downside of JIT: 1) Some JIT management systems allow for inventory levels as low as 1 hour's worth of parts. The discipline of these levels and the required process has imposed an extraordinary rigour on firms. Such a system requires a substantial expenditure on computer systems to coordinate the delivery activity. 2) May be forced to shut down manufacturing plants if parts cannot be delivered by suppliers due to weather or other disruptions. The cost is lost business.

Block - Chapter 07 #143 Difficulty: Hard Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-22 Just-in-Time Inventory Management Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

No, Mountain Home Systems should not enter this market.

Block - Chapter 07 #144 Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-15 An Actual Credit Decision Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Tanner Co. should expand into this market.

Block - Chapter 07 #145 Difficulty: Hard Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-15 An Actual Credit Decision Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 07 #146 Difficulty: Hard Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

A) What is the economic order quantity? B) What is the amount of average inventory? C) How many orders will be made per year? D) What is the total cost of this inventory decision? A)

B) 155/2 = 77.5 units C)

Block - Chapter 07 #147 Difficulty: Hard Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

It will be worthwhile to establish the lockbox system.

Block - Chapter 07 #148 Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 07 Summary Category

# of Qu estions

Accessibility: Keyboard Navigation

132

Block - Chapter 07

150

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 0701 Extend Chapter 6 concepts of liquidity and risk to current asset management; recognizing that a firms investment in current assets sh ould achieve an adequate return for its liquidity and risk.

Learning Objective: 0702 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquid ity; and compare techniques to make cash management more efficient.

Learning Objective: 0703 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments.

Learning Objective: 0704 Characterize accounts receivable as an investment resulting from the firms credit policies; outline the considerations in granting credi t; and evaluate a credit decision that changes credit terms to stimulate sales.

Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment.

Topic: 07-01 Cost-Benefit Analysis

Topic: 07-02 Cash Management

Topic: 07-03 Reasons for Holding Cash Balances

Topic: 07-04 Collections and Disbursements

Topic: 07-05 Float

Topic: 07-06 Improving Collections and Extending Disbursements

Topic: 07-07 Electronic Funds Transfer

Topic: 07-08 Cash Management Analysis

Topic: 07-09 International Cash Management

Topic: 07-10 Marketable Securities

Topic: 07-11 The Rates and Securities

Topic: 07-12 Management of Accounts Receivable

Topic: 07-13 Accounts Receivable as an Investment

Topic: 07-14 Credit Policy Administration

Topic: 07-15 An Actual Credit Decision

Topic: 07-16 Another Example of a Credit Decision

Topic: 07-17 Inventory Management

Topic: 07-18 Level Versus Seasonal Production

Topic: 07-19 Inventory Policy in Inflation (and Deflation)

Topic: 07-20 The Inventory Decision Model

Topic: 07-21 Safety Stock and Stockouts

Topic: 07-22 Just-in-Time Inventory Management

Type: Concept

112

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 08 1. What is generally the largest source of short-term credit for small firms? A. Bank loans. B. Commercial paper. C. Installment loans. D. Trade credit.

2. Trade credit may be used to finance a major part of the firm's working capital when: A. the firm extends less liberal credit terms than the supplier. B. the firm extends more liberal credit terms than the supplier. C. the firm and the supplier both extend the same credit terms. D. neither the firm nor the supplier extends credit.

3. Net credit position refers to: A. the difference between receivables and payables. B. the difference between receipts and disbursements. C. the average collection period. D. the average payment period.

4. In financing accounts receivable, pledging uses receivables _______ while factoring uses receivables _________. A. as collateral; to purchase B. as collateral; to sell C. to sell; as collateral D. to sell; to purchase

5. The factoring of accounts receivable consists of: A. selling accounts receivable at a profit. B. pledging accounts receivable as collateral for a loan. C. selling accounts receivable to raise working capital. D. buying accounts receivable from a factor.

Foundations of Financial Management - 10th Canadian Edition by Block

6. LIBOR is: A. a resource used in production. B. an interest rate paid on deposits of US dollars in the London market. C. an interest rate paid by European firms when they borrow Eurodollar deposits from Canadian banks. D. the interest rate paid by the British government on its long-term bonds.

7. A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 2/20, net 90. What change might be expected on the balance sheets of its customers? A. Decreased receivables and increased bank loans. B. Increased receivables and increased bank loans. C. Increased payables and decreased bank loans. D. Increased payables and increased bank loans.

8. In determining the cost of bank financing, which is the important factor? A. Prime rate. B. Nominal rate. C. Annual rate. D. Discount rate.

9. From the banker's point of view, short-term bank credit is an excellent way of financing: A. capital assets. B. permanent working capital needs. C. repayment of long-term debt. D. seasonal bulges in inventory and receivables.

10. The bank rate is determined by: A. the chartered banks. B. the yield on 91-day Treasury bills. C. the prime rate. D. the Bank of Canada overnight rate.

11. Financial managers may prefer financial futures markets in the United States to the Montreal Futures Exchange because of: A. political uncertainty. B. the use of U.S. dollars. C. Chicago is closer to Toronto than Montreal. D. greater liquidity.

Foundations of Financial Management - 10th Canadian Edition by Block

12. Sears Canada Receivables Trust receives a better credit rating than Sears Canada because: A. credit card receivables have a low default rate. B. the interest rate on receivables is better than a Sears credit card. C. a trust has the backing of the government through financial legislation. D. securitization automatically qualifies for a better rating.

13. General Rent-All's officers arrange a $50,000 loan. The company is required to maintain a minimum account balance of 10% of the outstanding loan in their chequing account. This is referred to as: A. an instalment loan. B. a compensating balance. C. a discounted loan. D. a balloon payment.

14. Holland Construction Co. has an outstanding 180-day bank loan of $400,000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its chequing account. What is the annual interest cost on the loan? Assume the company would not normally maintain this average amount. A. 11.18% B. 9.5% C. 15.00% D. 20.00%

15. Which of the following is not a characteristic of commercial paper? A. Issued by large prestigious firms. B. One-to-two year maturity. C. Rates are usually below prime rates on business loans. D. Usually in denominations of $100,000 or more.

16. The extent to which inventory financing may be used depends on: A. prime rate of interest. B. cost of goods. C. how fragile the goods are. D. how perishable the goods are.

17. Which of the following is not a method for lenders to control pledged inventory? A. Blanket inventory liens. B. Trust receipts. C. Warehousing. D. Factoring.

Foundations of Financial Management - 10th Canadian Edition by Block

18. Commercial paper has an advantage that: A. it has low probability of default. B. it requires small compensating balances. C. it is secured by an independent third party. D. it requires no compensating balances.

19. Multinational firms have found that they can lower borrowing costs: A. by borrowing US dollars. B. by issuing more debt. C. by using more bankers' acceptances. D. by borrowing foreign currencies through foreign subsidiaries at rates lower than the Canadian prime and then converting these foreign loans into dollars.

20. The cost of not taking the discount on trade credit of 3/10, net 30 is equal to: A. 57.75%. B. 55.67%. C. 56.44%. D. 36.50%.

21. Bank loans to business firms: A. are usually long-term in nature. B. are preferred by the business not to be self-liquidating. C. may require commercial paper to be issued. D. may require compensating balances.

22. Mr. Jones borrows $3,000 for 90 days and pays $35 interest. What is his annual rate of interest? A. 1.2% B. 3.5% C. 4.7% D. 11.7%

23. Ms. Smith borrowed $1,250 at an 11% stated rate of interest and was to pay back the installment loan in 24 monthly payments. What is her annual rate of interest? A. 10.56% B. 11.60%. C. 18.96% D. 22.00%

Foundations of Financial Management - 10th Canadian Edition by Block

24. The prime rate: A. is the annual rate of interest for banks' best customers. B. changes infrequently. C. is usually lower than treasury bill rates. D. is the annual rate of interest for the bank.

25. Analog Computers needs to borrow $800,000 from the Midland Bank. The bank requires a 15% compensating balance. How much money will Analog need to borrow in order to end up with $800,000 spendable cash? A. $920,000. B. $1,058,264. C. $941,177. D. $800,000.

26. If Analog computers can borrow at 9.5% for 3 years, what is the annual rate of interest on an $800,000 loan where a 15% compensating balance is required? A. 11.18%. B. 17.27%. C. 9.50%. D. 3.16%.

27. Hedging refers to: A. avoiding high-risk investment opportunities. B. a transaction that reduces risk exposure. C. the same thing as asset diversification. D. avoiding the financial futures market.

28. The financial futures market: A. is a place in Chicago or Toronto where future stocks are traded. B. allows for the trading of a financial instruments at a future point in time. C. is of particular value to small investors in managing their portfolios. D. increases the cost of hedging.

29. The prime rate: A. is the rate that banks are charged by the Bank of Canada. B. was over 30% in the early 1980s. C. is fixed over a long period of time. D. is affected by economic and political factors.

Foundations of Financial Management - 10th Canadian Edition by Block

30. Bank term loans: A. usually carry fixed interest rates. B. are very short-term in nature. C. are offered to superior credit applicants. D. are risky for the borrower due to interest rate fluctuation.

31. Firms exposed to the risk of interest rate changes may reduce that risk by: A. obtaining a Eurodollar loan. B. hedging in the financial futures market. C. hedging in the commodities market. D. pledging or factoring accounts receivable.

32. A firm has invested in corporate bonds; it may engage in a financial futures contract in order to protect itself from: A. declining interest rates. B. rising interest rates. C. inflation. D. changes in hedging activities.

33. Large firms tend to be: A. net users of trade credit. B. net suppliers of trade credit. C. firms with high levels of profitability. D. firms with low levels of inventory turnover and accounts receivable turnover.

34. Other things being equal, an increase in the number of days that a commercial bank loan is outstanding will mean: A. a reduction in the banks risk. B. an increase in the administration costs. C. an increase in the dollar amount of the interest. D. a reduction in the principal amount borrowed.

35. When calculating a loan with a 20% compensating balance a firm would borrow ____ in order to have available funds of $200,000. A. $160,000 B. $200,000 C. $250,000 D. $260,000

Foundations of Financial Management - 10th Canadian Edition by Block

36. Commercial paper that is sold without going through a broker or dealer is known as: A. direct paper. B. dealer paper. C. book-entry transactions. D. term paper.

37. Commercial paper that is sold without the use of an actual paper certificate is known as: A. finance paper. B. dealer paper. C. book-entry paper. D. term paper.

38. Accounts receivable may be used as a source of financing by: A. collecting the receivables. B. writing off the receivables as bad debt expense. C. buying securities backed by the receivables. D. factoring the receivables to a finance company.

39. Which method of controlling pledged inventory provides the greatest degree of security to the lender? A. Blanket inventory liens. B. Overall inventory liens. C. Trust receipts. D. Warehousing.

40. The required compensating balance is usually computed as a: A. percentage of customer loans outstanding. B. factor of accounts receivable. C. the bank's commitment to LIBOR. D. pledge of inventory value.

41. A term loan is usually characterized by: A. maturity of ten to fifteen years. B. a zero interest rate. C. monthly or quarterly instalment payments. D. securitization of inventory.

Foundations of Financial Management - 10th Canadian Edition by Block

42. Which of the following is not a true statement about commercial paper? A. Finance paper is sold directly to the lender by the finance company. B. Finance paper is also referred to as direct paper. C. Dealer paper is sold directly to the lender by a finance company. D. Industrial companies, utility firms, or finance companies too small to sell direct paper will sell dealer paper.

43. Which of the following best describes the benefits to the borrower of selling asset backed securities? A. Due to the portfolio effect, the borrower can package up low quality accounts receivable and sell them for a premium price. B. The borrower trades current cash flows for future cash flows. C. The asset-backed security may carry a better credit rating. D. The borrower has collateral tied to the asset backed security.

44. Compensating balances: A. are used by banks as a substitute for charging service fees. B. are created by having a concentration account. C. generate returns to customers from interest bearing accounts. D. are used to reward new accounts.

45. After treasury bills, the largest outstanding short-term security is: A. commercial paper. B. bankers' acceptances. C. bearer deposit notes. D. certificates of deposit.

46. Securitized paper: A. is not part of the money market. B. is off balance sheet financing. C. is guaranteed by security firms. D. is backed by a variety of assets.

47. The London Interbank Offered Rate (LIBOR): A. competes with the prime rate domestically for international firms. B. often is higher than the domestic prime rate. C. is the loan rate offered by chartered banks to its best customers. D. is the rate used when banks lend to each other.

Foundations of Financial Management - 10th Canadian Edition by Block

48. A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 3.5/9, net 25. What change might be expected on the balance sheets of its customers? A. Decreased receivables and increased bank loans. B. Increased receivables and increased bank loans. C. Decreased payables and increased bank loans. D. Increased payables and increased bank loans.

49. Francis Construction Co. has an outstanding 180-day bank loan of $600,000 at an annual interest rate of 8%. The company is required to maintain a 20% compensating balance in its chequing account. What is the annual interest cost on the loan? Assume the company would not normally maintain this average amount. A. 8.0% B. 9.5% C. 10.0% D. 6.40%

50. Which of the following is a characteristic of commercial paper? A. Issued by large firms. B. One-to-two year maturity. C. Rates are usually above prime rates on business loans. D. Issued by small firms.

51. The cost of forgoing the discount on trade credit of 1/10, net 30 is equal to: A. 22.35%. B. 18.43%. C. 20.52%. D. 12.00%

52. The cost of forgoing the discount on trade credit of 4/10, net 90 is equal to: A. 18.25%. B. 19.01%. C. 20.52%. D. 12.13%.

53. The cost of forgoing the discount on trade credit of 4/10, net 25 is equal to: A. 101.32%. B. 87.33%. C. 28.8%. D. 12.13%.

Foundations of Financial Management - 10th Canadian Edition by Block

54. Bank loans to business firms: A. are usually long-term in nature. B. are preferred by the banker to be self-liquidating. C. require compensating balances. D. are always at a fixed rate.

55. Mrs. Robinson borrows $5,000 for 90 days and pays $80 interest. What is her annual rate of interest? A. 1.6% B. 6.49% C. 12.98% D. 6.40%

56. Mr. Phelps borrows $3,000 for 30 days and pays $80 interest. What is his annual rate of interest? A. 2.67% B. 16.24% C. 32.44% D. 24.54%

57. The bank rate: A. is the rate that the Bank of Canada charges Chartered banks. B. is very stable over time. C. is affected by economic and political factors. D. is available to all bank customers.

58. The London Interbank Offered Rate (LIBOR): A. does not compete with the prime rate domestically for international firms. B. often is lower than the domestic prime rate. C. is the loan rate offered by London banks to its best customers. D. is a stable international rate.

59. You are considering buying a new big screen TV from the BIG Electronics Co. BIG has offered to finance your purchase by extending credit to you. The terms of the credit are 12 easy monthly payments of $95. If you choose to finance this purchase, rather than pay the cash price of $850, what would your annual interest on this loan be? A. 15.89% B. 20.63% C. 19.50% D. 17.58%

Foundations of Financial Management - 10th Canadian Edition by Block

60. Your employer needs to borrow $550,000 to finance inventory for the upcoming seasonal rush. BIG Bank has offered to finance the inventory at 8% provided that your employer keeps a compensating balance in its operating account of 8%. How much must your employer borrow to end up with the $550,000? A. $597,826 B. $594,000 C. $588,500 D. $87,926

61. Commercial paper was a popular financing method before the credit crunch of 2007-08 due to: A. Higher borrowing rates for qualified firms compared to bank rates. B. Decreased ability of corporations to raise short-term funds. C. Decrease in government borrowing. D. Lower costs to borrowers for bankers' acceptances.

62. Laura's Book Shoppe is going to borrow $50,000 for 90 days at an annual rate of 9%. The amount of interest owing in 90 days will be: A. $4,500.00 B. $1,109.59 C. $1,225.00 D. $1,009.59

63. The largest source of short-term funds for most companies is suppliers (trade credit). True False

64. Larger firms tend to be net users of trade credit. True False

65. Small companies finance a relatively greater proportion of their assets through trade credit than do larger concerns. True False

66. A trade discount is a percentage reduction from the invoice price given for purchasing certain minimum quantities. True False

Foundations of Financial Management - 10th Canadian Edition by Block

67. Financial institution deregulation has eased competition between banks and foreign financial institutions. True False

68. Although the LIBOR has remained competitive and comparable to the Canadian prime rate, it has remained slightly higher than the prime rate. True False

69. Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate. True False

70. It is difficult to acquire a loan in Canadian dollars outside Canada. True False

71. The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate. True False

72. Compensating balances have been important for banks because their existence allows them to make loans at lower quoted rates. True False

73. A compensating balance will be lower in periods of tight money than in periods of credit ease. True False

74. Compensating balances are a way for banks to recover the cost of corporate services provided, but not directly charged. True False

75. Commercial paper is an unsecured short-term IOU from a large financially secure company. True False

Foundations of Financial Management - 10th Canadian Edition by Block

76. Small businesses frequently find commercial paper a useful means of obtaining funds when it is not possible to raise funds by other means. True False

77. Accounts payable is a spontaneous source of funds that grows as the business expands. True False

78. Stretching the payment period refers to the practice of trying to take a trade discount after the discount period. True False

79. On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit. True False

80. Compensating balances represent unfair hidden costs of borrowing. True False

81. Monthly instalment loans usually increase the effective rate of borrowing by approximately 2 times the stated rate. True False

82. Issuers of commercial paper can be divided into finance companies and industrial or utility firms. True False

83. Commercial paper represents secured short-term borrowing by large companies. True False

84. The prime rate has been tied to market interest rates to better relate the interest rate to banks' cost of funds. True False

Foundations of Financial Management - 10th Canadian Edition by Block

85. One major advantage of commercial paper is that it can always be "rolled over" (reissued) when it matures. True False

86. Eurodollar loans are similar to Canadian bank loans in that they are usually short-term in nature. True False

87. In times of tight credit in Canada, Eurodollar loans become difficult to obtain. True False

88. The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30. True False

89. Firms can almost always increase the amount of time they take to pay for purchases without incurring problems. True False

90. All commercial paper involves the physical transfer of actual paper certificates. True False

91. It is easier for small firms to obtain financing through bank loans than through the commercial paper market. True False

92. Even though a firm factors its receivables to a finance company, it is still liable if the account becomes uncollectible. True False

93. The sale of securities backed by the receivables of large credit worthy firms is a large source of financing. True False

Foundations of Financial Management - 10th Canadian Edition by Block

94. Approximately 50% of short-term financing is in the form of accounts payable or trade credit. True False

95. Trade credit is usually extended for periods of one year or more. True False

96. A cash discount calls for a reduction in price if payment cannot be made within a specified time period. True False

97. The annual effective rate of interest on a loan is a measure that includes the compounding effects on the loan. True False

98. The lender's primary concern is whether the borrower's capacity to generate receivables is sufficient to liquidate the loan as it comes due. True False

99. The sale of asset-backed securities enables the issuing firm to acquire lower-cost funds than it normally would receive from a bank loan or bond offering. True False

100. The upward movement of the exchange rate can increase the total cost of a loan by making the principal repayment require more money than the original amount of the loan. True False

101. The London Interbank offered rate is used to set a base lending rate for some corporate loans originating in the Euromarkets. True False

102. Firms using commercial paper are generally required to maintain bank lines of credit equal to the amount of paper outstanding. True False

Foundations of Financial Management - 10th Canadian Edition by Block

103. The commercial paper market is available to all publicly traded companies. True False

104. One of the disadvantages of commercial paper is that if the company's credit quality declines, the issuance of additional paper may be impossible. True False

105. The banks have been significant issuers of asset-backed securities. True False

106. Asset-backed securities often have superior credit ratings because of coverage from deposit insurance. True False

107. The effective annual rate on a loan will always be higher than the stated rate because the effective annual rate takes into account compounding. True False

108. Commercial Paper is generally issued by public companies that are considered to be financial very secure and thus have much lower levels of business risk. True False

109. An instalment loan uses a series of equal payments to retire a loan. True False

110. A discounted loan features subtraction of the calculated interest payment in advance. True False

111. What is a compensating balance and what is its purpose? Is it commonly used? Why or why not?

Foundations of Financial Management - 10th Canadian Edition by Block

112. Why is commercial paper an attractive alternative to short-term bank financing?

113. What are the risks in the commercial paper market?

114. The Magic Pumpkin Limousine Company wants to purchase a car telephone system for one of its automobiles. The telephone vendor has offered to finance the $1,500 purchase over one year in 12 installments, with a total of $140 in interest to be paid on the loan. Magic Pumpkin's bank has offered to finance the purchase with an instalment loan, where $155 in interest will be repaid and payments on the loan must be made quarterly. What are the annual interest rates on these loans?

115. Business Book Publishing needs to borrow $700,000 in order to finance its new inventory. Two banks in town offered different loan terms: Marine Bank offered a 10% loan with a 15% compensatory balance to be paid back in quarterly payments. McLean National Bank offered Business Book Publishing a 12% loan to be paid back semi-annually. Which loan terms should Business Book Publishing take?

Foundations of Financial Management - 10th Canadian Edition by Block

116. Slipshod Machine Tool Co. owes $40,000 to one of its suppliers. The supplier has offered a trade discount of 2/10 net 30. Slipshod can borrow the funds from either of two banks. First City Bank will loan the funds for 20 days at a cost of $400. Upstart Bank offers a discounted loan for 20 days at a cost of $320. A) What is the cost of failing to take the discount? B) What is the annual interest rate on each of the loans? C) Which alternative should Slipshod follow?

117. Brand Advertising is offered a 3/10 net 40 trade discount by its supplier. In the past Brand has been able to get away with paying for supplies on credit in 60 days. Since it doesn't have money on hand to take advantage of the discount, it tries to negotiate a loan with Second Canadian Bank. The amount of $375,000 with a 15% compensating balance and a $5,500 interest charge has been negotiated for the month of May. Brand already maintains a $16,250 balance at the bank. Compute the annual rate of interest on the loan, and the cost of not taking the discount. Which one should Brand take?

118. In order to finance a shipment of badminton sets, Rujisawa Import-Export is seeking a $500,000 one-year bank loan. The Marine Bank requires that Rujisawa maintain a 20% compensating balance and requires four quarterly payments. The Prairie Bank requires only a 10% compensating balance, but requires 12 monthly payments. In addition, the Prairie Bank discounts the loan. Both banks state that their interest rate is 9%. A) Which bank has the lowest annual interest rate? (NOTE: deduct the compensating balances from the principal in determining the annual rate.) B) If Prairie Bank eliminated its compensating-balance requirement, would your answer change?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 08 Key

1. What is generally the largest source of short-term credit for small firms? A. Bank loans. B. Commercial paper. C. Installment loans. D. Trade credit.

Accessibility: Keyboard Navigation Block - Chapter 08 #1 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-02 Trade Credit Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #2 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-03 Payment Period Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #3 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-05 Net Credit Position Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #4 Difficulty: Medium Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-21 Accounts Receivable Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #5 Difficulty: Medium Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-23 Factoring Receivables Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #6 Difficulty: Easy Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm. Topic: 08-19 Foreign Borrowing Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #7 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

8. In determining the cost of bank financing, which is the important factor? A. Prime rate. B. Nominal rate. C. Annual rate. D. Discount rate.

Accessibility: Keyboard Navigation Block - Chapter 08 #8 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-10 Cost of Bank Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #9 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-06 Bank Credit Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

10. The bank rate is determined by: A. the chartered banks. B. the yield on 91-day Treasury bills. C. the prime rate. D. the Bank of Canada overnight rate.

Accessibility: Keyboard Navigation Block - Chapter 08 #10 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-07 Demand Loans and the Prime Rate Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 08 #11 Difficulty: Medium Learning Objective: 08-06 Demonstrate the hedging of interest rates to reduce borrowing risk. Topic: 08-29 Hedging to Reduce Borrowing Risk Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 08 #12 Difficulty: Medium Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-24 Asset-Backed Securities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #13 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #14 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-11 Interest Costs with Fees or Compensating Balances Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #15 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

16. The extent to which inventory financing may be used depends on: A. prime rate of interest. B. cost of goods. C. how fragile the goods are. D. how perishable the goods are.

Accessibility: Keyboard Navigation Block - Chapter 08 #16 Difficulty: Medium Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-25 Inventory Financing Type: Concept

17. Which of the following is not a method for lenders to control pledged inventory? A. Blanket inventory liens. B. Trust receipts. C. Warehousing. D. Factoring.

Accessibility: Keyboard Navigation Block - Chapter 08 #17 Difficulty: Medium Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-27 Nature of Lender Control Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #18 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-16 Advantages of Commercial Paper Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #19 Difficulty: Hard Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm. Topic: 08-19 Foreign Borrowing Type: Concept

20. The cost of not taking the discount on trade credit of 3/10, net 30 is equal to: A. 57.75%. B. 55.67%. C. 56.44%. D. 36.50%.

Accessibility: Keyboard Navigation Block - Chapter 08 #20 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #21 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

22. Mr. Jones borrows $3,000 for 90 days and pays $35 interest. What is his annual rate of interest? A. 1.2% B. 3.5% C. 4.7% D. 11.7%

Accessibility: Keyboard Navigation Block - Chapter 08 #22 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-10 Cost of Bank Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #23 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-12 Rate on Instalment Loans Type: Concept

24. The prime rate: A. is the annual rate of interest for banks' best customers. B. changes infrequently. C. is usually lower than treasury bill rates. D. is the annual rate of interest for the bank.

Accessibility: Keyboard Navigation Block - Chapter 08 #24 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-07 Demand Loans and the Prime Rate Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #25 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-07 Demand Loans and the Prime Rate Type: Concept

26. If Analog computers can borrow at 9.5% for 3 years, what is the annual rate of interest on an $800,000 loan where a 15% compensating balance is required? A. 11.18%. B. 17.27%. C. 9.50%. D. 3.16%.

Accessibility: Keyboard Navigation Block - Chapter 08 #26 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-11 Interest Costs with Fees or Compensating Balances Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #27 Difficulty: Easy Learning Objective: 08-06 Demonstrate the hedging of interest rates to reduce borrowing risk. Topic: 08-29 Hedging to Reduce Borrowing Risk Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #28 Difficulty: Easy Learning Objective: 08-06 Demonstrate the hedging of interest rates to reduce borrowing risk. Topic: 08-29 Hedging to Reduce Borrowing Risk Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 08 #29 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-07 Demand Loans and the Prime Rate Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 08 #30 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-09 Maturity Provisions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #31 Difficulty: Medium Learning Objective: 08-06 Demonstrate the hedging of interest rates to reduce borrowing risk. Topic: 08-29 Hedging to Reduce Borrowing Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #32 Difficulty: Medium Learning Objective: 08-06 Demonstrate the hedging of interest rates to reduce borrowing risk. Topic: 08-29 Hedging to Reduce Borrowing Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #33 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-05 Net Credit Position Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #34 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-10 Cost of Bank Financing Type: Concept

35. When calculating a loan with a 20% compensating balance a firm would borrow ____ in order to have available funds of $200,000. A. $160,000 B. $200,000 C. $250,000 D. $260,000

Accessibility: Keyboard Navigation Block - Chapter 08 #35 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Memory

36. Commercial paper that is sold without going through a broker or dealer is known as: A. direct paper. B. dealer paper. C. book-entry transactions. D. term paper.

Accessibility: Keyboard Navigation Block - Chapter 08 #36 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

37. Commercial paper that is sold without the use of an actual paper certificate is known as: A. finance paper. B. dealer paper. C. book-entry paper. D. term paper.

Accessibility: Keyboard Navigation Block - Chapter 08 #37 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 08 #38 Difficulty: Medium Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-21 Accounts Receivable Financing Type: Concept

39. Which method of controlling pledged inventory provides the greatest degree of security to the lender? A. Blanket inventory liens. B. Overall inventory liens. C. Trust receipts. D. Warehousing.

Accessibility: Keyboard Navigation Block - Chapter 08 #39 Difficulty: Easy Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-27 Nature of Lender Control Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #40 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Concept

41. A term loan is usually characterized by: A. maturity of ten to fifteen years. B. a zero interest rate. C. monthly or quarterly instalment payments. D. securitization of inventory.

Accessibility: Keyboard Navigation Block - Chapter 08 #41 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-09 Maturity Provisions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 08 #42 Difficulty: Medium Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #43 Difficulty: Easy Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-24 Asset-Backed Securities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #44 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Memory

45. After treasury bills, the largest outstanding short-term security is: A. commercial paper. B. bankers' acceptances. C. bearer deposit notes. D. certificates of deposit.

Accessibility: Keyboard Navigation Block - Chapter 08 #45 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-18 Bankers Acceptances Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

46. Securitized paper: A. is not part of the money market. B. is off balance sheet financing. C. is guaranteed by security firms. D. is backed by a variety of assets.

Accessibility: Keyboard Navigation Block - Chapter 08 #46 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-07 Demand Loans and the Prime Rate Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 08 #47 Difficulty: Easy Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm. Topic: 08-19 Foreign Borrowing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 08 #48 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #49 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-11 Interest Costs with Fees or Compensating Balances Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #50 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Memory

51. The cost of forgoing the discount on trade credit of 1/10, net 30 is equal to: A. 22.35%. B. 18.43%. C. 20.52%. D. 12.00%

Accessibility: Keyboard Navigation Block - Chapter 08 #51 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

52. The cost of forgoing the discount on trade credit of 4/10, net 90 is equal to: A. 18.25%. B. 19.01%. C. 20.52%. D. 12.13%.

Accessibility: Keyboard Navigation Block - Chapter 08 #52 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

53. The cost of forgoing the discount on trade credit of 4/10, net 25 is equal to: A. 101.32%. B. 87.33%. C. 28.8%. D. 12.13%.

Accessibility: Keyboard Navigation Block - Chapter 08 #53 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

54. Bank loans to business firms: A. are usually long-term in nature. B. are preferred by the banker to be self-liquidating. C. require compensating balances. D. are always at a fixed rate.

Accessibility: Keyboard Navigation Block - Chapter 08 #54 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-06 Bank Credit Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

55. Mrs. Robinson borrows $5,000 for 90 days and pays $80 interest. What is her annual rate of interest? A. 1.6% B. 6.49% C. 12.98% D. 6.40%

Accessibility: Keyboard Navigation Block - Chapter 08 #55 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-10 Cost of Bank Financing Type: Concept

56. Mr. Phelps borrows $3,000 for 30 days and pays $80 interest. What is his annual rate of interest? A. 2.67% B. 16.24% C. 32.44% D. 24.54%

Accessibility: Keyboard Navigation Block - Chapter 08 #56 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-10 Cost of Bank Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #57 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-07 Demand Loans and the Prime Rate Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #58 Difficulty: Easy Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm. Topic: 08-19 Foreign Borrowing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 08 #59 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-10 Cost of Bank Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 08 #60 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 08 #61 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Concept

62. Laura's Book Shoppe is going to borrow $50,000 for 90 days at an annual rate of 9%. The amount of interest owing in 90 days will be: A. $4,500.00 B. $1,109.59 C. $1,225.00 D. $1,009.59

Accessibility: Keyboard Navigation Block - Chapter 08 #62 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-10 Cost of Bank Financing Type: Memory

63. The largest source of short-term funds for most companies is suppliers (trade credit). TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #63 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-02 Trade Credit Type: Concept

64. Larger firms tend to be net users of trade credit. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #64 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-02 Trade Credit Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

65. Small companies finance a relatively greater proportion of their assets through trade credit than do larger concerns. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #65 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-02 Trade Credit Type: Concept

66. A trade discount is a percentage reduction from the invoice price given for purchasing certain minimum quantities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #66 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-03 Payment Period Type: Concept

67. Financial institution deregulation has eased competition between banks and foreign financial institutions. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #67 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-06 Bank Credit Type: Memory

68. Although the LIBOR has remained competitive and comparable to the Canadian prime rate, it has remained slightly higher than the prime rate. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #68 Difficulty: Hard Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm. Topic: 08-19 Foreign Borrowing Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

69. Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #69 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-07 Demand Loans and the Prime Rate Type: Concept

70. It is difficult to acquire a loan in Canadian dollars outside Canada. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #70 Difficulty: Medium Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm. Topic: 08-19 Foreign Borrowing Type: Concept

71. The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #71 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

72. Compensating balances have been important for banks because their existence allows them to make loans at lower quoted rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #72 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

73. A compensating balance will be lower in periods of tight money than in periods of credit ease. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #73 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Concept

74. Compensating balances are a way for banks to recover the cost of corporate services provided, but not directly charged. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #74 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Memory

75. Commercial paper is an unsecured short-term IOU from a large financially secure company. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #75 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Memory

76. Small businesses frequently find commercial paper a useful means of obtaining funds when it is not possible to raise funds by other means. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #76 Difficulty: Medium Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

77. Accounts payable is a spontaneous source of funds that grows as the business expands. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #77 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-02 Trade Credit Type: Concept

78. Stretching the payment period refers to the practice of trying to take a trade discount after the discount period. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #78 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

79. On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #79 Difficulty: Easy Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

80. Compensating balances represent unfair hidden costs of borrowing. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #80 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

81. Monthly instalment loans usually increase the effective rate of borrowing by approximately 2 times the stated rate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #81 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-12 Rate on Instalment Loans Type: Concept

82. Issuers of commercial paper can be divided into finance companies and industrial or utility firms. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #82 Difficulty: Medium Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Concept

83. Commercial paper represents secured short-term borrowing by large companies. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #83 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Memory

84. The prime rate has been tied to market interest rates to better relate the interest rate to banks' cost of funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #84 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-07 Demand Loans and the Prime Rate Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

85. One major advantage of commercial paper is that it can always be "rolled over" (reissued) when it matures. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #85 Difficulty: Medium Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-16 Advantages of Commercial Paper Type: Memory

86. Eurodollar loans are similar to Canadian bank loans in that they are usually short-term in nature. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #86 Difficulty: Medium Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm. Topic: 08-19 Foreign Borrowing Type: Concept

87. In times of tight credit in Canada, Eurodollar loans become difficult to obtain. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #87 Difficulty: Medium Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm. Topic: 08-19 Foreign Borrowing Type: Concept

88. The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #88 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

89. Firms can almost always increase the amount of time they take to pay for purchases without incurring problems. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #89 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-02 Trade Credit Type: Concept

90. All commercial paper involves the physical transfer of actual paper certificates. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #90 Difficulty: Medium Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Concept

91. It is easier for small firms to obtain financing through bank loans than through the commercial paper market. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #91 Difficulty: Medium Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Concept

92. Even though a firm factors its receivables to a finance company, it is still liable if the account becomes uncollectible. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #92 Difficulty: Medium Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-23 Factoring Receivables Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

93. The sale of securities backed by the receivables of large credit worthy firms is a large source of financing. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #93 Difficulty: Medium Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-24 Asset-Backed Securities Type: Concept

94. Approximately 50% of short-term financing is in the form of accounts payable or trade credit. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #94 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-02 Trade Credit Type: Memory

95. Trade credit is usually extended for periods of one year or more. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #95 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-03 Payment Period Type: Memory

96. A cash discount calls for a reduction in price if payment cannot be made within a specified time period. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #96 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Topic: 08-04 Cash Discount Policy Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

97. The annual effective rate of interest on a loan is a measure that includes the compounding effects on the loan. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #97 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-12 Rate on Instalment Loans Type: Memory

98. The lender's primary concern is whether the borrower's capacity to generate receivables is sufficient to liquidate the loan as it comes due. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #98 Difficulty: Medium Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-20 Use of Collateral in Short-Term Financing Type: Concept

99. The sale of asset-backed securities enables the issuing firm to acquire lower-cost funds than it normally would receive from a bank loan or bond offering. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #99 Difficulty: Medium Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-24 Asset-Backed Securities Type: Concept

100. The upward movement of the exchange rate can increase the total cost of a loan by making the principal repayment require more money than the original amount of the loan. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #100 Difficulty: Medium Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm. Topic: 08-19 Foreign Borrowing Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

101. The London Interbank offered rate is used to set a base lending rate for some corporate loans originating in the Euromarkets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #101 Difficulty: Easy Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm. Topic: 08-19 Foreign Borrowing Type: Memory

102. Firms using commercial paper are generally required to maintain bank lines of credit equal to the amount of paper outstanding. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #102 Difficulty: Medium Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-17 Limitations on the Issuance of Commercial Paper Type: Memory

103. The commercial paper market is available to all publicly traded companies. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #103 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Memory

104. One of the disadvantages of commercial paper is that if the company's credit quality declines, the issuance of additional paper may be impossible. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #104 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-17 Limitations on the Issuance of Commercial Paper Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

105. The banks have been significant issuers of asset-backed securities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #105 Difficulty: Easy Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-24 Asset-Backed Securities Type: Memory

106. Asset-backed securities often have superior credit ratings because of coverage from deposit insurance. FALSE

Accessibility: Keyboard Navigation Block - Chapter 08 #106 Difficulty: Easy Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan. Topic: 08-24 Asset-Backed Securities Type: Memory

107. The effective annual rate on a loan will always be higher than the stated rate because the effective annual rate takes into account compounding. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #107 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-12 Rate on Instalment Loans Type: Concept

108. Commercial Paper is generally issued by public companies that are considered to be financial very secure and thus have much lower levels of business risk. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #108 Difficulty: Easy Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-15 Financing Through Commercial Paper Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

109. An instalment loan uses a series of equal payments to retire a loan. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #109 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-09 Maturity Provisions Type: Memory

110. A discounted loan features subtraction of the calculated interest payment in advance. TRUE

Accessibility: Keyboard Navigation Block - Chapter 08 #110 Difficulty: Easy Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-10 Cost of Bank Financing Type: Memory

111. What is a compensating balance and what is its purpose? Is it commonly used? Why or why not? In providing loans and other services, banks will often charge setup fees and administration or review fees. Sometimes banks may require that business customers maintain a minimum average account balance in chequing accounts, referred to as a compensating balance, to cover banking costs. The required amount of a compensating balance is usually computed as a percentage of customer loans outstanding or as a percentage of bank commitments toward future loans to a given account. Generally fees for services are charged by the banking industry on a cost plus profit basis as opposed to requiring a compensating balance. Under the Bank Act, borrowers must agree to the compensating balance requirement, and Canadian banks must disclose the full cost of the loan, which is increased by the need for a compensating balance. However, banks seem to be making most of their loans these days without the requirement for the compensating balance, preferring instead to charge interest rates consistent with their cost of funds. The emphasis has turned to doing more intensive analysis of the profitability of each loan.

Block - Chapter 08 #111 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-08 Fees and Compensating Balances Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

112. Why is commercial paper an attractive alternative to short-term bank financing? • Generally it is cheaper (funds are raised in the wholesale market). • Compensating balances are not required (although banks offer standby lines of credit). • It is prestigious to float paper in a somewhat exclusive market. • Asset-backed paper can free up a firm's balance sheet.

Block - Chapter 08 #112 Difficulty: Medium Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-16 Advantages of Commercial Paper Type: Concept

113. What are the risks in the commercial paper market? • The possibility of default • The potential for a liquidity freeze • A lack of loyalty or ongoing commitment (as opposed to a banking relationship) Default in the commercial paper has included the Atlantic Acceptance Corporation, Olympia and York, the Mercantile Bank, Confederation Life Insurance Company, and Coventree Capital. Many were left holding unsecured IOUs that could not be liquidated as the market froze. Despite investment grade ratings as high as R1 (low) by the Dominion Bond Rating Service at the time of default, these firms could not raise additional capital to meet their commitments because of financial difficulties. Therefore, lines of credit at a bank are important in protecting the firm against adverse turns of events in the money markets.

Block - Chapter 08 #113 Difficulty: Medium Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm. Topic: 08-17 Limitations on the Issuance of Commercial Paper Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Bank Plan:

Block - Chapter 08 #114 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-12 Rate on Instalment Loans Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

where the compensating balance is subtracted from the principal. McLean National Bank

Take McLean's offer.

Block - Chapter 08 #115 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-12 Rate on Instalment Loans Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

B) First City:

Upstart:

C) Take Upstart's loan. The annual interest rate is much lower.

Block - Chapter 08 #116 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-05 Net Credit Position Topic: 08-11 Interest Costs with Fees or Compensating Balances Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Annual rate on loan

Additional compensating balance required

Take the loan. It's cheaper.

Block - Chapter 08 #117 Difficulty: Medium Learning Objective: 08-01 Characterize trade credit as an important form of short-term financing; and calculate its cost to the firm if a discount is forgone. Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-05 Net Credit Position Topic: 08-11 Interest Costs with Fees or Compensating Balances Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

PRAIRIE BANK:

B) Annual rate =

No, Prairie Bank is still more expensive.

Block - Chapter 08 #118 Difficulty: Medium Learning Objective: 08-02 Describe bank loans as self-liquidating; as short-term; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions. Topic: 08-12 Rate on Instalment Loans Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 08 Summary Category

# of Quest ions

Accessibility: Keyboard Navigation

110

Block - Chapter 08

118

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 08-01 Characterize trade credit as an important form of shortterm financing; and calculate its cost to the firm if a discount is forgone.

Learning Objective: 08-02 Describe bank loans as self-liquidating; as shortterm; and as having their interest cost tied to the prime rate. Also; calculate interest rates under different conditions.

Learning Objective: 08-03 Describe commercial paper as a short-term; unsecured promissory note of the firm.

Learning Objective: 08-04 Review borrowing in foreign markets as a cost-effective alternative for the firm.

Learning Objective: 08-05 Explain that offering accounts receivable and inventory as collateral may lower the interest costs on a loan.

Learning Objective: 08-06 Demonstrate the hedging of interest rates to reduce borrowing risk.

Topic: 08-02 Trade Credit

Topic: 08-03 Payment Period

Topic: 08-04 Cash Discount Policy

Topic: 08-05 Net Credit Position

Topic: 08-06 Bank Credit

Topic: 08-07 Demand Loans and the Prime Rate

Topic: 08-08 Fees and Compensating Balances

Topic: 08-09 Maturity Provisions

Topic: 08-10 Cost of Bank Financing

Topic: 08-11 Interest Costs with Fees or Compensating Balances

Topic: 08-12 Rate on Instalment Loans

Topic: 08-15 Financing Through Commercial Paper

Topic: 08-16 Advantages of Commercial Paper

Topic: 08-17 Limitations on the Issuance of Commercial Paper

Topic: 08-18 Bankers Acceptances

Topic: 08-19 Foreign Borrowing

Topic: 08-20 Use of Collateral in Short-Term Financing

Topic: 08-21 Accounts Receivable Financing

Topic: 08-23 Factoring Receivables

Topic: 08-24 Asset-Backed Securities

Topic: 08-25 Inventory Financing

Topic: 08-27 Nature of Lender Control

Topic: 08-29 Hedging to Reduce Borrowing Risk

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 09 1. A dollar today is worth more than a dollar to be received in the future because: A. risk of nonpayment in the future. B. the dollar can be invested today and earn interest. C. inflation will reduce purchasing power of a future dollar. D. a dollar today is not worth more than a dollar to be received in the future.

2. If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, which table would you use to find the ending balance in your account? A. Present value of $1 B. Future value of $1 C. Present value of an annuity of $1 D. Compound sum of an annuity of $1

3. The FVIFA for the future value of an annuity is 4.641 at 10% for 4 years. If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be? A. $2,500 B. $2,000 C. $1,724 D. $2,200

4. Under what conditions must a distinction be made between money to be received today and money to be received in the future? A. A period of recession B. When idle money can earn a positive return C. When there is no risk of nonpayment in the future D. When current interest rates are different from expected future rates

5. An annuity may be defined as: A. a payment at a fixed interest rate. B. a series of payments of unequal amount. C. a series of yearly payments. D. a series of consecutive payments or receipts of equal amounts.

Foundations of Financial Management - 10th Canadian Edition by Block

6. You are to receive $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today? A. Present value of an annuity of $1 B. Future value of an annuity C. Present value of $1 D. Compound sum of $1

7. As the interest rate increases, the present value of an amount to be received at the end of a fixed period: A. increases. B. decreases. C. remains the same. D. not enough information to tell.

8. As the time period until receipt increases, the present value of an amount at a fixed interest rate: A. decreases. B. remains the same. C. increases. D. not enough information to tell.

9. A home buyer signed a 20-year, 8% mortgage for $72,500. How much should the annual loan payments be? (Assume annual compounding.) A. $5,560 B. $7,384 C. $8,074 D. $13,900

10. A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. How much will your annual benefits be? A. $1,435 B. $3,671 C. $6,608 D. $8,043

Foundations of Financial Management - 10th Canadian Edition by Block

11. After 20 years, 100 shares of stock originally purchased for $1,000 was sold for $5,000. What was the annual yield on the investment? Choose the closest answer. A. 19.00% B. 5.00% C. 12.70% D. 8.38%

12. Mr. Blochirt is creating a university investment fund for his daughter. He will put in $850 per year at the end of each year for the next 15 years and expects to earn an 8% annual rate of return. How much money will his daughter have when she starts university? A. $11,250 B. $12,263 C. $24,003 D. $23,079

13. Ambrin Corp. expects to receive $2,000 per year for 10 years and $3,500 per year for the next 10 years. What is the present value of this 20 year cash flow? Use an 11% discount rate. A. $19,038 B. $27,872 C. $32,391 D. $15,927

14. In determining the compound sum of a single amount, one measures: A. the future value of periodic payments at a given interest rate. B. the present value of an amount discounted at a given interest rate. C. the future value of an amount allowed to grow at a given interest rate. D. the present value of periodic payments at a given interest rate.

15. The concept of time value of money is not important to financial decision making because: A. it emphasizes earning a return on invested capital. B. it recognizes that earning a return makes $1 worth more today than $1 received in the future. C. it can be applied to future cash flows in order to compare different streams of income. D. it emphasizes the historic interest paid.

Foundations of Financial Management - 10th Canadian Edition by Block

16. Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives annual interest of 8% for 7 years. How much interest will his investment earn during this time period? A. $2,915 B. $3,569 C. $6,254 D. $8,570

17. Dr. J. wants to buy an IBM personal computer which will cost $2,788 four years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn a 7% annual return. How much should he set aside? A. $697.00 B. $627.94 C. $823.15 D. $531.81

18. Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be $170,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed? A. Between 11% and 12% B. Between 8% and 9% C. 17% D. 14%

19. Babe Ruth Jr. has agreed to play for the Toronto Blue Jays for $9 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars? A. Present value of an annuity. B. Present value of a single amount. C. Future value of an annuity. D. Future value of an annuity due.

20. John Doeber borrowed $125,000 to buy a house. His loan cost was 11% and he promised to repay the loan over 15 years (amortization). How much are the monthly payments with semiannual compounding? A. $1,146 B. $1,380 C. $1,421 D. $1,402

Foundations of Financial Management - 10th Canadian Edition by Block

21. Lou Lewis borrows $10,000 to be repaid over 10 years with equal annual payments at 9 percent. Repayment of principal in the first year is: A. $1,558.20. B. $1,000.00. C. $900.00. D. $658.20.

22. A 20-year mortgage with monthly payments has a principal outstanding of $125,000. Interest is at 8% compounded semi-annually. What are the monthly payments? A. $833.33 B. $1,035.24 C. $1,045.55 D. $1,354.16

23. Mr. Darden is selling his house for $165,000. He bought it for $55,000 nine years ago. What is the annual return on his investment? A. 13% B. 22% C. 33% D. 16%

24. The shorter the length of time between a present value and its corresponding future value: A. the lower the present value, relative to the future value. B. the higher the present value, relative to the future value. C. the higher the interest rate used in the present-valuation. D. the lower the discount rate used.

25. The higher the discount rate used in determining the future value of a $1 annuity,: A. the greater the future value at the end of a period. B. the smaller the future value at the end of a period. C. the greater the present value at the beginning of a period. D. none of the other answers are correct: the interest has no effect on the future value of an annuity.

26. Increasing the number of periods will increase all of the following except: A. the present value of an annuity. B. the present value of $1. C. the future value of $1. D. the future value of an annuity.

Foundations of Financial Management - 10th Canadian Edition by Block

27. Joe Nautilus has $120,000 and wants to retire. What return must his money earn so he may receive annual benefits of $20,000 for the next 14 years? A. 12% B. Between 12% and 13% C. 14% D. Greater than 15%

28. Football player Walter Johnson signs a contract calling for payments of $2,500,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use? A. The future value of $1 B. The future value of an annuity of $1 and the future value of $1 C. The present value of an annuity of $1 and the present value of $1 D. The present value of an annuity of $1

29. To find the yield on investments that require the payment of a single amount initially, and which then return a single amount sometime in the future, the correct table to use is: A. the future value of $1. B. the compound sum of $1. C. present value of an annuity of $1. D. present value of an annuity due of $1.

30. As the discount rate becomes higher and higher, the present value of inflows approaches: A. zero. B. minus infinity. C. plus infinity. D. need more information.

31. Janice Hardin sets aside $5,000 each year for 10 years. She then withdraws the funds on an equal annual basis for the next 10 years. The two tables she should use in the correct order are: A. present value of an annuity of $1; future value of an annuity of $1. B. future value of an annuity of $1; present value of an annuity of $1. C. future value of an annuity of $1; present value of $1. D. future value of an annuity of $1; future value of $1.

Foundations of Financial Management - 10th Canadian Edition by Block

32. Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12th year (10 payments). The discount rate is 10%. The present value today of this deferred annuity is: A. $61,446 B. $55,860 C. $46,165 D. $50,782

33. The future value of a $1,000 investment today at 8% annual interest compounded semiannually for 5 years is: A. $1,469 B. $1,480 C. $1,520 D. $1,555

34. You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 4 years. The annual interest rate is 8%. Your annual withdrawal will be: A. $2,340 B. $4,332 C. $797 D. $1,084

35. Sharon Smith will receive $1,000,000 in 50 years. The discount rate is 14%. As an alternative she can receive $2,000 today. Which should she choose? A. The $1,000,000 in 50 years. B. The $2,000 today. C. She should be indifferent. D. It depends on the inflation rate.

36. Pedro Gonzalez will invest $5,000 at the beginning of each year for the next 9 years. The current yield is 8%. What is the future value? A. $45,000 B. $62,438 C. $67,433 D. $60,105

Foundations of Financial Management - 10th Canadian Edition by Block

37. Carol Thomas will pay out $6,000 at the end of the year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13%, how much money does she need to have on hand today to meet her obligations? A. $4,110 B. $10,243 C. $14,000 D. $4,000

38. If you were to put $5,000 in the bank at 4% interest each year for the next 8 years, which table would you use to find the ending balance in your account? A. Present value of $1 B. Future value of $1 C. Present value of an annuity of $1 D. Future value of an annuity of $1

39. If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be if we receive an interest rate of 10% on our investments? The first payment is made at the end of each year. A. $1,379.24 B. $1,567.06 C. $1,723.77 D. $2,000.00

40. As the interest rate decreases, the present value of an amount to be received at the end of a fixed period: A. increases. B. decreases. C. remains the same. D. not enough information to tell.

41. As the time period until receipt decreases, the present value of an amount at a fixed interest rate: A. decreases. B. remains the same. C. increases. D. not enough information to tell.

Foundations of Financial Management - 10th Canadian Edition by Block

42. Cheryl Gold signed a 20-year, 6% mortgage for $250,000. How much should the biweekly loan payments be? (Assume compounding biweekly.) A. $576.92 B. $826.08 C. $509.62 D. $958.62

43. A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement you will have $250,000 to your credit in the plan. The plan anticipates earning 9% interest compounded monthly. How much will your monthly benefits be, paid at the end of each month? A. $2,249.31 B. $1,024.59 C. $1,555.69 D. $1,894.24

44. After 10 years, 1,000 shares of stock originally purchased for $10/share was sold for $50/share. What was the annual yield on the investment? Choose the closest answer assuming annual compounding. A. 500.00% B. 5.00% C. 12.70% D. 17.46%

45. Laura Diane is creating a university investment fund for her son Leland. She will put in $71.00 per month at the end of each month for the next 15 years and expects to earn an 8% annual rate of return, compounded monthly. How much money will Leland have when he starts university? A. $28,052.38 B. $12,780.00 C. $13,393.98 D. $24,568.71

46. Morgan D. expects to receive $200 per month for 10 years and $250 per month for the next 10 years. What is the present value of this 20-year cash flow? Use a 10% discount rate, assuming monthly compounding. A. $22,122.59 B. $34,052.02 C. $54,000.00 D. $15,134.23

Foundations of Financial Management - 10th Canadian Edition by Block

47. Dr. Russell wants to buy an expensive car which will cost $74,000 four years from today. He would like to set aside an equal amount at the end of each month in order to accumulate the amount needed. He can earn a 7% annual return. How much should he set aside? A. $1,340.36 B. $1,541.67 C. $2,236.23 D. $1,109.44

48. Ruth H. wants to build a house in 12 years. She estimates that the total cost will be $350,000. If she can put aside $20,000 at the end of each year, what rate of return must she earn in order to have the amount needed, assuming annual compounding? A. Between 11% and 12% B. Between 8% and 9% C. 17% D. 6.63%

49. Debby Robinson borrows $10,000 to be repaid over 10 years with equal annual payments at 9%. Repayment of principal in the second year is: A. $1,558.20. B. $1,000.00. C. $717.44. D. $658.20.

50. Mr. Sheridan is selling his house for $280,000. He bought it for $55,000 15 years ago. What is the annual return on his investment, assuming monthly compounding? A. 13.20% B. 10.90% C. 3.39% D. 5.09%

51. The longer the length of time between a present value and its corresponding future value,: A. the lower the present value, relative to the future value. B. the higher the present value, relative to the future value. C. the higher the interest rate used in the present-valuation. D. there is no difference.

Foundations of Financial Management - 10th Canadian Edition by Block

52. You will deposit $10,000 today. It will grow for 10 years at 10% interest compounded monthly. You will then withdraw the funds quarterly over the next 4 years. The annual interest rate over those 4 years is 8%. Your annual withdrawal will be: A. $1691.90. B. $1993.74. C. $1789.37. D. $660.87.

53. You have decided to purchase a new home valued at $300,000. You have a 20% down payment the bank has offered to finance a mortgage at a rate of 3.25% over 30 years. What would be your biweekly payments? A. 602 B. $1,204 C. $482 D. $241

54. Canadian Coal Corporation (CCC) produced 420,000 metric tonnes of coal in 2015. If CCC's coal production in 2010 was 30,000 metric tonnes, what was CCC's average annual increase in production between 2010 and 2015? A. 36.5% B. 14.0% C. 65.0% D. 55.0%

55. You can purchase a strip bond at $888 that has a term to maturity of 7 years. What would be the Yield-toMaturity on this bond? A. 5.71% B. 3.25% C. 1.71% D. 2.89%

56. You can lease a vehicle today for 36 months. The dealer will guarantee a residual value of $10,000. If the cash price of the car is $38,000, and the financing is priced at 8.75%, what would be your monthly payment? A. $1,204 B. $602 C. $960 D. $782

Foundations of Financial Management - 10th Canadian Edition by Block

57. What is the maximum price you would pay for an investment that guarantees a payment of $1,000 a month beginning immediately lasts for 15 years and yields 12%? A. $84,155 B. $100,000 C. $62,832 D. $83,262

58. An amount of money to be received in the future is worth less today than the stated amount. True False

59. If an individual's cost of capital were 10%, he or she would prefer to receive $107 at the end of one year rather than $100 right now. True False

60. The time value of money is not a useful concept in determining the value of a bond or in capital investment decisions. True False

61. In paying off a mortgage loan, the amount of the periodic payment that goes toward the reduction of principal increases over the life of the mortgage. True False

62. Inflation is the most important reason that a dollar today is worth more than a dollar in the future. True False

63. In evaluating capital investment projects, current outlays must be judged against the current value of future benefits. True False

64. If a single amount were put on deposit at a given interest rate and allowed to grow, its future value could be determined by reference to the future value of $1 table. True False

Foundations of Financial Management - 10th Canadian Edition by Block

65. The formula FV = PV (1 + n)i will determine the present value of $1. True False

66. In determining the PVIF for the present value of $1, one could use the reciprocal of the FVIF for the future value of $1 at the same rate and time period. True False

67. As the interest rate increases, the PVIF for the present value of $1 increases. True False

68. An annuity is a series of consecutive payments of equal amount. True False

69. In determining the future value of an annuity, the final payment is not compounded at all. True False

70. The amount of annual payments necessary to repay a mortgage loan can be found by reference to the present value of an annuity table. True False

71. The amount of annual payments necessary to accumulate a desired total can be found by reference to the present value of an annuity table. True False

72. The annualized return on an investment can be determined by reference to a table for the present value of $1. True False

73. To determine the current worth of 4 annual payments of $1,000 at 4%, one would refer to a table for the present value of $1. True False

Foundations of Financial Management - 10th Canadian Edition by Block

74. The time value of money concept is fundamental to the analysis of cash inflow and outflow decisions covering periods of over one year. True False

75. The future value of an annuity assumes that the payments are received at the end of the year and that the last payment does not compound. True False

76. The interest factor for the future value of an annuity is simply the sum of the interest factors for the future value using the same number of periods. True False

77. The interest factor for a future value (FVIF) is equal to (1 + i)n. True False

78. The future value is the same concept as the way money grows in a bank account. True False

79. The interest factor for the present value of a single amount is the inverse of the future value interest factor. True False

80. The interest factor for the present value of a single sum is equal to (1 + i)/i. True False

81. Pension fund retirement accounts use the present value of an annuity to calculate the ending value upon retirement. True False

82. The time value of money concept becomes less critical as the prime rate increases. True False

Foundations of Financial Management - 10th Canadian Edition by Block

83. Cash flow decisions that ignore the time value of money will probably not be as accurate as those decisions that do rely on the time value of money. True False

84. When the inflation rate is zero, the present value of $1 is identical to the future value of $1. True False

85. Higher interest rates (discount rates) reduce the present value of amounts to be received in the future. True False

86. The farther into the future any given amount is received, the larger its present value. True False

87. The present value of a positive future value may become negative as discount rates become higher and higher. True False

88. Using semiannual compounding rather than annual compounding will increase the future value of an annuity. True False

89. Yield is defined as the interest rate that equates a future value of an annuity to a given present value. True False

90. What is the difference between a nominal interest rate and an effective interest rate?

Foundations of Financial Management - 10th Canadian Edition by Block

91. You are considering the purchase of a house. The house costs $300,000. You have no down payment. You have several financing alternatives.

For each alternative calculate 1. The payment cost 2. Total cost over the term of the mortgage 3. Total interest cost over the term of the mortgage 4. Compare the results and recommend which is the best decision and explain why.

92. How long does it take $1,000 to double in value if you have a A) 3% return B) 6% return C) 10% return Assume compounding monthly.

93. You have an opportunity to buy a $1,000 bond, which matures in 10 years. The bond pays $30 every six months. The current market interest rate is 8%. What is the most you would be willing to pay for this bond?

Foundations of Financial Management - 10th Canadian Edition by Block

94. In January, 2005 Harold Black bought 100 shares of Country homes for $37.50 per share. He sold them in January, 2015 for a total of $9,727.50. Calculate Harold's annual rate of return.

95. Mr. Sullivan is borrowing $2 million to expand his business. The loan will be for 10 years at 12% on the declining balance, and will be repaid in equal quarterly installments. What will the quarterly payments be? At the end of the first year, how much interest will Mr. Sullivan have paid? By how much will he have reduced the principal?

96. Marcia Stubern is planning for her golden years. She will retire in 20 years, at which time she plans to begin withdrawing $60,000 annually. She is expected to live for 20 years following her retirement. Her financial advisor thinks she can earn 9% annually. How much does she need to invest each year to prepare for her financial needs after her retirement?

97. Samuel Johnson invested in gold Maple Leaf coins 10 years ago, paying $185 for each one-ounce gold coin. He could sell each coin for $734 today. What was his annual rate of return for this investment?

Foundations of Financial Management - 10th Canadian Edition by Block

98. Gary Kiraly wants to buy a new Italian sports car in three years. The vehicle is expected to cost $80,000 at that time. If Gary should be so lucky as to find an investment yielding 12% over that three-year period, how much would he have to invest now in order to accumulate $80,000 at the end of the three years?

99. Sara Shouppe has invested $100,000 in an account at her local bank. The bank will pay her a constant amount each year for 6 years, starting one year from today, and the account's balance will be 0 at the end of the sixth year. If the bank has promised Ms. Shouppe a 10% return, how much will they have to pay her each year?

100. The Swell Computer Company has developed a new line of desktop computers. It is estimated that the cash returns generated by the new product line will be $800,000 per year for the next five years, and then $500,000 per year for 3 years after that (the cash returns occur at the end of each year). At a 9% interest rate, what is the present value of these cash returns?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 09 Key

1. A dollar today is worth more than a dollar to be received in the future because: A. risk of nonpayment in the future. B. the dollar can be invested today and earn interest. C. inflation will reduce purchasing power of a future dollar. D. a dollar today is not worth more than a dollar to be received in the future.

Accessibility: Keyboard Navigation Block - Chapter 09 #1 Difficulty: Easy Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #2 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-02 Future Value (Compound Value)—Single Amount Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #3 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-10 Annuity Equalling a Future Value (Sinking-Fund Value) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #4 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #5 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 09 #6 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

7. As the interest rate increases, the present value of an amount to be received at the end of a fixed period: A. increases. B. decreases. C. remains the same. D. not enough information to tell.

Accessibility: Keyboard Navigation Block - Chapter 09 #7 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

8. As the time period until receipt increases, the present value of an amount at a fixed interest rate: A. decreases. B. remains the same. C. increases. D. not enough information to tell.

Accessibility: Keyboard Navigation Block - Chapter 09 #8 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

9. A home buyer signed a 20-year, 8% mortgage for $72,500. How much should the annual loan payments be? (Assume annual compounding.) A. $5,560 B. $7,384 C. $8,074 D. $13,900

Accessibility: Keyboard Navigation Block - Chapter 09 #9 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #10 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #11 Difficulty: Medium Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-14 Yield—Present Value of a Single Amount Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #12 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #13 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-07 Present Value (Cumulative Present Value)—Annuity Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #14 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #15 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #16 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-03 Annual Interest Rates—Effective and Nominal Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #17 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #18 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #19 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-07 Present Value (Cumulative Present Value)—Annuity Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #20 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value) Type: Concept

21. Lou Lewis borrows $10,000 to be repaid over 10 years with equal annual payments at 9 percent. Repayment of principal in the first year is: A. $1,558.20. B. $1,000.00. C. $900.00. D. $658.20.

Accessibility: Keyboard Navigation Block - Chapter 09 #21 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-03 Annual Interest Rates—Effective and Nominal Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #22 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value) Type: Concept

23. Mr. Darden is selling his house for $165,000. He bought it for $55,000 nine years ago. What is the annual return on his investment? A. 13% B. 22% C. 33% D. 16%

Accessibility: Keyboard Navigation Block - Chapter 09 #23 Difficulty: Medium Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-13 Determining the Yield on an Investment Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #24 Difficulty: Medium Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-13 Determining the Yield on an Investment Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #25 Difficulty: Medium Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-13 Determining the Yield on an Investment Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #26 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-02 Future Value (Compound Value)—Single Amount Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #27 Difficulty: Medium Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-13 Determining the Yield on an Investment Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #28 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-07 Present Value (Cumulative Present Value)—Annuity Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #29 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-03 Annual Interest Rates—Effective and Nominal Type: Concept

30. As the discount rate becomes higher and higher, the present value of inflows approaches: A. zero. B. minus infinity. C. plus infinity. D. need more information.

Accessibility: Keyboard Navigation Block - Chapter 09 #30 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #31 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Topic: 09-06 Future Value—Annuity in Advance (Annuity Due) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #32 Difficulty: Hard Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-17 Patterns of Payment Type: Concept

33. The future value of a $1,000 investment today at 8% annual interest compounded semiannually for 5 years is: A. $1,469 B. $1,480 C. $1,520 D. $1,555

Accessibility: Keyboard Navigation Block - Chapter 09 #33 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-03 Annual Interest Rates—Effective and Nominal Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #34 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #35 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

36. Pedro Gonzalez will invest $5,000 at the beginning of each year for the next 9 years. The current yield is 8%. What is the future value? A. $45,000 B. $62,438 C. $67,433 D. $60,105

Accessibility: Keyboard Navigation Block - Chapter 09 #36 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-06 Future Value—Annuity in Advance (Annuity Due) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #37 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #38 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #39 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-10 Annuity Equalling a Future Value (Sinking-Fund Value) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

40. As the interest rate decreases, the present value of an amount to be received at the end of a fixed period: A. increases. B. decreases. C. remains the same. D. not enough information to tell.

Accessibility: Keyboard Navigation Block - Chapter 09 #40 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

41. As the time period until receipt decreases, the present value of an amount at a fixed interest rate: A. decreases. B. remains the same. C. increases. D. not enough information to tell.

Accessibility: Keyboard Navigation Block - Chapter 09 #41 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-02 Future Value (Compound Value)—Single Amount Type: Concept

42. Cheryl Gold signed a 20-year, 6% mortgage for $250,000. How much should the biweekly loan payments be? (Assume compounding biweekly.) A. $576.92 B. $826.08 C. $509.62 D. $958.62

Accessibility: Keyboard Navigation Block - Chapter 09 #42 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #43 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-10 Annuity Equalling a Future Value (Sinking-Fund Value) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #44 Difficulty: Hard Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-13 Determining the Yield on an Investment Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #45 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #46 Difficulty: Hard Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-17 Patterns of Payment Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #47 Difficulty: Medium Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-17 Patterns of Payment Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #48 Difficulty: Medium Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-17 Patterns of Payment Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

49. Debby Robinson borrows $10,000 to be repaid over 10 years with equal annual payments at 9%. Repayment of principal in the second year is: A. $1,558.20. B. $1,000.00. C. $717.44. D. $658.20.

Accessibility: Keyboard Navigation Block - Chapter 09 #49 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #50 Difficulty: Medium Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-13 Determining the Yield on an Investment Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #51 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-02 Future Value (Compound Value)—Single Amount Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 09 #52 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #53 Difficulty: Easy Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-20 Canadian Mortgages Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #54 Difficulty: Easy Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-13 Determining the Yield on an Investment Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

55. You can purchase a strip bond at $888 that has a term to maturity of 7 years. What would be the Yield-toMaturity on this bond? A. 5.71% B. 3.25% C. 1.71% D. 2.89%

Accessibility: Keyboard Navigation Block - Chapter 09 #55 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-02 Future Value (Compound Value)—Single Amount Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #56 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 09 #57 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-08 Present Value—Annuity in Advance Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

58. An amount of money to be received in the future is worth less today than the stated amount. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #58 Difficulty: Easy Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

59. If an individual's cost of capital were 10%, he or she would prefer to receive $107 at the end of one year rather than $100 right now. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #59 Difficulty: Easy Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

60. The time value of money is not a useful concept in determining the value of a bond or in capital investment decisions. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #60 Difficulty: Easy Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

61. In paying off a mortgage loan, the amount of the periodic payment that goes toward the reduction of principal increases over the life of the mortgage. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #61 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

62. Inflation is the most important reason that a dollar today is worth more than a dollar in the future. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #62 Difficulty: Easy Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

63. In evaluating capital investment projects, current outlays must be judged against the current value of future benefits. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #63 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

64. If a single amount were put on deposit at a given interest rate and allowed to grow, its future value could be determined by reference to the future value of $1 table. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #64 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-02 Future Value (Compound Value)—Single Amount Type: Concept

65. The formula FV = PV (1 + n)i will determine the present value of $1. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #65 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-02 Future Value (Compound Value)—Single Amount Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

66. In determining the PVIF for the present value of $1, one could use the reciprocal of the FVIF for the future value of $1 at the same rate and time period. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #66 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-02 Future Value (Compound Value)—Single Amount Type: Concept

67. As the interest rate increases, the PVIF for the present value of $1 increases. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #67 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

68. An annuity is a series of consecutive payments of equal amount. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #68 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Memory

69. In determining the future value of an annuity, the final payment is not compounded at all. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #69 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

70. The amount of annual payments necessary to repay a mortgage loan can be found by reference to the present value of an annuity table. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #70 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value) Type: Concept

71. The amount of annual payments necessary to accumulate a desired total can be found by reference to the present value of an annuity table. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #71 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Concept

72. The annualized return on an investment can be determined by reference to a table for the present value of $1. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #72 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

73. To determine the current worth of 4 annual payments of $1,000 at 4%, one would refer to a table for the present value of $1. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #73 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-07 Present Value (Cumulative Present Value)—Annuity Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

74. The time value of money concept is fundamental to the analysis of cash inflow and outflow decisions covering periods of over one year. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #74 Difficulty: Easy Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

75. The future value of an annuity assumes that the payments are received at the end of the year and that the last payment does not compound. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #75 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Concept

76. The interest factor for the future value of an annuity is simply the sum of the interest factors for the future value using the same number of periods. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #76 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Concept

77. The interest factor for a future value (FVIF) is equal to (1 + i)n. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #77 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-05 Future Value (Cumulative Future Value)—Annuity Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

78. The future value is the same concept as the way money grows in a bank account. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #78 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-02 Future Value (Compound Value)—Single Amount Type: Concept

79. The interest factor for the present value of a single amount is the inverse of the future value interest factor. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #79 Difficulty: Easy Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Memory

80. The interest factor for the present value of a single sum is equal to (1 + i)/i. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #80 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-02 Future Value (Compound Value)—Single Amount Type: Memory

81. Pension fund retirement accounts use the present value of an annuity to calculate the ending value upon retirement. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #81 Difficulty: Easy Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-03 Annual Interest Rates—Effective and Nominal Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

82. The time value of money concept becomes less critical as the prime rate increases. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #82 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

83. Cash flow decisions that ignore the time value of money will probably not be as accurate as those decisions that do rely on the time value of money. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #83 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

84. When the inflation rate is zero, the present value of $1 is identical to the future value of $1. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #84 Difficulty: Hard Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

85. Higher interest rates (discount rates) reduce the present value of amounts to be received in the future. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #85 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

86. The farther into the future any given amount is received, the larger its present value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #86 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

87. The present value of a positive future value may become negative as discount rates become higher and higher. FALSE

Accessibility: Keyboard Navigation Block - Chapter 09 #87 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

88. Using semiannual compounding rather than annual compounding will increase the future value of an annuity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #88 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

89. Yield is defined as the interest rate that equates a future value of an annuity to a given present value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 09 #89 Difficulty: Medium Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

90. What is the difference between a nominal interest rate and an effective interest rate? Interest rates are most commonly expressed on an annual basis. The nominal rate of interest is an interest rate that does not capture the effects of compounding. Generally at the end of a period of time, often a year, the investor receives interest and can reinvest it, along with the original investment, for another year. The investor will earn interest on interest as well as on the original investment. For example, after four years of reinvestment annually, $1,000 PV accumulates $464 in interest at a 10% nominal interest rate. Over the four-year period this represents a 46.4% rate of return (not 40% as would be expected in simple interest). This is the effective rate of interest, an interest rate that includes any compounding effects. An effective rate of interest is more informative because we can calculate the actual interest earned or, if we are borrowing, the actual cost of the loan.

Block - Chapter 09 #90 Difficulty: Hard Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-03 Annual Interest Rates—Effective and Nominal Type: Concept

91. You are considering the purchase of a house. The house costs $300,000. You have no down payment. You have several financing alternatives.

Alternative 2 results in the lowest overall cost and lowest interest cost. A 20 year mortgage biweekly costs $216.04/month more than a 25-year but saves $64,062 over 20 years. The cost per month of bimonthly payments is also slightly lower than monthly payments. This is a good exercise to demonstrate the advantage of shorter term mortgages.

Block - Chapter 09 #91 Difficulty: Hard Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-20 Canadian Mortgages Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

92. How long does it take $1,000 to double in value if you have a A) 3% return B) 6% return C) 10% return Assume compounding monthly. A) 23.13 years B) 11.58 years C) 6.96 years

Block - Chapter 09 #92 Difficulty: Hard Learning Objective: 09-01 Explain the concept of the time value of money. Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital Type: Concept

PV of face amount, Appendix B: PV = FV × PVIF (4%, 20 periods) PV = $1,000 × .456 PV = $456.00 PVA of interest payments, Appendix D: PVA = A × PVIFA (4%, 20 periods) PVA = $30 × 13.590 PVA = $407.70 PV of bond = PV of face amount + PV of interest payments = 456.00 + 407.70 = $863.70 Current value (maximum price) Block - Chapter 09 #93 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

94. In January, 2005 Harold Black bought 100 shares of Country homes for $37.50 per share. He sold them in January, 2015 for a total of $9,727.50. Calculate Harold's annual rate of return.

FV = PV × FVIF (App. A) $9,727.50 = 100($37.50) × FVIF 2.594 = FVIF Looking across the 10 year line, the interest factor is for 10%. Annual Rate of Return 10% To check, $9,727.50 = $3,750 × (1 + .10)10 = $3,750 × 2.5937 = $9,726.375 (Difference due to rounding)

Block - Chapter 09 #94 Difficulty: Medium Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-15 Yield—Present Value of an Annuity Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 09 #95 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-07 Present Value (Cumulative Present Value)—Annuity Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Amount needed in 20 years: PVA = A × PVIFA (9%, 20 yrs) Appendix D = 60,000 × 9.129 = $547,740 Amount deposited annually in order to attain that goal: PVA = A × FVIFA (9%, 20 yrs) Appendix C 547,740 = A × 51.60 A = $10,615.12 Block - Chapter 09 #96 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-07 Present Value (Cumulative Present Value)—Annuity Type: Concept

Block - Chapter 09 #97 Difficulty: Medium Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows. Topic: 09-14 Yield—Present Value of a Single Amount Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 09 #98 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

Block - Chapter 09 #99 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Solve as the sum of two annuities: one of $500,000 per period for 8 periods, and one of $300,000 per period for 5 periods.

Block - Chapter 09 #100 Difficulty: Medium Learning Objective: 09-02 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate. Topic: 09-04 Present Value (Discounted Value)—Single Amount Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 09 Summary Category

# of Questio ns

Accessibility: Keyboard Navigation

Block - Chapter 09

100

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 09-01 Explain the concept of the time value of money.

Learning Objective: 0902 Calculate present values; future values; and annuities based on the number of time periods involved and the going interest rate.

Learning Objective: 09-03 Calculate yield based on the time relationships between cash flows.

Topic: 09-01 Application to the Capital Budgeting Decision and the Cost of Capital

Topic: 09-02 Future Value (Compound Value)—Single Amount

Topic: 09-03 Annual Interest Rates—Effective and Nominal

Topic: 09-04 Present Value (Discounted Value)—Single Amount

Topic: 09-05 Future Value (Cumulative Future Value)—Annuity

Topic: 09-06 Future Value—Annuity in Advance (Annuity Due)

Topic: 09-07 Present Value (Cumulative Present Value)—Annuity

Topic: 09-08 Present Value—Annuity in Advance

Topic: 09-10 Annuity Equalling a Future Value (Sinking-Fund Value)

Topic: 09-11 Annuity Equalling a Present Value (Capital Recovery Value)

Topic: 09-13 Determining the Yield on an Investment

Topic: 09-14 Yield—Present Value of a Single Amount

Topic: 09-15 Yield—Present Value of an Annuity

Topic: 09-17 Patterns of Payment

Topic: 09-20 Canadian Mortgages

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 10 1. A 4-year bond pays 4% annual interest (paid semi-annually). It currently sells for $872.25. What is the bond's yield to maturity? A. 4.00% B. 4.59% C. 6.06% D. 7.78%

2. A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, what is the market value of the bond? A. Over $1,000 B. Under $1,000 C. Over $1,200 D. Not enough information given to tell

3. A 10-year bond pays 8% annual interest (paid semi-annually). If similar bonds are currently yielding 6% annually, what is the market value of the bond? A. $1,000.00 B. $1,147.20 C. $1,148.77 D. $1,080.00

4. A 14-year zero-coupon bond was issued with a $1,000 par value and a yield to maturity of 9%. If similar bonds are currently yielding 12%, what is the approximate market value of the bond? A. $205 B. $299 C. $801 D. $1,000

5. A 10-year bond pays 11% interest on a $1,000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity? A. 8.33% B. 12.95% C. 11.00% D. 8.08%

Foundations of Financial Management - 10th Canadian Edition by Block

6. An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm's common stock is 14%. What is the preferred stock price if the required rate of return is 11%? A. $45.45 B. $41.67 C. $35.71 D. $31.45

7. Valuation of financial assets requires knowledge of: A. future cash flows. B. appropriate discount rate. C. past asset performance. D. future cash flows and appropriate discount rate.

8. An issue of common stock has just paid a dividend of $3.75. Its growth rate is 8%. What is its price if the market's rate of return is 16%? A. $25.01 B. $46.88 C. $50.63 D. $54.38

9. An issue of common stock is selling for $57.20. The year-end dividend is expected to be $2.32 assuming a constant growth rate of 6%. What is the required rate of return? A. 10.3% B. 10.1% C. 4.1% D. 6.0%

10. The market allocates capital to companies based on: A. risk. B. effectiveness. C. previous returns. D. need.

11. The relationship between a bond's price and the yield to maturity: A. changes at a constant level for each percentage change of yield to maturity. B. is an inverse relationship. C. is a linear relationship. D. changes at a constant level for each percentage change of yield to maturity and is an inverse relationship.

Foundations of Financial Management - 10th Canadian Edition by Block

12. Which of the following does not influence the yield to maturity for a security? A. Required real rate of return B. Risk free rate C. Business risk D. Yields of similar securities

13. An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to 8%. If the required rate of return is 13%, what is its current price? A. $103.68 B. $36.92 C. $96.00 D. $48.00

14. If expected dividends grow at 8% and the appropriate discount rate is 12%, what is the value of a share with an expected dividend of $2.33? A. $62.88 B. $19.41 C. $29.12 D. $58.25

15. The value of a common stock is based on its: A. past performance. B. divided yield. C. current earnings. D. future benefits to the holder.

16. The cost of common stock is usually greater than the simple dividend yield because: A. investors perceive risk in common stock. B. investors expect both a current dividend and future growth. C. dividends are not tax-deductible. D. the company must make profits before it can pay dividends.

17. The dividend valuation model stresses the: A. importance of earnings per share. B. importance of dividends and legal rules for maximum payment. C. relationship of dividends to market prices. D. relationship of dividends to earnings per share.

Foundations of Financial Management - 10th Canadian Edition by Block

18. Stock valuation models are dependent upon: A. expected dividends, future dividend growth, and an appropriate discount rate. B. past dividends, flotation costs, and bond yields. C. historical dividends, historical growth, and an appropriate discount rate. D. cost of capital.

19. The cost of capital for common stock is Ke = (D1/Po) + g. What are the assumptions of the model? A. Growth (g) is constant to infinity B. The price earnings ratio stays the same C. The firm must pay a dividend to use this model D. Dividends are tax deductible

20. Which is a characteristic of the cost of preferred stock? A. Preferred stock dividends are fixed, they are tax deductible. B. Preferred stock has no maturity, the cost analysis is similar to that of debt. C. Preferred stock is valued as a perpetuity. D. The price earnings ratio stays the same.

21. A higher interest rate (discount rate) would: A. increase the price of corporate bonds. B. reduce the price of preferred stock. C. increase the price of common stock. D. reduce the cost of dividends.

22. An increase in the riskiness of a particular security would NOT affect: A. the risk premium for that security. B. the premium for expected inflation. C. the total required return for the security. D. investors' willingness to buy the security.

23. A common stock which pays a constant dividend can be valued as if it were: A. a corporate bond. B. stock paying a growing dividend. C. a preferred stock. D. a discount bond.

Foundations of Financial Management - 10th Canadian Edition by Block

24. In a general sense, the value of any asset is the: A. value of the dividends received from the asset. B. present value of the expected cash flows received from the asset. C. value of past dividends and price increases for the asset. D. future value of the expected cash flows to be received from the asset.

25. A bond which has a yield to maturity greater than its coupon interest rate will sell for a price: A. below par. B. at par. C. above par. D. that is equal to the face value of the bond plus the value of all interest payments.

26. The return measure that an investor demands for giving up current use of funds, without adjusting for purchasing power changes, is the: A. risk premium. B. inflation premium. C. real rate of return. D. discount rate.

27. Preferred stock has all, except which of the following characteristics? A. No stated maturity B. A fixed dividend payment that carries a higher precedence than common stock dividends C. The same binding contractual obligation as debt D. Preferred lacks the ownership privilege of common stock

28. A bond pays 9% yearly interest in semi-annual payments for 6 years. The current yield on similar bonds is 12%. To determine the market value of this bond, you must: A. find the interest factors (IFs) for 12 periods at 12%. B. find the interest factors (IFs) for 6 periods at 9%. C. find the interest factors (IFs) for 6 periods at 6%. D. find the interest factors (IFs) for 12 periods at 6%.

29. A 15-year bond pays 11% on a face value of $1,000. If similar bonds are currently yielding 8%, what is the market value of the bond? A. Over $1,000 B. Under $1,000 C. Over $1,200 D. Under $800

Foundations of Financial Management - 10th Canadian Edition by Block

30. The risk premium is likely to be highest for: A. government bonds. B. corporate bonds. C. gold mining expedition. D. blue chip stock.

31. If the inflation premium for a bond goes up, the price of the bond: A. is unaffected. B. goes down. C. goes up. D. need more information.

32. If in determining the yield to maturity on a bond at a given interest rate, you get a value below the current market price, in the next calculation you should use: A. a higher interest rate. B. a lower interest rate. C. a longer maturity. D. a higher coupon payment.

33. The price of preferred stock may react strongly to a change in kp because: A. preferred stock may be cumulative. B. preferred stock dividends have to be paid before common stock dividends. C. there is no maturity date. D. preferred stock dividends pass tax free between corporations.

34. If a company's stock price (Po) goes up, and nothing else changes, Ke (the required rate of return) should: A. go up. B. go down. C. remain unchanged. D. need more information.

35. Which of the following is not a component of a bond's required rate of return? A. Risk premium B. Real rate of return C. Inflation premium D. Maturity payment

Foundations of Financial Management - 10th Canadian Edition by Block

36. Which of the following financial assets is likely to have the highest required rate of return based on risk? A. Corporate bond B. Treasury bill C. Preferred share D. Common share

37. The longer the time to maturity: A. the greater the price increase from a given increase in yield. B. the less the price increase from a given increase in yield. C. the greater the price increase from a given decrease in yield. D. the less the price increase from a given decrease in yield.

38. The dividend on preferred shares is most similar to: A. common shares with no growth in dividends. B. common shares with constant growth in dividends. C. common shares with variable growth in dividends. D. a term deposit.

39. A "supernormal growth" firm is one in which: A. sales grow at a very rapid rate. B. the firm's earnings grow at a high rate for many years into the future. C. the firm's dividends grow alternatively at high, then low, rates. D. the firm's dividends grow at a high rate for several periods, then at a lower rate afterward.

40. To value the common stock of a supernormal growth firm, an analyst could forecast the length of the supernormal growth period and the dividends paid, and then find the: A. total of the dividends paid. B. total of the dividends paid and multiply by the length of the growth period. C. present value of the supernormal growth period's dividends. D. present value of the supernormal growth period's dividends and add the present value of the stock price at the end of the growth period.

41. The value of a supernormal growth firm's common stock is the present value of the: A. first year's dividend after the supernormal growth period. B. expected stock price at the start of the supernormal growth period. C. first year's dividends multiplied by (1 - the supernormal growth rate), divided by the required rate of return. D. expected stock price at the end of the supernormal growth period.

Foundations of Financial Management - 10th Canadian Edition by Block

42. The longer the supernormal growth period for a firm's lasts,: A. the higher the value of its common stock. B. the lower the value of its common stock. C. the higher the value of its preferred stock. D. the lower the required rate of return used in finding the price of its common stock.

43. The method used for finding the value of a supernormal growth firm's common stock at the end of the supernormal growth period is similar to that used to find the value of: A. a firm's preferred stock. B. a firm's common stock, with a constant growth rate for its dividends. C. a firm's interest-paying bonds. D. a firm's percentage increase in sales growth.

44. A 10-year bond pays 8% annual interest (paid semi-annually). If similar bonds are currently yielding 5% annually, what is the market value of the bond? A. $1,000.00 B. $1,857.40 C. $1,233.84 D. $1,080.00

45. A 15-year zero-coupon bond was issued with a $1,000 par value and a yield to maturity of 8%. If similar bonds are currently yielding 10%, what is the market value of the bond? A. $239.39 B. $315.24 C. $800.00 D. $1,000.00

46. A 10-year bond pays 12% interest on a $1,000 face value annually. If it currently sells for $1,100, what is its approximate yield to maturity? A. 10.35% B. 10.91% C. 11.00% D. 12.00%

Foundations of Financial Management - 10th Canadian Edition by Block

47. An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm's common stock is 12%. What is the preferred stock price if the required rate of return is 10%? A. $50.00 B. $41.67 C. $22.73 D. $5.00

48. An issue of common stock has just paid a dividend of $4.50. The dividend growth rate is 10%. What is its price if the market's rate of return is 16%? A. $82.50 B. $45.00 C. $28.13 D. $75.00

49. An issue of common stock is selling for $64.50. The year-end dividend is expected to be $3.30 assuming a constant growth rate of 7%. What is the required rate of return? A. 12.1% B. 10.1% C. 4.1% D. 5.1%

50. An issue of common stock is expected to pay a dividend of $4.00 at the end of the year. Its growth rate is equal to 8%. If the required rate of return is 15%, what is its current price? A. $103.68 B. $50.00 C. $26.67 D. $57.14

51. If expected dividends grow at 8% and the appropriate discount rate is 11%, what is the value of a share with an expected dividend of $2.50? A. $22.73 B. $31.25 C. $13.16 D. $83.33

Foundations of Financial Management - 10th Canadian Edition by Block

52. A lower interest rate (discount rate) would: A. reduce the price of corporate bonds. B. reduce the price of preferred stock. C. increase the discount rate. D. increase the price of common stock.

53. A bond which has a yield to maturity less than its coupon interest rate will sell for a price: A. below par. B. at par. C. above par. D. that is equal to the face value of the bond plus the value of all interest payments.

54. You want to buy 100 shares of Aquarific, Ltd. (AL). Your required rate of return is 12% and you expect AL's sales and earnings to grow by 5% annually beginning 4 years from today. Over the next 2 years AL is expected to break even. However, in year 3 AL is expected to earn $1.75 a share. What is the maximum price that you would pay for 100 shares of AL? A. $1,780 B. $1,589 C. $2,500 D. $1,869

55. Gamble and Johnson's (GJ) common shares are selling for $52.50. They are expected to pay a dividend of $2.25 next year and dividends should grow at a rate of 7% annually. What is your required rate of return on an investment in GJ common shares? A. 11.30% B. 19.25% C. 12.00% D. 15.75%

56. A bond with a coupon rate of 6%, paid quarterly, and 5 years to maturity is being offered in the market. If bonds with similar risks are currently being paid 3%, what is the price you would pay for this bond? A. $1,972 B. $1,139 C. $1,000 D. $862

57. The valuation of a financial asset is based on the concept of determining the present value of future cash flows. True False

Foundations of Financial Management - 10th Canadian Edition by Block

58. The prices of financial assets are based on the expected value of future cash flows, discount rate, and past dividends. True False

59. The market determined required rate of return is also called the discount rate. True False

60. The discount rate depends on the market's perceived level of risk associated with an individual security. True False

61. By using different discount rates, the market allocates capital to companies based on their risk, efficiency, and expected returns. True False

62. In estimating the market value of a bond, the coupon rate should be used as the discount rate. True False

63. Most bonds promise both a periodic return and a lump-sum payment. True False

64. A 20-year bond pays 12% annual interest in semi-annual payments. The current market yield to maturity is 10%. The appropriate interest factors should use 5% for 40 periods (by tables or calculator). True False

65. The yield to maturity is always equal to the interest payment of a bond. True False

66. The price of a bond is equal to the present value of all future interest payments added to the present value of the principal. True False

Foundations of Financial Management - 10th Canadian Edition by Block

67. The appropriate discount rate for bonds is called the yield to maturity. True False

68. A rise in yield to maturity would be coupled with an increase in the price of a bond. True False

69. The total required real rate of return is equal to the nominal rate of return plus the inflation premium. True False

70. Historically the real rate of return has been 2 to 3%. True False

71. The required rate of return is payment given to the investor for forgoing present consumption. True False

72. The inflation premium is based on past and current inflation levels. True False

73. The risk-free rate of return is equal to the inflation premium plus the real rate of return. True False

74. The risk premium is equal to the required yield to maturity minus the risk-free rate (the real rate of return and the inflation premium). True False

75. The risk premium is primarily concerned with business risk, financial risk, and economic risk. True False

76. The longer the maturity of a bond, the greater the impact on price to changes in market interest rates. True False

Foundations of Financial Management - 10th Canadian Edition by Block

77. As time to maturity increases, bond price sensitivity decreases. True False

78. The price of preferred stock is determined by dividing the fixed dividend payment by the required rate of return. True False

79. Preferred stock is compensated for not having ownership privileges with a fixed dividend stream supported by a binding contractual obligation (of interest on debt). True False

80. The variable growth model is useful for firms in emerging industries. True False

81. The value of a share is the present value of the expected stream of future dividends. True False

82. Valuation of a common stock with no dividend growth potential is treated in the same manner as preferred stock. True False

83. The constant growth valuation formula is Po = D1/g - Ke. True False

84. To use a dividend valuation model, a firm must have a constant growth rate and the discount rate must not exceed the growth rate. True False

85. The drawback of the future share value procedure is that it does not consider dividend income. True False

Foundations of Financial Management - 10th Canadian Edition by Block

86. Future share value is equal to Po = D1/Ke - g, assuming constant growth in dividends. True False

87. Firms with great potential tend to trade at low P/E ratios. True False

88. The variable growth dividend model can be used for both constant and variable growth stocks. True False

89. Preferred stock with a 10% dividend would be valued the same as a common stock with a zero dividend growth rate. True False

90. When the interest rate on a bond and its yield to maturity are equal, the bond will trade at par value. True False

91. Business risk relates to the inability of the firm to meet its debt obligations as they come due. True False

92. The further the yield to maturity of a bond moves away from the bond's coupon rate the greater the pricechange effect will be. True False

93. The price-earnings ratio is another tool used to measure the value of common stock. True False

94. Firm's with bright expectations for the future, tend to trade at high P/E ratios. True False

95. The fact that small businesses are usually illiquid does not affect their valuation process. True False

Foundations of Financial Management - 10th Canadian Edition by Block

96. Even though the Canada Revenue Agency tries to minimize occurrences, small business owners often intermingle business and personal expenses in order to minimize taxable income. True False

97. Supernormal growth implies that the number of the company's employees is rising rapidly. True False

98. The higher the growth rate during a period of supernormal growth, the higher the share's value. True False

99. If a share has supernormal growth for five years, only the present value of the first four years needs to be calculated. True False

100. The price of a supernormal growth stock includes the present value of the stock's price at the end of the supernormal growth period. True False

101. A mortgage bond is less risky than a debenture but more risky than a common share. True False

102. If g is greater than k, the model P = D1/(K - g) would not work because it would produce a negative value for a common stock. True False

103. The risk-free rate of return is the interest rate that compensates the investor for the current use of funds and loss of purchasing power due to inflation, but not for taking risks. True False

Foundations of Financial Management - 10th Canadian Edition by Block

104. List and explain the factors that influence the investors required rate of return.

105. The preferred stock of Laura's Shiny Things Inc. pays an annual dividend of $8.00. What is the price of the preferred stock if the required return is: A) 4% B) 8% C) 12%

106. How is a supernormal growth firm's common stock valued?

107. The Morgan Music Company has common and preferred stock outstanding. The preferred stock pays an annual dividend of $9 per share, and the required rate of return for similar preferred stocks is 8%. The common stock paid a dividend of $2.00 per share last year, but the company expected that earnings and dividends will grow by 30% for the next two years before dropping to a constant 5% growth rate afterward. The required rate of return on similar common stocks is 11% What is the per-share value of the company's preferred and common stock?

Foundations of Financial Management - 10th Canadian Edition by Block

108. The Nickelodeon Manufacturing Co. has a series of $1,000 par value bonds outstanding. Each bond pays interest semi annually and carries a coupon rate of 7%. Some bonds are due in 3 years while others are due in 10 years. If the required rate of return on bonds is 10%, what is the current price of A) the bonds with 3 years to maturity? B) the bonds with 10 years to maturity? C) Explain the relationship between the number of years until a bond matures and its price.

109. Fullerton Company's bonds are currently selling for $1,157.75 per $1,000 par-value bond. The bonds have a 10% coupon rate (paid annually) and will mature in 10 years. What is the yield to maturity?

110. Madison Corporation has outstanding, a $1,000 par value bond paying annual interest of 7%. The bond matures in 20 years. If the present yield to maturity for this bond is 9%, calculate the current price of the bond using annual compounding.

111. Washington Corporation has a $1,000 par value bond outstanding paying annual interest of 8%. The bond matures in 20 years. If the present yield to maturity for this bond is 10%, calculate the current price of the bond.

Foundations of Financial Management - 10th Canadian Edition by Block

112. The preferred stock of Gapers Inc. pays an annual dividend of $6.50. What is the price of the preferred stock if the required return is: A) 6% B) 8% C) 10%

113. State Street Corp. will pay a dividend on common stock of $4.80 per share at the end of the year. The required return on common stock (Ke) is 13.2%. The firm has a constant growth rate of 7.2%. Compute the current price of the stock (Po).

114. Perot Marketing is expected to pay $2.40 per share in dividends at the end of the next 12 months. The growth rate in dividends is expected to be constant at 9% per year. If the stock is selling for $51.30 per share, what is the required rate of return?

115. The Weatherfield Way Construction Company has common and preferred stock outstanding. The preferred stock pays an annual dividend of $7.50 per share, and the required rate of return for similar preferred stocks is 11%. The common stock paid a dividend of $3.00 per share last year, but the company expected that earnings and dividends will grow by 25% for the next two years before dropping to a constant 9% growth rate afterward. The required rate of return on similar common stocks is 13% What is the per-share value of the company's preferred and common stock?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 10 Key

1. A 4-year bond pays 4% annual interest (paid semi-annually). It currently sells for $872.25. What is the bond's yield to maturity? A. 4.00% B. 4.59% C. 6.06% D. 7.78%

Accessibility: Keyboard Navigation Block - Chapter 10 #1 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-06 Determining Yield to Maturity from the Bond Price Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #2 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #3 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #4 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

5. A 10-year bond pays 11% interest on a $1,000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity? A. 8.33% B. 12.95% C. 11.00% D. 8.08%

Accessibility: Keyboard Navigation Block - Chapter 10 #5 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-06 Determining Yield to Maturity from the Bond Price Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #6 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

7. Valuation of financial assets requires knowledge of: A. future cash flows. B. appropriate discount rate. C. past asset performance. D. future cash flows and appropriate discount rate.

Accessibility: Keyboard Navigation Block - Chapter 10 #7 Difficulty: Easy Learning Objective: 10-01 Describe the valuation of a financial asset as based on the present value of future cash flows. Topic: 10-01 Valuation Concepts Type: Concept

8. An issue of common stock has just paid a dividend of $3.75. Its growth rate is 8%. What is its price if the market's rate of return is 16%? A. $25.01 B. $46.88 C. $50.63 D. $54.38

Accessibility: Keyboard Navigation Block - Chapter 10 #8 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #9 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-14 Determining the Required Rate of Return from the Market Price Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

10. The market allocates capital to companies based on: A. risk. B. effectiveness. C. previous returns. D. need.

Accessibility: Keyboard Navigation Block - Chapter 10 #10 Difficulty: Easy Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #11 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Memory

12. Which of the following does not influence the yield to maturity for a security? A. Required real rate of return B. Risk free rate C. Business risk D. Yields of similar securities

Accessibility: Keyboard Navigation Block - Chapter 10 #12 Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #13 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

14. If expected dividends grow at 8% and the appropriate discount rate is 12%, what is the value of a share with an expected dividend of $2.33? A. $62.88 B. $19.41 C. $29.12 D. $58.25

Accessibility: Keyboard Navigation Block - Chapter 10 #14 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

15. The value of a common stock is based on its: A. past performance. B. divided yield. C. current earnings. D. future benefits to the holder.

Accessibility: Keyboard Navigation Block - Chapter 10 #15 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #16 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-14 Determining the Required Rate of Return from the Market Price Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 10 #17 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-14 Determining the Required Rate of Return from the Market Price Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 10 #18 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #19 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 10 #20 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 10 #21 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #22 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

23. A common stock which pays a constant dividend can be valued as if it were: A. a corporate bond. B. stock paying a growing dividend. C. a preferred stock. D. a discount bond.

Accessibility: Keyboard Navigation Block - Chapter 10 #23 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #24 Difficulty: Medium Learning Objective: 10-01 Describe the valuation of a financial asset as based on the present value of future cash flows. Topic: 10-01 Valuation Concepts Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #25 Difficulty: Medium Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #26 Difficulty: Hard Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #27 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #28 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

29. A 15-year bond pays 11% on a face value of $1,000. If similar bonds are currently yielding 8%, what is the market value of the bond? A. Over $1,000 B. Under $1,000 C. Over $1,200 D. Under $800

Accessibility: Keyboard Navigation Block - Chapter 10 #29 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

30. The risk premium is likely to be highest for: A. government bonds. B. corporate bonds. C. gold mining expedition. D. blue chip stock.

Accessibility: Keyboard Navigation Block - Chapter 10 #30 Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

31. If the inflation premium for a bond goes up, the price of the bond: A. is unaffected. B. goes down. C. goes up. D. need more information.

Accessibility: Keyboard Navigation Block - Chapter 10 #31 Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #32 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #33 Difficulty: Hard Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

34. If a company's stock price (Po) goes up, and nothing else changes, Ke (the required rate of return) should: A. go up. B. go down. C. remain unchanged. D. need more information.

Accessibility: Keyboard Navigation Block - Chapter 10 #34 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock Type: Concept

35. Which of the following is not a component of a bond's required rate of return? A. Risk premium B. Real rate of return C. Inflation premium D. Maturity payment

Accessibility: Keyboard Navigation Block - Chapter 10 #35 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

36. Which of the following financial assets is likely to have the highest required rate of return based on risk? A. Corporate bond B. Treasury bill C. Preferred share D. Common share

Accessibility: Keyboard Navigation Block - Chapter 10 #36 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #37 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-05 Time to Maturity Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #38 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-11 No Growth in Dividends Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #39 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #40 Difficulty: Medium Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #41 Difficulty: Hard Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 10 #42 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #43 Difficulty: Medium Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #44 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-07 Semiannual Interest and Bond Prices Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #45 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

46. A 10-year bond pays 12% interest on a $1,000 face value annually. If it currently sells for $1,100, what is its approximate yield to maturity? A. 10.35% B. 10.91% C. 11.00% D. 12.00%

Accessibility: Keyboard Navigation Block - Chapter 10 #46 Difficulty: Hard Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-06 Determining Yield to Maturity from the Bond Price Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #47 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Concept

48. An issue of common stock has just paid a dividend of $4.50. The dividend growth rate is 10%. What is its price if the market's rate of return is 16%? A. $82.50 B. $45.00 C. $28.13 D. $75.00

Accessibility: Keyboard Navigation Block - Chapter 10 #48 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #49 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #50 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

51. If expected dividends grow at 8% and the appropriate discount rate is 11%, what is the value of a share with an expected dividend of $2.50? A. $22.73 B. $31.25 C. $13.16 D. $83.33

Accessibility: Keyboard Navigation Block - Chapter 10 #51 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

52. A lower interest rate (discount rate) would: A. reduce the price of corporate bonds. B. reduce the price of preferred stock. C. increase the discount rate. D. increase the price of common stock.

Accessibility: Keyboard Navigation Block - Chapter 10 #52 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #53 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-05 Time to Maturity Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #54 Difficulty: Hard Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 10 #55 Difficulty: Hard Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #56 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation Type: Concept

57. The valuation of a financial asset is based on the concept of determining the present value of future cash flows. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #57 Difficulty: Easy Learning Objective: 10-01 Describe the valuation of a financial asset as based on the present value of future cash flows. Topic: 10-01 Valuation Concepts Type: Concept

58. The prices of financial assets are based on the expected value of future cash flows, discount rate, and past dividends. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #58 Difficulty: Easy Learning Objective: 10-01 Describe the valuation of a financial asset as based on the present value of future cash flows. Topic: 10-01 Valuation Concepts Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

59. The market determined required rate of return is also called the discount rate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #59 Difficulty: Easy Learning Objective: 10-01 Describe the valuation of a financial asset as based on the present value of future cash flows. Topic: 10-01 Valuation Concepts Type: Memory

60. The discount rate depends on the market's perceived level of risk associated with an individual security. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #60 Difficulty: Easy Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Concept

61. By using different discount rates, the market allocates capital to companies based on their risk, efficiency, and expected returns. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #61 Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Concept

62. In estimating the market value of a bond, the coupon rate should be used as the discount rate. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #62 Difficulty: Easy Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

63. Most bonds promise both a periodic return and a lump-sum payment. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #63 Difficulty: Easy Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 10 #64 Difficulty: Easy Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Memory

65. The yield to maturity is always equal to the interest payment of a bond. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #65 Difficulty: Easy Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Memory

66. The price of a bond is equal to the present value of all future interest payments added to the present value of the principal. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #66 Difficulty: Easy Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

67. The appropriate discount rate for bonds is called the yield to maturity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #67 Difficulty: Easy Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Memory

68. A rise in yield to maturity would be coupled with an increase in the price of a bond. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #68 Difficulty: Easy Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Concept

69. The total required real rate of return is equal to the nominal rate of return plus the inflation premium. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #69 Difficulty: Easy Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Memory

70. Historically the real rate of return has been 2 to 3%. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #70 Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Memory

71. The required rate of return is payment given to the investor for forgoing present consumption. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #71 Difficulty: Easy Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

72. The inflation premium is based on past and current inflation levels. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #72 Difficulty: Easy Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Memory

73. The risk-free rate of return is equal to the inflation premium plus the real rate of return. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #73 Difficulty: Easy Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Memory

74. The risk premium is equal to the required yield to maturity minus the risk-free rate (the real rate of return and the inflation premium). TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #74 Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Memory

75. The risk premium is primarily concerned with business risk, financial risk, and economic risk. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #75 Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

76. The longer the maturity of a bond, the greater the impact on price to changes in market interest rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #76 Difficulty: Medium Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Concept

77. As time to maturity increases, bond price sensitivity decreases. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #77 Difficulty: Medium Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Concept

78. The price of preferred stock is determined by dividing the fixed dividend payment by the required rate of return. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #78 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Memory

79. Preferred stock is compensated for not having ownership privileges with a fixed dividend stream supported by a binding contractual obligation (of interest on debt). FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #79 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

80. The variable growth model is useful for firms in emerging industries. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #80 Difficulty: Medium Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Concept

81. The value of a share is the present value of the expected stream of future dividends. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #81 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock Type: Memory

82. Valuation of a common stock with no dividend growth potential is treated in the same manner as preferred stock. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #82 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-11 No Growth in Dividends Type: Memory

83. The constant growth valuation formula is Po = D1/g - Ke. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #83 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

84. To use a dividend valuation model, a firm must have a constant growth rate and the discount rate must not exceed the growth rate. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #84 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

85. The drawback of the future share value procedure is that it does not consider dividend income. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #85 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

86. Future share value is equal to Po = D1/Ke - g, assuming constant growth in dividends. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #86 Difficulty: Hard Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

87. Firms with great potential tend to trade at low P/E ratios. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #87 Difficulty: Medium Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-15 The Price-Earnings Ratio Concept and Valuation Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

88. The variable growth dividend model can be used for both constant and variable growth stocks. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #88 Difficulty: Medium Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Concept

89. Preferred stock with a 10% dividend would be valued the same as a common stock with a zero dividend growth rate. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #89 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-11 No Growth in Dividends Type: Concept

90. When the interest rate on a bond and its yield to maturity are equal, the bond will trade at par value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #90 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-11 No Growth in Dividends Type: Concept

91. Business risk relates to the inability of the firm to meet its debt obligations as they come due. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #91 Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

92. The further the yield to maturity of a bond moves away from the bond's coupon rate the greater the pricechange effect will be. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #92 Difficulty: Medium Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Concept

93. The price-earnings ratio is another tool used to measure the value of common stock. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #93 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-15 The Price-Earnings Ratio Concept and Valuation Type: Concept

94. Firm's with bright expectations for the future, tend to trade at high P/E ratios. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #94 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-15 The Price-Earnings Ratio Concept and Valuation Type: Concept

95. The fact that small businesses are usually illiquid does not affect their valuation process. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #95 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-15 The Price-Earnings Ratio Concept and Valuation Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

96. Even though the Canada Revenue Agency tries to minimize occurrences, small business owners often intermingle business and personal expenses in order to minimize taxable income. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #96 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-15 The Price-Earnings Ratio Concept and Valuation Type: Memory

97. Supernormal growth implies that the number of the company's employees is rising rapidly. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #97 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Concept

98. The higher the growth rate during a period of supernormal growth, the higher the share's value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #98 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Concept

99. If a share has supernormal growth for five years, only the present value of the first four years needs to be calculated. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #99 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

100. The price of a supernormal growth stock includes the present value of the stock's price at the end of the supernormal growth period. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #100 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Memory

101. A mortgage bond is less risky than a debenture but more risky than a common share. FALSE

Accessibility: Keyboard Navigation Block - Chapter 10 #101 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-06 Determining Yield to Maturity from the Bond Price Type: Concept

102. If g is greater than k, the model P = D1/(K - g) would not work because it would produce a negative value for a common stock. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #102 Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

103. The risk-free rate of return is the interest rate that compensates the investor for the current use of funds and loss of purchasing power due to inflation, but not for taking risks. TRUE

Accessibility: Keyboard Navigation Block - Chapter 10 #103 Difficulty: Easy Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

104. List and explain the factors that influence the investors required rate of return. 1. The Required Real Rate of Return: This is the rate of return that the investor demands for giving up current use of the funds on a non-inflation-adjusted basis. It is the financial rent the investor charges for using his or her funds for one year, five years, or any given time period. 2. Inflation Premium: A premium to compensate for the eroding effect of inflation on the value of the dollar. The size of the inflation premium is based on the investor's expectations about future inflation. Through the 1980s the inflation premium was 4 to 5%. In the late 1970s it was in excess of 10%. Since 2000 the annual inflation rate has been slightly less than 2.0%. If one combines the real rate of return and the inflation premium, the risk-free rate of return is determined. This is the rate that compensates the investor for the current use of his or her funds and for the loss in purchasing power due to inflation, but not for taking risks. The risk-free rate of return is often considered to be the yield on Government of Canada Treasury bills. As an example, if the real rate of return were 3% and the inflation premium were 4%, we would say the risk-free rate of return was 7%. 3. Risk Premium: This is a premium associated with the special risks of a given investment. Of primary interest to us are two types of risks: business risk and financial risk. Business risk relates to the possible inability of the firm to hold its competitive position and maintain stability and growth in its earnings. We can relate this to the firm's capital assets and operating leverage. Financial risk relates to the possible inability of the firm to meet its debt obligations as they come due. This relates In addition to these two forms of risk, the risk premium is greater or less for different investments. For example, because bonds possess a contractual obligation for the firm to pay interest and repay principal to bondholders, they are considered less risky than common stock, where no such obligation exists. On the other hand, common stock carries the potential for unlimited return when the corporation is very profitable.

Block - Chapter 10 #104 Difficulty: Hard Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 Yield Type: Concept

105. The preferred stock of Laura's Shiny Things Inc. pays an annual dividend of $8.00. What is the price of the preferred stock if the required return is: A) 4% B) 8% C) 12% Price = dividend/required return A) $8.00/.04 = $200 B) $8.00/.08 = $100.00 C) $8.00/.12 = $66.67

Block - Chapter 10 #105 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

106. How is a supernormal growth firm's common stock valued? It is a combination of the present value of the supernormal growth period's expected dividends and the present value of the expected stock price at the end of the supernormal growth period.

Block - Chapter 10 #106 Difficulty: Easy Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value. Topic: 10-16 Variable Growth in Dividends Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Dividends expected: Year 1 = $2.00 × 1.30 (20% growth) = $2.60 Year 2 = $2.60 × 1.30 (20% growth) = $3.38 Year 3 = $3.38 × 1.05 (5% growth) = $3.55 Present Value of Future Stock Price: = $3.55/.06 = $59.15 Present Values of Dividends

Block - Chapter 10 #107 Difficulty: Hard Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

C) Present Value of Interest Payments:

The nearer a bond is to maturity, the closer its price will be to its par value.

Block - Chapter 10 #108 Difficulty: Medium Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-03 Valuation of Bonds Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 10 #109 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-06 Determining Yield to Maturity from the Bond Price Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Present Value of Interest Payments PVA = A × PVIFA (n = 20, i = 9%) Appendix D PVA = $70 × 9.129 = $639.03 Present Value of Principal at Maturity PV = FV × PVIF (n = 20, i = 9%) Appendix B PV = $1,000 × .178 = $178.00

Block - Chapter 10 #110 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-07 Semiannual Interest and Bond Prices Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Present Value of Interest Payments PVA = A × PVIFA (n = 20, i = 10%) Appendix D PVA = $80 × 8.514 = $681.12 Present Value of Principal at Maturity PV = FV × PVIF (n = 20, i = 10%) Appendix B PV = $1,000 × .149 = $149.00

Block - Chapter 10 #111 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-06 Determining Yield to Maturity from the Bond Price Type: Concept

112. The preferred stock of Gapers Inc. pays an annual dividend of $6.50. What is the price of the preferred stock if the required return is: A) 6% B) 8% C) 10% Price = dividend/required return A) $6.50/.06 = $108.33 B) $6.50/.08 = $81.25 C) $6.50/.10 = $65.00

Block - Chapter 10 #112 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 10 #113 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

Block - Chapter 10 #114 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-14 Determining the Required Rate of Return from the Market Price Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Dividends expected: Year 1 = $3.00 × 1.25 (25% growth) = $3.75 Year 2 = $3.75 × 1.25 (25% growth) = $4.69 Year 3 = $4.69 × 1.09 (9% growth) = $5.11 Present Value of Future Stock Price:

Present Values of Dividends

Block - Chapter 10 #115 Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-12 Constant Growth in Dividends Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 10 Summary Category

# of Questio ns

Accessibility: Keyboard Navigation

103

Block - Chapter 10

115

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 10-01 Describe the valuation of a financial asset as based on the present value of future cash flows.

Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved.

Learning Objective: 1003 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flo ws).

Learning Objective: 1004 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows.

Learning Objective: 10-05 Describe the use of a price-earnings ratio to determine value.

Topic: 10-01 Valuation Concepts

Topic: 10-02 Yield

Topic: 10-03 Valuation of Bonds

Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

Topic: 10-05 Time to Maturity

Topic: 10-06 Determining Yield to Maturity from the Bond Price

Topic: 10-07 Semiannual Interest and Bond Prices

Topic: 10-08 Valuation of Preferred Stock

Topic: 10-10 Valuation of Common Stock

Topic: 10-11 No Growth in Dividends

Topic: 10-12 Constant Growth in Dividends

Topic: 10-14 Determining the Required Rate of Return from the Market Price

Topic: 10-15 The Price-Earnings Ratio Concept and Valuation

Topic: 10-16 Variable Growth in Dividends

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 11 1. The cost of capital is used as a discount rate because: A. it is an indication of how much the firm is earning overall. B. as long as the cost of capital is earned, the common stock value of the firm will be maintained. C. it is comparable to the prevailing market interest rates. D. returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to shareholders.

2. The component parts of the cost of capital should be weighted by their proportion in the firm's: A. current capital structure. B. historical capital structure. C. optimum capital structure. D. expected capital structure.

3. If a firm's bonds are currently yielding 8% in the marketplace, why would the firm's cost of debt be lower? A. Interest rates have changed. B. Additional debt can be issued more cheaply than the original debt. C. There should be no difference; cost of debt is the same as the bond's market yield. D. Interest is tax-deductible.

4. Although debt financing is usually the cheapest component of capital, it cannot be used to excess because: A. interest rates may change. B. the firm's share price will increase and raise the cost of equity financing. C. the financial risk of the firm may increase and thus drive up the cost of all sources of financing. D. underwriting costs may change.

5. Each project should be judged against: A. the specific means of financing used to support its implementation. B. the going interest rate at that point in time. C. the cost of new common stock equity. D. the risk and return to the shareholder.

Foundations of Financial Management - 10th Canadian Edition by Block

6. For a firm paying 7% for new debt, the higher the firm's tax rate: A. the higher the after tax cost of debt. B. the lower the after tax cost of debt. C. after tax cost is unchanged. D. Not enough information to judge.

7. The after tax cost of preferred stock to the issuing corporation: A. is the same as the before-tax cost. B. is usually lower than the cost of debt. C. is dependent on the firm's tax bracket. D. is determined by the dividend payment.

8. A firm in a cyclical industry should use: A. a large amount of debt to lower the cost of capital. B. no debt at all. C. preferred stock in place of debt. D. a limited amount of debt to lower the cost of capital.

9. Use of the marginal cost of capital: A. acknowledges that when retained earnings is used up as a source of equity the cost of capital lowers as new common stock is sold to support more growth. B. recognizes that the return from the last dollar of funds generated should be less than the cost of the last dollar of funds raised. C. acknowledges that when retained earnings is used up as a source of equity the cost of capital rises as new common stock is sold to support more growth. D. recognizes that the return from the last dollar of funds generated should be more than the cost of the last dollar of funds raised.

10. The overall weighted average cost of capital is used instead of costs for specific sources of funds because: A. use of the cost for specific sources of capital would make investment decisions consistent. B. it is the minimum point for the firms cost of capital given the current equity mix. C. investments funded by low cost debt would have a disadvantage over other investments. D. a project with the lowest return would always be accepted under the specific cost criteria.

Foundations of Financial Management - 10th Canadian Edition by Block

11. A firm's debt to equity ratio varies at times because: A. a firm will want to sell common stock when prices are low and bond when interest rates are high. B. a firm will want to take advantage of timing its fund raising in order to maximize costs over the long run. C. the market allows no leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital. D. a company will sell bonds when interest rates are low and stock prices are high.

12. Using the constant dividend growth model for common stock, if Po goes up: A. the assumed cost goes up. B. the assumed cost goes down. C. the assumed cost remains unchanged. D. Need further information.

13. New common stock is more expensive than ke: A. to compensate for risk. B. to compensate for more dividends. C. to compensate for expansionary problems. D. to cover distribution costs.

14. Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4%, and the growth rate is 3%. Compute cost of the new common stock. A. 9.00% B. 9.25% C. 9.18% D. 9.38%

15. Marginal cost of capital: A. recognizes that cost of capital does not stay constant as more funds are raised. B. usually provides the same capital budgeting choices as the use of weighted average cost of capital. C. can be defined as the cost of capital when no retained earnings are available for expansion. D. assumes an increasing cost of equity.

16. The cost of debt is determined by taking the: A. present value of the interest payments and principal times one minus the tax rate. B. historical yield on bonds times one minus the tax rate. C. estimated yield on new bond issues of the same risk times one minus the shareholder marginal tax rate. D. yield and subtracting the tax rate.

Foundations of Financial Management - 10th Canadian Edition by Block

17. Which is not true about debt financing and the weighted average cost of capital? A. Debt is usually the cheapest source of financing B. As the level of debt increases beyond the optimum capital structure, the cost of capital increases C. No debt in the firm's capital structure will minimize the firm's weighted-average cost of capital D. The cost of debt and the weighted average cost of capital both go down as the tax rate goes up.

18. In determining the cost of retained earnings: A. the dividend valuation model is inappropriate. B. flotation costs are included. C. growth is not considered. D. the capital asset pricing model can be used.

19. Within the capital asset pricing model: A. the risk-free rate is usually higher than the return in the market. B. the higher the beta the lower the required rate of return. C. beta measures the volatility of an individual stock relative to a stock market index. D. beta is added to the market risk free rate.

20. The pre-tax cost of debt for a new issue of debt is determined by: A. the investor's required rate of return on issued stock. B. the coupon rate of existing debt. C. the yield to maturity of outstanding bonds. D. the coupon rate of potential bonds.

21. The Halifax Corporation has 70% of its capital structure in the form of equity capital. $150,000 in capital needs to be raised for a project but only $30,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Halifax Corporation's capital structure? A. $105,000 B. $75,000 C. $120,000 D. $21,000

22. A firm is paying an annual dividend of $3.63 for its preferred stock which is selling for $62.70. There is a selling cost of $3.30. What is the after tax cost of preferred stock if the firm's tax rate is 33%? A. 2.02% B. 4.09% C. 5.79% D. 6.11%

Foundations of Financial Management - 10th Canadian Edition by Block

23. The coupon rate on a debt issue is 12%. If the yield to maturity on the debt is 9.33%, what is the after tax cost of debt (for a cost of capital calculation) if the firm's tax rate is 34%? A. 3.17% B. 4.08% C. 6.16% D. 7.92%

24. The coupon rate on an issue of debt is 12%. The yield to maturity on this issue is 14%. The corporate tax rate is 31%. What would be the approximate after tax cost of debt for a new issue of bonds? A. 4.34% B. 3.72% C. 9.66% D. 8.28%

25. A firm's stock is selling for $85. The dividend yield is 5%. A 7% growth rate is expected for the common stock. The firm's tax rate is 32%. What is the firm's cost of common equity? A. 8.16% B. 12.00% C. 12.35% D. 10.40%

26. A firm's stock is selling for $78. The next annual dividend is expected to be $2.34. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings? A. 12.82% B. 12.21% C. 12.00% D. 9.41%

27. The weighted average cost of capital for firm X is currently 10%. Firm X is considering a new project but must raise new debt to finance the project. Debt represents 25% of the capital structure. If the after tax cost of debt will rise from 7% to 8%, what is the marginal cost of capital? A. 8.00% B. 10.25% C. 10.75% D. 12.00%

Foundations of Financial Management - 10th Canadian Edition by Block

28. Firm X has a tax rate of 30%. The price of its new preferred stock is $63 and its flotation cost is $3.15. The cost of new preferred stock is 12%. What is the firm's dividend? A. $7.18 B. $5.03 C. $7.56 D. $6.30

29. A firm's cost of financing, in an overall sense, is equal to its: A. weighted average cost of capital. B. yield from various kinds of marketable securities. C. rate of return from various kinds of marketable securities. D. rate of return of debt required by its investors.

30. The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of: A. the existence of taxes. B. the existence of flotation costs. C. investors' unwillingness to purchase additional shares of common stock. D. the existence of financial leverage.

31. The after tax cost of debt will usually be below: A. the cost of dividends. B. the weighted average cost of capital less the cost of equity. C. the cost of equity. D. the floatation cost.

32. The optimal capital structure for firms in cyclical industries should contain ________________ than firms in stable industries. A. more debt B. less debt C. an equal amount of debt D. There is no relationship between the cyclical nature of an industry and optimal capital structure.

33. The general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is accept all projects with: A. rates of return greater than or equal to the WACC. B. rates of return less than the WACC. C. rates of return equal to or less than the WACC. D. positive rates of return.

Foundations of Financial Management - 10th Canadian Edition by Block

34. For many firms, the cheapest and most important source of equity capital is in the form of: A. debt. B. common stock. C. preferred stock. D. retained earnings.

35. A firm can issue $1,000 par value bond that pays $100 per year in interest at a price of $980. The bond will have a 5-year life. The firm is in a 35% tax bracket. What is the after tax cost of debt? A. 10.53% B. 10.20% C. 6.85% D. 6.50%

36. In computing the cost of common equity, if D1 goes downward and Po goes up, Ke will: A. go up. B. go down. C. stay the same. D. slowly increase.

37. If the flotation cost goes up, the cost of retained earnings will: A. go up. B. go down. C. stay the same. D. slowly increase.

38. Most firms are able to use _________ percent debt in their capital structure without exceeding norms acceptable to creditors and investors. A. 20-50 B. 30-60 C. 40-70 D. 50-80

39. There may be a change in the marginal cost of capital curve because: A. the tax rate charged to investors changes. B. the firm has exhausted its supply of retained earnings. C. the firm is limited in the amount of amortization it can take. D. the firm has invested in a new project.

Foundations of Financial Management - 10th Canadian Edition by Block

40. Financial capital does not include: A. common equity capital. B. bonds. C. preferred shares. D. working capital.

41. Why is the cost of debt normally lower than the cost of preferred shares? A. Preferred share dividends are tax deductible. B. Interest is tax deductible. C. Preferred share dividends must be paid before common share dividends. D. Common share dividends are not tax deductible.

42. Retained earnings has a cost associated with it because: A. new funds must be raised. B. there is an opportunity cost associated with shareholder funds. C. Ke > g. D. flotation costs increase the cost of funding.

43. In the equation Kj = α + ßj Rm + e: A. beta (ß) is a stock's measure of volatility (risk) relative to the market. B. beta is the stock's expected return. C. beta is the market's adjusted return. D. beta is an accurate predictor of one stock's future risk.

44. The Security Market Line (SML): A. shows the relationship between a stock return and the market return but ignores risk. B. shows the relationship between risk and return. C. uses the AAA corporate bond rate for a riskless rate of return. D. shows the market risk relative to the industry risk.

45. In the equation Kj = Rf + ßj (Rm - Rf): A. Rf is the return expected in the future. B. Rf is the return expected on a corporate AAA bond. C. Rf is the risk free rate of interest represented by a Canadian government treasury bill. D. Rf is a risk premium expected over the market return.

Foundations of Financial Management - 10th Canadian Edition by Block

46. In the equation Kj = Rf + ßj (Rm - Rf): A. beta (ßj) is the stock's measure of volatility relative to the company's historical volatility. B. Rm - Rf is the dollar discount on the market rate. C. Kj is the expected volatility of company j. D. ßj (Rm - Rf) is the expected return above the risk-free rate for the stock of company j.

47. If the investor desires less risk than the market, he or she: A. buys stocks with alphas of zero. B. buys stocks with betas less than 1.0. C. makes sure the risk-free rate is higher than the expected market return. D. buys stocks only when the slope of the security market line is on a 45 degree angle.

48. Analysis of returns using the SML would indicate that: A. as betas increase, the expected return decreases. B. the required return for all securities can be expressed as the risk free rate minus a premium for risk. C. if beta is positive a negative correlation exists between market risk and the risk free rate. D. if the beta is 2.0, twice the market risk premium must be earned.

49. The risk-free rate of interest: A. is independent of market rates of returns on short-term securities. B. can be thought of as a real rate of interest on a short-term riskless government security. C. is influenced by the treasury bill's beta. D. is calculated by multiplying the market rate of risk by beta.

50. As investors become more pessimistic (risk averse): A. they require smaller premiums for taking risk. B. they require larger betas for taking risk. C. prices of securities fall in order to raise their expected rate of return. D. they invest in a portfolio with a high beta.

51. The capital asset pricing model: A. expresses a linear relationship between returns on individual stocks and the market over time. B. can be used to examine common stock returns but not the risk of the stock. C. is not very useful because it is unrealistically a linear model. D. is a linear model used to evaluate risk free rate.

Foundations of Financial Management - 10th Canadian Edition by Block

52. A reduction in the willingness of investors to take on risk would have what effect on the Security Market Line (CAPM)? A. No effect B. Rotate the SML counter clockwise around the risk-free rate C. Rotate the SML clockwise around the risk-free rate D. Shift the SML upward, parallel to its previous location

53. The difference between the return on the market and the risk-free return in the Capital Asset Pricing Model is known: A. as the market return. B. as the market risk premium. C. as the risk-free rate of return. D. as the security market return.

54. The required rate of return for a stock which has 1.5 times the risk of the market in general will be: A. 1.5 times the risk-free rate. B. 1.5 times the market rate of return. C. 1.5 times the market risk premium, plus the risk-free rate. D. 1.5 times the risk-free rate, plus the market risk premium.

55. Under the traditional approach to cost-of-capital analysis, a firm's value: A. remains the same, regardless of the amount of debt used. B. increases as more debt is used. C. decreases as more debt is used. D. is at its maximum when the weighted average cost of capital is minimized.

56. In the Net Operating Income approach to cost-of-capital analysis, a firm's value depends on: A. its net operating income. B. its use of debt. C. size of the firm. D. retained earnings as a proportion of debt.

57. According to the original approach of Modigliani and Miller (M&M), a firm's value is: A. unaffected by its capital structure. B. positively related to its use of debt. C. negatively related to its use of debt. D. positively related to its use of debt, but only up to some maximum debt/equity mix.

Foundations of Financial Management - 10th Canadian Edition by Block

58. Modigliani and Miller's analysis of the tax deductible nature of debt suggested that firm value would: A. decrease as the firm's use of debt increased. B. increase as the firm's use of debt increased. C. be unrelated to the firm's use of debt. D. be unrelated to earnings before taxes and interest on the firm's debt.

59. When both the tax deductibility of debt and the present value of potential bankruptcy costs are included, the cost of capital for a firm tends to: A. be constant regardless of the level of debt usage. B. decrease as the level of debt increases. C. increase as the level of debt increases. D. decrease up to some debt-value ratio, then increase as bankruptcy costs become significant.

60. Each project should be judged against: A. the specific means of financing used to support its implementation. B. the going interest rate at that point in time. C. the cost of new common stock equity. D. the weighted average cost of capital.

61. For a firm paying 7% for new debt, the lower the firm's tax rate: A. the higher the after tax cost of debt. B. the lower the after tax cost of debt. C. after tax cost is unchanged. D. not enough information to judge.

62. The after tax cost of preferred stock to the issuing corporation: A. is lower than the before-tax cost. B. is usually lower than the cost of debt. C. is dependent on the firm's tax bracket. D. is the same as the before -tax cost.

63. Use of the marginal cost of capital: A. acknowledges that when retained earnings is used up as a source of equity the cost of capital decreases as new common stock is sold to support more growth. B. recognizes that the return from the last dollar of funds generated should be less than the cost of the last dollar of funds raised. C. is highly dependent on the investment opportunities available to the firm. D. is the cost of borrowing privately.

Foundations of Financial Management - 10th Canadian Edition by Block

64. A firm's debt to equity ratio varies at times because: A. a firm will want to sell common stock when prices are low and bond when interest rates are high. B. a firm will want to take advantage of timing its fund raising in order to minimize costs over the long run. C. the market allows extensive leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital. D. of the cyclical nature of the industry in which the firm operates.

65. Expected cash dividends are $4.50, the dividend yield is 8%, flotation costs are 5%, and the growth rate is 4%. Compute cost of the new common stock. A. 13.00% B. 12.63% C. 8.42% D. 4.21%

66. Morgan Corporation has 60% of its capital structure in the form of equity capital. $200,000 in capital needs to be raised for a project but only $50,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Morgan Corporation's capital structure? A. $70,000 B. $50,000 C. $120,000 D. $90,000

67. A firm is paying an annual dividend of $2.50 for its preferred stock which is selling for $50.00. There is a selling cost of $4.00. What is the after tax cost of preferred stock if the firm's tax rate is 33%? A. 5.00% B. 8.00% C. 5.43% D. 6.20%

68. The coupon rate on a debt issue is 13%. If the yield to maturity on the debt is 10%, what is the after tax cost of debt (for a cost of capital calculation) if the firm's tax rate is 34%? A. 4.42% B. 3.00% C. 8.58% D. 6.60%

Foundations of Financial Management - 10th Canadian Edition by Block

69. The weighted average cost of capital for Patrick Corp. is currently 10%. Patrick Corp. is considering a new project but must raise new debt to finance the project. Debt represents 25% of the capital structure. If the after tax cost of debt will rise from 6% to 10%, what is the marginal cost of capital? A. 10.25% B. 10.75% C. 11.00% D. 11.50%

70. A firm can issue $1,000 par value bond that pays $90 per year in interest at a price of $950. The bond will have a 10-year life. The firm is in a 35% tax bracket. What is the after tax cost of debt? A. 9.81% B. 10.20% C. 6.37% D. 6.50%

71. Wonder Warp Corp. (WWC) recently reported that is after-tax cost of debt capital was 6.50%. If WWC's average tax rate is 30% what is the yield-to-maturity on WWC's bonds? A. 6.90% B. 8.97% C. 9.30% D. 21.67%

72. Figs, Dates and Other Things (FDT) has the following cost of capital structure:

What is FDT's WACC? A. 6.50% B. 5.00% C. 7.50% D. 6.75%

Foundations of Financial Management - 10th Canadian Edition by Block

73. Micro Brew (MB) is considering issuing new common stock. MB currently trades at $32.50 a share and MB's investment bankers estimate that it will cost $2.30 a share to issue new common stock. What is MB's estimated cost of new common shares, if the firm's cost of retained earnings is 12.01%? A. 8.50% B. 12.25% C. 13.02% D. 15.00%

74. You have determined that a stock has a required rate of return of 18%. If the market risk premium is 10.50%, and the 91 day T-bill is yielding 2.50%, what is the stock's Beta? A. 1.00 B. 2.00 C. 1.48 D. 0.95

75. A firm's bond have a coupon rate of 8.80%. They currently have a yield-to-maturity of 9.75%. if the firm's tax rate is 25%, its after-tax cost of debt is _______. A. 9.75% B. 2.44% C. 7.31% D. 8.80%

76. It is standard practice to evaluate investment decisions using the cost of the specific financing method involved. True False

77. The cost of new common stock is greater than the cost of outstanding common stock. True False

78. In determining the cost of debt, yields and prices of outstanding bonds are used. True False

79. In determining the cost of preferred stock, the dividend yield on outstanding preferred stock may be used as a proxy. True False

Foundations of Financial Management - 10th Canadian Edition by Block

80. According to traditional financial theory, the cost of capital curve is U-shaped over the range of debt-equity mixes. True False

81. The out-of-pocket cost of common stock is a good approximation of the cost of common stock equity. True False

82. The discount rate that equates a future stream of expected dividends to the current price is a good approximation of the cost of common shares. True False

83. Ke represents an expected return to shareholders as well as a cost to the firm. True False

84. The cost of retained earnings is equal to the required rate of return on a firm's outstanding common stock. True False

85. Retained earnings represent an internal source of funds that is raised without the payment of interest, or cost to the firm's shareholders. True False

86. Most firms are able to use 60%-75% debt in their capital structure without exceeding norms acceptable to most creditors and investors. True False

87. A firm that does not earn the cost of capital in the short run will probably be in bankruptcy. True False

88. A firm that does not earn the cost of capital in the long run will not maximize shareholder wealth. True False

Foundations of Financial Management - 10th Canadian Edition by Block

89. Weights used to calculate the weighted average cost of capital Ka are derived from the optimum capital structure. True False

90. The calculation of the cost of capital depends upon historical costs of funds. True False

91. The cost of capital for each source of funds is a cost dependent on current market conditions and expected rates of return. True False

92. The cost of debt is equal to the current bond yield on bonds of similar risk class and adjusted for the corporate tax rate. True False

93. A firm's cost of preferred stock is equal to the preferred dividend divided by the net price after flotation costs Kp = (Dp/Po - F). True False

94. A firm's cost of preferred stock is equal to the preferred dividend divided by market price plus the dividend growth rate (Kp = D/Po + g). True False

95. The only difference in the cost of common stock (Ke) and the cost of new common stock (Kn) is the flotation cost on new common stock. True False

96. The use of common stock equity in the weighted average cost of capital is always (Ke) and not (Kn), the cost of new common stock. True False

97. The use of the optimum capital structure minimizes the cost of capital. True False

Foundations of Financial Management - 10th Canadian Edition by Block

98. In determining the optimum capital structure it is assumed that the firm will raise capital in the optimum proportions every year. True False

99. All firms within particular industries have similar optimum capital structures. True False

100. A firm should always be at a single optimum debt to equity ratio to minimize its cost of capital. True False

101. Companies prefer to maintain some financing flexibility in order to choose the lowest cost source of funds at a single point in time. True False

102. The use of the weighted average cost of capital assumes that the firm is in its optimum capital structure range and the cost of each component stays constant over the range of financing. True False

103. The amount of debt capital used by a corporation is not related to the availability of equity funds from retained earnings and new common stock. True False

104. Although the after tax cost of debt is below the cost of equity, firms cannot increase their use of debt without limit. True False

105. Regardless of the particular source of funds utilized for a project, the required rate of return, or discount rate, will be the weighted average cost of capital. True False

106. Research has indicated that betas are stable for individual stocks. True False

Foundations of Financial Management - 10th Canadian Edition by Block

107. Betas seem to be more stable in a portfolio context (group of stocks) than for individual stocks. True False

108. Even though the CAPM model is exponential in nature, the model has historical consistency. True False

109. By definition the market has a beta of zero. True False

110. Beta is a good measure of a stock's risk when the stock is combined into a portfolio. True False

111. The cost of capital for common stock (Ke) is not related to the concept of the security market line. True False

112. The SML helps us to identify the effects of several factors that can cause the cost of capital to change. True False

113. An increase in the risk-free rate causes the SML to shift down parallel to the old SML. True False

114. An increase in investors' aversion to risk causes the SML to shift up parallel to the old SML. True False

115. A decrease in the risk free rate causes the SML to shift down parallel to the old SML. True False

116. A decrease in investors' risk aversion causes the slope of the SML to decline becoming more horizontal. True False

Foundations of Financial Management - 10th Canadian Edition by Block

117. An upward shift in the SML indicates that the prices of all assets will shift downward as interest rates move up. True False

118. The capital asset pricing model relates the risk-return trade-offs of individual assets to market returns. True False

119. The security market line shows the relationship between the return on the market on the horizontal axis and the return of the individual stock on the vertical axis. True False

120. Least squares regression analysis makes up the statistical equation for the capital asset pricing model. True False

121. The market risk premium is equal to the market return minus the risk-free rate. True False

122. A stock that had a beta of 2 would have a required rate of return that was twice the market risk premium. True False

123. A general increase in interest rates will raise the required rates of return for all stocks. True False

124. In the Net Operating Income approach to cost-of-capital analysis, a firm's value is directly related to its use of debt. True False

125. In the traditional approach to cost-of-capital analysis, firm's value will be highest when it uses no debt in its capital structure. True False

Foundations of Financial Management - 10th Canadian Edition by Block

126. Modigliani and Miller originally suggested that firm value and the use of debt were independent. True False

127. The addition of bankruptcy costs in Modigliani and Miller's work suggests that the cost of capital will eventually increase as more debt is issued. True False

128. The final conclusions of Modigliani and Miller are most similar to the Net Income approach of Durand. True False

129. The cost of existing common stock is greater than the cost of new common stock. True False

130. A stock with a Beta of .85 has less systematic risk than a stock with a Beta of .50. True False

131. The market Beta is always 1.00. True False

132. An increase in investors risk aversion will cause the SML's slope to increase. True False

133. Weighted average cost of capital is the result of multiplying the cost of each item in the capital structure by its corresponding representation in the overall capital structure and summing the results. True False

134. Briefly explain what a firm's cost of capital is and how it is determined.

Foundations of Financial Management - 10th Canadian Edition by Block

135. Why are the options for raising capital in a small business limited?

136. What options do small businesses have for raising capital? How does small business cost of capital compare to the cost of capital for a large business?

137. Zinger Corporation manufactures industrial type sewing machines. Zinger Corp. received a very large order from a few European countries. In order to be able to supply these countries with its products, Zinger will have to expand its facilities. Of the required expansion, Zinger feels it can raise $75 million internally, through retained earnings. The firm's optimum capital structure has been 45% debt, 10% preferred stock, and 45% equity. The company will try to maintain this capital structure in financing this expansion plan. Currently Zinger's common stock is traded at a price of $20 per share. Last year's dividend was $1.50 per share. The growth rate has been at 6% and is expected to increase to 8%. The company's preferred stock is selling at $50 and has been yielding 6% in the current market. Flotation costs have been estimated at 8% of common stock and 3% of preferred stock. Zinger Corp. has bonds outstanding at 10%, but its investment dealer has informed the company that interest rates for bonds of equal risk are currently yielding 9%. Zinger's tax rate is 46%. A) Compute the cost of Kd, Kp, Ke, Kn. B) Calculate the weighted average cost of capital, assuming no external equity financing. C) How much can Zinger raise to fund the whole project, while using only internal financing?

Foundations of Financial Management - 10th Canadian Edition by Block

138. The Accidental Petroleum Company is trying to determine its weighted average cost of capital for use in making a number of investment decisions. The firm's bonds were issued 6 years ago and have 14 years left until maturity. They carried an 8% coupon rate paid annually, and are currently selling for $962.50. The firm's preferred stock carries a $4.60 dividend and is currently selling at $42.50 per share. Accidental's investment dealer has stated that issue costs for new preferred will be 50 cents per share. The firm has significant retained earnings, but will also need to sell new common stock to finance the projects it is now considering. Accidental Petroleum common stock is expected to pay a $2.50 per share dividend next year, and is expected to maintain an 8% growth rate for the foreseeable future. The stock is currently priced at $50 per share, but new common stock will have flotation costs of 60 cents per share. Calculate the costs of the various components of Accidental Petroleum's capital. The firm's tax rate is 44%.

139. Given the information about Accidental Petroleum in the previous problem, calculate the company's weighted average cost of capital assuming that its new financing will consist of 30% debt, 60% equity, and 10% preferred stock.

140. Jury Company wants to calculate the component costs in its capital structure. Common stock currently sells for $27, and is expected to pay a dividend of $0.50. Jury's dividend growth rate is 8%, and flotation cost is $1.25. Preferred stock sells for $46, pays a dividend of $4.00, and carries a flotation cost of $1.10. Jury Company bonds yield 9% in the market. Jury is in the 40% tax bracket. Calculate cost of debt, cost of common stock, cost of new common stock, cost of preferred stock and cost of retained earnings.

Foundations of Financial Management - 10th Canadian Edition by Block

141. Jury Company has the following capital structure: 55% debt, 35% equity, and 10% preferred stock. Calculate Jury's weighted average cost of capital (WACC) assuming no new common shares are issued, using the answers obtained from question 117.

142. Saven Travel Corporation is considering several investment opportunities in order to diversify its operations. Mr. Saven, president, is trying to determine the firm's cost of capital before he makes a decision. This diversification plan will require the firm to raise $400 million. A share of common stock is currently selling for $50, and the amount of the last dividend paid was $1.25. The company's earnings and dividends have been growing at about 12%, however, this is expected to drop to 9% per year in the future. Flotation costs of new common will be $4.00 per share. The firm can raise $150 million internally through retained earnings. The firm's investment dealer has informed Mr. Saven that this amount of equity can support $100 million in 12% coupon bonds. The company's tax rate is 46%. A) Compute the weighted average cost of capital on the first $250 million of funds. B) Saven Travel will need to raise $150 of additional capital for expansion. How much of this will be debt and equity? C) Compute the marginal cost of capital on the additional $150 million assuming the cost of debt stays the same. Kd = 12% (1 ─ .46) = 0.0648 = 6.48%

WEIGHTS:

Foundations of Financial Management - 10th Canadian Edition by Block

143. Bibbidi Bobbidi Boo Fireplaces is considering the broadening of its horizons and is looking at investing into the carriage trade. Before any analysis of the cash flows can begin, the CEO, Ms. Cindy Ella, must select an appropriate discount rate. The accountant, Rick Tepsters, suggests the calculation of the cost of capital. The following is the existing (book value) capital structure of BBB Fireplaces.

The yield on 91-day Government of Canada Treasury Bills is currently 11.78%. The debentures, which have been outstanding for three years, have a coupon rate of 14%. Current market yields on this risk security are currently about 12.5%. Flotation costs would be 2% of the issue price. The preferred shares with a fixed dividend rate of 7% currently trade at a market value of $3,000,000. Flotation expenses of a new issue of preferreds would be 3% of the issue price. The common shares, of which there are 5 million outstanding, are currently priced at $5.00 per share. The current dividend is $0.10 per share. Bibbidi Bobbidi Boo's beta is 1.2 and its projected growth rate is 16% annually, particularly if this new project does not turn into a pumpkin. Flotation expenses would be 5% of the existing share price. Bibbidi Bobbidi Boo's tax rate is 41% and the current exchange rate is 1 Canadian dollar equal to $0.86 U.S. Internally generated funds will have to be supplemented by princely new external sources for the equity contribution to new capital projects. Calculate the cost of capital of Bibbidi Bobbidi Boo. Use market value weightings.

Foundations of Financial Management - 10th Canadian Edition by Block

144. The Abacus Computer Company has decided to use the Capital Asset Pricing Model to estimate its cost of equity. The firm's beta was estimated at 1.4. The S&P/TSX Composite-stock index has returned 12.5% to investors over a fairly long period of time, and Abacus has decided to use this value as the market return. Treasury bills are currently providing investors with a 6.5% yield. A) Calculate Abacus's cost of equity using the CAPM. B) If its beta was incorrectly estimated, and a new revised estimate of 1.8 was used in the calculations, what would its new estimate of the cost of equity be?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 11 Key

1. The cost of capital is used as a discount rate because: A. it is an indication of how much the firm is earning overall. B. as long as the cost of capital is earned, the common stock value of the firm will be maintained. C. it is comparable to the prevailing market interest rates. D. returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to shareholders.

Accessibility: Keyboard Navigation Block - Chapter 11 #1 Difficulty: Medium Learning Objective: 11-01 Explain that the cost of capital represents the overall cost of financing to the firm. Topic: 11-01 The Overall Concept Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #2 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #3 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #4 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #5 Difficulty: Medium Learning Objective: 11-01 Explain that the cost of capital represents the overall cost of financing to the firm. Topic: 11-01 The Overall Concept Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #6 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #7 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-03 Cost of Preferred Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #8 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #9 Difficulty: Medium Learning Objective: 11-05 Apply the marginal cost of capital concept. Topic: 11-15 The Marginal Cost of Capital Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #10 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #11 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #12 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-05 Valuation Approach (Dividend Model) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

13. New common stock is more expensive than ke: A. to compensate for risk. B. to compensate for more dividends. C. to compensate for expansionary problems. D. to cover distribution costs.

Accessibility: Keyboard Navigation Block - Chapter 11 #13 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-07 Cost of New Common Stock Type: Concept

14. Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4%, and the growth rate is 3%. Compute cost of the new common stock. A. 9.00% B. 9.25% C. 9.18% D. 9.38%

Accessibility: Keyboard Navigation Block - Chapter 11 #14 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-07 Cost of New Common Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #15 Difficulty: Medium Learning Objective: 11-05 Apply the marginal cost of capital concept. Topic: 11-15 The Marginal Cost of Capital Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #16 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #17 Difficulty: Hard Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #18 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #19 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 11 #20 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #21 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #22 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-03 Cost of Preferred Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #23 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #24 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #25 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-04 Cost of Common Equity Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #26 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-06 Cost of Retained Earnings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #27 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #28 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-03 Cost of Preferred Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #29 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #30 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-07 Cost of New Common Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

31. The after tax cost of debt will usually be below: A. the cost of dividends. B. the weighted average cost of capital less the cost of equity. C. the cost of equity. D. the floatation cost.

Accessibility: Keyboard Navigation Block - Chapter 11 #31 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #32 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #33 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-14 Cost of Capital in the Capital Budgeting Decision Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

34. For many firms, the cheapest and most important source of equity capital is in the form of: A. debt. B. common stock. C. preferred stock. D. retained earnings.

Accessibility: Keyboard Navigation Block - Chapter 11 #34 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-06 Cost of Retained Earnings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #35 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

36. In computing the cost of common equity, if D1 goes downward and Po goes up, Ke will: A. go up. B. go down. C. stay the same. D. slowly increase.

Accessibility: Keyboard Navigation Block - Chapter 11 #36 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-04 Cost of Common Equity Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

37. If the flotation cost goes up, the cost of retained earnings will: A. go up. B. go down. C. stay the same. D. slowly increase.

Accessibility: Keyboard Navigation Block - Chapter 11 #37 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-07 Cost of New Common Stock Type: Concept

38. Most firms are able to use _________ percent debt in their capital structure without exceeding norms acceptable to creditors and investors. A. 20-50 B. 30-60 C. 40-70 D. 50-80

Accessibility: Keyboard Navigation Block - Chapter 11 #38 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #39 Difficulty: Medium Learning Objective: 11-05 Apply the marginal cost of capital concept. Topic: 11-15 The Marginal Cost of Capital Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

40. Financial capital does not include: A. common equity capital. B. bonds. C. preferred shares. D. working capital.

Accessibility: Keyboard Navigation Block - Chapter 11 #40 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-13 Capital Acquisition and Investment Decision Making Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 11 #41 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-03 Cost of Preferred Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #42 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-07 Cost of New Common Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #43 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 11 #44 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 11 #45 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #46 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 11 #47 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #48 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #49 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #50 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-13 Capital Acquisition and Investment Decision Making Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #51 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #52 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #53 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 11 #54 Difficulty: Hard Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #55 Difficulty: Hard Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #56 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #57 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #58 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 11 #59 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #60 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-13 Capital Acquisition and Investment Decision Making Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #61 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #62 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-03 Cost of Preferred Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #63 Difficulty: Medium Learning Objective: 11-05 Apply the marginal cost of capital concept. Topic: 11-15 The Marginal Cost of Capital Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #64 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-13 Capital Acquisition and Investment Decision Making Type: Concept

65. Expected cash dividends are $4.50, the dividend yield is 8%, flotation costs are 5%, and the growth rate is 4%. Compute cost of the new common stock. A. 13.00% B. 12.63% C. 8.42% D. 4.21%

Accessibility: Keyboard Navigation Block - Chapter 11 #65 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-07 Cost of New Common Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #66 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-12 Calculating Market Value Weightings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #67 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-03 Cost of Preferred Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #68 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #69 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-12 Calculating Market Value Weightings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #70 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #71 Difficulty: Hard Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

72. Figs, Dates and Other Things (FDT) has the following cost of capital structure:

What is FDT's WACC? A. 6.50% B. 5.00% C. 7.50% D. 6.75%

Block - Chapter 11 #72 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-12 Calculating Market Value Weightings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #73 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-07 Cost of New Common Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #74 Difficulty: Hard Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 11 #75 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

76. It is standard practice to evaluate investment decisions using the cost of the specific financing method involved. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #76 Difficulty: Easy Learning Objective: 11-01 Explain that the cost of capital represents the overall cost of financing to the firm. Topic: 11-01 The Overall Concept Type: Concept

77. The cost of new common stock is greater than the cost of outstanding common stock. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #77 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-07 Cost of New Common Stock Type: Concept

78. In determining the cost of debt, yields and prices of outstanding bonds are used. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #78 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

79. In determining the cost of preferred stock, the dividend yield on outstanding preferred stock may be used as a proxy. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #79 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-03 Cost of Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

80. According to traditional financial theory, the cost of capital curve is U-shaped over the range of debt-equity mixes. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #80 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

81. The out-of-pocket cost of common stock is a good approximation of the cost of common stock equity. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #81 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-04 Cost of Common Equity Type: Concept

82. The discount rate that equates a future stream of expected dividends to the current price is a good approximation of the cost of common shares. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #82 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-04 Cost of Common Equity Type: Concept

83. Ke represents an expected return to shareholders as well as a cost to the firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #83 Difficulty: Easy Learning Objective: 11-01 Explain that the cost of capital represents the overall cost of financing to the firm. Topic: 11-01 The Overall Concept Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

84. The cost of retained earnings is equal to the required rate of return on a firm's outstanding common stock. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #84 Difficulty: Easy Learning Objective: 11-01 Explain that the cost of capital represents the overall cost of financing to the firm. Topic: 11-01 The Overall Concept Type: Memory

85. Retained earnings represent an internal source of funds that is raised without the payment of interest, or cost to the firm's shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #85 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-06 Cost of Retained Earnings Type: Memory

86. Most firms are able to use 60%-75% debt in their capital structure without exceeding norms acceptable to most creditors and investors. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #86 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

87. A firm that does not earn the cost of capital in the short run will probably be in bankruptcy. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #87 Difficulty: Medium Learning Objective: 11-11B Capital structure theory and Modigliani and Miller Topic: 11-11B Modigliani and Miller with Bankruptcy Considerations Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

88. A firm that does not earn the cost of capital in the long run will not maximize shareholder wealth. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #88 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-13 Capital Acquisition and Investment Decision Making Type: Concept

89. Weights used to calculate the weighted average cost of capital Ka are derived from the optimum capital structure. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #89 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-12 Calculating Market Value Weightings Type: Memory

90. The calculation of the cost of capital depends upon historical costs of funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #90 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

91. The cost of capital for each source of funds is a cost dependent on current market conditions and expected rates of return. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #91 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-11 Market Value Weightings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

92. The cost of debt is equal to the current bond yield on bonds of similar risk class and adjusted for the corporate tax rate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #92 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Type: Concept

93. A firm's cost of preferred stock is equal to the preferred dividend divided by the net price after flotation costs Kp = (Dp/Po - F). TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #93 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-03 Cost of Preferred Stock Type: Memory

94. A firm's cost of preferred stock is equal to the preferred dividend divided by market price plus the dividend growth rate (Kp = D/Po + g). FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #94 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-03 Cost of Preferred Stock Type: Memory

95. The only difference in the cost of common stock (Ke) and the cost of new common stock (Kn) is the flotation cost on new common stock. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #95 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-07 Cost of New Common Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

96. The use of common stock equity in the weighted average cost of capital is always (Ke) and not (Kn), the cost of new common stock. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #96 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-12 Calculating Market Value Weightings Type: Concept

97. The use of the optimum capital structure minimizes the cost of capital. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #97 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

98. In determining the optimum capital structure it is assumed that the firm will raise capital in the optimum proportions every year. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #98 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

99. All firms within particular industries have similar optimum capital structures. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #99 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

100. A firm should always be at a single optimum debt to equity ratio to minimize its cost of capital. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #100 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

101. Companies prefer to maintain some financing flexibility in order to choose the lowest cost source of funds at a single point in time. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #101 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-13 Capital Acquisition and Investment Decision Making Type: Concept

102. The use of the weighted average cost of capital assumes that the firm is in its optimum capital structure range and the cost of each component stays constant over the range of financing. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #102 Difficulty: Hard Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

103. The amount of debt capital used by a corporation is not related to the availability of equity funds from retained earnings and new common stock. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #103 Difficulty: Hard Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

104. Although the after tax cost of debt is below the cost of equity, firms cannot increase their use of debt without limit. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #104 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

105. Regardless of the particular source of funds utilized for a project, the required rate of return, or discount rate, will be the weighted average cost of capital. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #105 Difficulty: Medium Learning Objective: 11-01 Explain that the cost of capital represents the overall cost of financing to the firm. Topic: 11-01 The Overall Concept Type: Concept

106. Research has indicated that betas are stable for individual stocks. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #106 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

107. Betas seem to be more stable in a portfolio context (group of stocks) than for individual stocks. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #107 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

108. Even though the CAPM model is exponential in nature, the model has historical consistency. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #108 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

109. By definition the market has a beta of zero. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #109 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

110. Beta is a good measure of a stock's risk when the stock is combined into a portfolio. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #110 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

111. The cost of capital for common stock (Ke) is not related to the concept of the security market line. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #111 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

112. The SML helps us to identify the effects of several factors that can cause the cost of capital to change. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #112 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

113. An increase in the risk-free rate causes the SML to shift down parallel to the old SML. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #113 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

114. An increase in investors' aversion to risk causes the SML to shift up parallel to the old SML. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #114 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

115. A decrease in the risk free rate causes the SML to shift down parallel to the old SML. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #115 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

116. A decrease in investors' risk aversion causes the slope of the SML to decline becoming more horizontal. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #116 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

117. An upward shift in the SML indicates that the prices of all assets will shift downward as interest rates move up. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #117 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

118. The capital asset pricing model relates the risk-return trade-offs of individual assets to market returns. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #118 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

119. The security market line shows the relationship between the return on the market on the horizontal axis and the return of the individual stock on the vertical axis. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #119 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

120. Least squares regression analysis makes up the statistical equation for the capital asset pricing model. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #120 Difficulty: Easy Learning Objective: 11-11A Cost of capital and the capital asset pricing model Topic: 11-11A The capital asset pricing model Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

121. The market risk premium is equal to the market return minus the risk-free rate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #121 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

122. A stock that had a beta of 2 would have a required rate of return that was twice the market risk premium. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #122 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

123. A general increase in interest rates will raise the required rates of return for all stocks. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #123 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

124. In the Net Operating Income approach to cost-of-capital analysis, a firm's value is directly related to its use of debt. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #124 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

125. In the traditional approach to cost-of-capital analysis, firm's value will be highest when it uses no debt in its capital structure. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #125 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

126. Modigliani and Miller originally suggested that firm value and the use of debt were independent. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #126 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

127. The addition of bankruptcy costs in Modigliani and Miller's work suggests that the cost of capital will eventually increase as more debt is issued. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #127 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

128. The final conclusions of Modigliani and Miller are most similar to the Net Income approach of Durand. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #128 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

129. The cost of existing common stock is greater than the cost of new common stock. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #129 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-07 Cost of New Common Stock Type: Concept

130. A stock with a Beta of .85 has less systematic risk than a stock with a Beta of .50. FALSE

Accessibility: Keyboard Navigation Block - Chapter 11 #130 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

131. The market Beta is always 1.00. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #131 Difficulty: Easy Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Memory

132. An increase in investors risk aversion will cause the SML's slope to increase. TRUE

Accessibility: Keyboard Navigation Block - Chapter 11 #132 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 11 #133 Difficulty: Easy Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-12 Calculating Market Value Weightings Type: Memory

134. Briefly explain what a firm's cost of capital is and how it is determined. A firm's cost of capital is • A composite of the various financing costs that have been borrowed or assembled • Determined by the components of its capital structure (debt and equity) • Based on the costs (or yields) currently demanded by investors in the financial markets Funds (capital) will be invested in the firm's assets to produce future cash flows. The present value (benefit) of these cash flows should be compared in value against the cost of acquiring the assets. This comparison requires a discount rate or a cost of capital. The cost of capital is the tool used to evaluate (discount) future cash flows and assign a value to them. It is the standard that will satisfy shareholders.

Block - Chapter 11 #134 Difficulty: Hard Learning Objective: 11-01 Explain that the cost of capital represents the overall cost of financing to the firm. Topic: 11-01 The Overall Concept Type: Concept

135. Why are the options for raising capital in a small business limited? The options for raising capital in a small business are limited because the full scope of the capital market is not available to the smaller firm. Investors and the investment dealers that put together financing packages in the capital markets shy away from the small business because of the risks perceived in the small business and because the amount of capital required is limited. Capital markets operate as wholesale markets, and require financing deals of a sufficient size to achieve economies of scale. Small business risks may relate only to a lack of understanding of the business by the capital markets, but nevertheless the small business owner will likely have to raise capital elsewhere.

Block - Chapter 11 #135 Difficulty: Hard Learning Objective: 11-01 Explain that the cost of capital represents the overall cost of financing to the firm. Topic: 11-01 The Overall Concept Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

136. What options do small businesses have for raising capital? How does small business cost of capital compare to the cost of capital for a large business? Debt financing is generally limited to bank operating loans that are used to support liquid current assets and term loans secured by capital assets. The cost of these loans is often several percentage points above the prime rate unless special government or bank programs are available. As for equity: personal savings, love money (from family and good friends), government assistance, and venture capital funding are the options. The sale of shares (equity) in the capital markets is pretty well impossible in the startup phase of the business. Money from "angels" or venture capital firms is also difficult to access in the firm on the expectations of rates of return of between 25 to 40% annually. Family and friends may have similar expectations.

Block - Chapter 11 #136 Difficulty: Hard Learning Objective: 11-01 Explain that the cost of capital represents the overall cost of financing to the firm. Topic: 11-01 The Overall Concept Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 11 #137 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-11 Market Value Weightings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Cost of Debt (after tax)

Cost of Preferred Stock:

Cost of Retained Earnings:

Cost of New Common Stock:

Foundations of Financial Management - 10th Canadian Edition by Block Block - Chapter 11 #138 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Topic: 11-03 Cost of Preferred Stock Topic: 11-04 Cost of Common Equity Type: Concept

Weighted average cost of capital = 10.42% Block - Chapter 11 #139 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-12 Calculating Market Value Weightings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Cost of Preferred Stock:

Cost of Retained Earnings:

Cost of New Common Stock:

Block - Chapter 11 #140 Difficulty: Medium Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-02 Cost of Debt Topic: 11-03 Cost of Preferred Stock Topic: 11-04 Cost of Common Equity Topic: 11-07 Cost of New Common Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 11 #141 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-12 Calculating Market Value Weightings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

WEIGHTS:

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 11 #142 Difficulty: Hard Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Learning Objective: 11-05 Apply the marginal cost of capital concept. Topic: 11-12 Calculating Market Value Weightings Topic: 11-15 The Marginal Cost of Capital Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Bibbidi Bobbidi Boo's cost of capital is 13.53 percent. Block - Chapter 11 #143 Difficulty: Hard Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-02 Cost of Debt Topic: 11-03 Cost of Preferred Stock Topic: 11-04 Cost of Common Equity Topic: 11-12 Calculating Market Value Weightings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 11 #144 Difficulty: Hard Learning Objective: 11-03 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares. Topic: 11-08 CAPM for the Required Return on Common Stock Type: Concept

145. The M&M Theory Company has an unleveraged value of $3,250,000, $1,500,000 in debt, and a corporate tax rate of 34%. In addition, the firm's bankruptcy costs have been estimated at $800,000 and the probability of bankruptcy is 10%, calculate: A) expected bankruptcy cost = cost of bankruptcy × probability of bankruptcy = $800,000 × .10 = $80,000 B) Value of the firm

Block - Chapter 11 #145 Difficulty: Medium Learning Objective: 11-04 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing. Topic: 11-10 Optimal Capital Structure—Weighting Costs Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 11 Summary Category

# of Questi ons

Accessibility: Keyboard Navigation

132

Block - Chapter 11

145

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 11-01 Explain that the cost of capital represents the overall cost of financing to the firm.

Learning Objective: 1103 Construct the cost of capital based on the various valuation techniques from Chapter 10 as applied to bonds; preferred stocks; and common shares.

Learning Objective: 1104 Examine how a firm attempts to find a minimum cost of capital by varying the mix of its sources of financing.

Learning Objective: 11-05 Apply the marginal cost of capital concept.

Learning Objective: 11-11A Cost of capital and the capital asset pricing model

Learning Objective: 11-11B Capital structure theory and Modigliani and Miller

Topic: 11-01 The Overall Concept

Topic: 11-02 Cost of Debt

Topic: 11-03 Cost of Preferred Stock

Topic: 11-04 Cost of Common Equity

Topic: 11-05 Valuation Approach (Dividend Model)

Topic: 11-06 Cost of Retained Earnings

Topic: 11-07 Cost of New Common Stock

Topic: 11-08 CAPM for the Required Return on Common Stock

Topic: 11-10 Optimal Capital Structure—Weighting Costs

Topic: 11-11 Market Value Weightings

Topic: 11-11A The capital asset pricing model

Topic: 11-11B Modigliani and Miller with Bankruptcy Considerations

Topic: 11-12 Calculating Market Value Weightings

Topic: 11-13 Capital Acquisition and Investment Decision Making

Topic: 11-14 Cost of Capital in the Capital Budgeting Decision

Topic: 11-15 The Marginal Cost of Capital

Type: Concept

125

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 12 1. Which of the following is not a time-adjusted method for ranking investment proposals? A. Net present value method B. Payback period C. Internal rate of return method D. Profitability index

2. In using the internal rate of return method, it is assumed that cash flows can be reinvested at: A. the cost of equity. B. the cost of capital. C. the internal rate of return. D. the prevailing interest rate.

3. An investment project has a positive net present value. The internal rate of return is: A. less than the cost of capital. B. greater than the cost of capital. C. equal to the cost of capital. D. indeterminate; it depends on the length of the project.

4. Which of the following statements about the "payback period" is true? A. The payback period considers cash flows after the payback has been reached. B. The payback period does not consider the time value of money. C. The payback period uses discounted cash-flow techniques. D. The payback period generally leads to the same decision as other investment selection methods.

5. Cash flow can be said to equal: A. income before amortization and taxes minus taxes. B. income before amortization and taxes plus taxes. C. income before amortization and taxes plus amortization. D. income after taxes minus amortization.

Foundations of Financial Management - 10th Canadian Edition by Block

6. If projects are mutually exclusive: A. they can only be accepted under capital rationing. B. the selection of one alternative precludes the selection of other alternatives. C. the payback method should be used. D. the net present-value should be used.

7. The _________ assumes returns are reinvested at the cost of capital. A. payback period B. internal rate of return C. net present value D. capital rationing

8. Capital rationing: A. is a way of preserving the assets of the firm over the long term. B. is a less than optimal way to arrive at capital budgeting decisions. C. assures shareholder wealth maximization. D. assures maximum potential profitability.

9. Using higher discount rates,: A. accelerated amortization is more valuable than straight line amortization. B. straight-line amortization is more valuable than accelerated amortization. C. amortization policy makes no difference. D. later year amortization has a higher net present value.

10. Which of the following is not a step in creating the net present value profile? A. Determining the net present value at a zero discount rate. B. Determining the net present value at a normal discount rate. C. Determining the project's internal rate of return. D. Determining the payback period for the project.

11. Which statement is true about amortization? A. Amortization is a cash expense that provides tax shield benefits. B. The greater the amortization expenses in earlier years, the lower the present value of the project C. The CCA amortization schedules supersede other methods for tax purposes D. The cash inflow from amortization increases profit.

Foundations of Financial Management - 10th Canadian Edition by Block

12. For acceptable investments, the discount rate assumption under the internal rate of return is generally: A. higher than under the net present-value method. B. lower than under the net present-value method. C. at the cost of capital. D. below the cost of capital.

13. As the cost of capital increases: A. fewer projects are accepted. B. more projects are accepted. C. project selection remains unchanged. D. projects become more profitable.

14. Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $25,000 but the book value is $32,000. What is the net cash outflow for the new machine with consideration for the sale of the old machine? A. $70,000 B. $45,000 C. $38,000 D. $32,000

15. A firm is selling an old asset below book value in a replacement decision. As the firm's tax rate is raised, the net cash outflow (purchase price less proceeds from the sale of the old asset plus CCA effects) would: A. go up. B. go down. C. remain the same. D. More information required.

16. The net present value profile: A. doesn't work if projects have a negative net present value. B. is a substitute for the IRR. C. graphically portrays the relationship between the discount rate and the net present value. D. is determined by the cost of debt.

17. The longer the life of an investment: A. the more significant the discount rate. B. the less significant the discount rate. C. Makes no difference. D. the easier it is to determine the discount rate.

Foundations of Financial Management - 10th Canadian Edition by Block

18. The reason cash flow is used in capital budgeting is because: A. income is used to purchase new machines. B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows. C. to include the tax shield provided from amortization ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines. D. cash includes all accounting accruals.

19. The net present value method is a better method of evaluation than the internal rate of return method because: A. the NPV method discounts cash flows at the internal rate of return. B. the NPV method is a more liberal method of analysis. C. the NPV method discounts cash flows at the firm's more conservative cost of capital. D. the NPV method includes accruals and other accounting discounts.

20. Under the capital cost allowance system: A. the life span over which an asset may be amortized is fixed at five years. B. all assets are amortized down to their salvage value. C. recovery periods for different types of assets are broken down into categories. D. the tax effect of accounting depreciation is included.

21. There are several disadvantages to the payback period, one of which is that: A. payback ignores the time value of money. B. payback emphasizes receiving money back as fast as possible for reinvestment. C. payback is easy to use and to understand. D. payback can be used in conjunction with time adjusted methods of evaluation.

22. The payback period has several disadvantages, which include: A. payback optimizes the most economic solution to a capital budgeting problem. B. payback includes cash inflows after the payback period. C. payback fails to choose the optimum or most economic solution to a capital budgeting problem. D. payback ignores liquidity concerns.

23. The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method: A. discounts cash flows at the project's internal rate of return. B. concentrates on the liquidity aspects of investment projects. C. discounts cash flows at the firm's weighted average cost of capital. D. ignores cash flows after the payback period.

Foundations of Financial Management - 10th Canadian Edition by Block

24. If the capital budgeting decision includes a replacement analysis, then: A. a gain from the sale of the old asset will represent a tax savings inflow. B. only incremental cash flows should be looked at. C. the sale price and tax savings will increase the cash inflows throughout the asset's life. D. only initial cash in-flow should be considered.

25. The Dammon Corp. has the following investment opportunities:

Under the payback period and assuming these machines are mutually exclusive, which machine(s) would Dammon Corp. choose? A. Machine A B. Machine B C. Machine C D. None of the machines will be accepted.

26. The Wet Corp. has an investment project that will reduce expenses by $15,000 per year for 3 years. The project's cost is $20,000, with a 20% CCA rate. Using a 40% tax rate, calculate the net operating cash flow at the end of year 1? A. $-15,000 B. $+11,000 C. $+9,000 D. $+9,800

27. An investment tax credit (ITC): A. increases the amortization base for tax purposes. B. decreases the amortization base for tax purposes. C. does not affect the amortization base for tax purposes. D. may increase or decrease the amortization base for tax purposes.

Foundations of Financial Management - 10th Canadian Edition by Block

28. Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually exclusive, the firm should accept all investment proposals: A. for which it can obtain financing. B. that have a positive net present value. C. that have positive cash flows. D. that provide returns greater than the after tax cost of debt.

29. An equipment replacement decision, under resultant cash flow analysis, requires: A. calculating the present value of all cash flows associated with the new equipment minus the salvage value of the old asset. B. calculating the present value of all changes in cash flows from the old equipment to the new equipment. C. subtracting the purchase price of the old equipment from the purchase price of the new equipment. D. recalculating the amortization schedule of the old equipment.

30. For CCA amortization, automobiles and light trucks fit into the: A. 30% category. B. 20% category. C. 10% category. D. 5% category.

31. Suppose that interest rates (and, therefore, the firm's Weighted Average Cost of Capital) increase. This would not change the capital budgeting choices a firm would make if it: A. uses payback period analysis. B. uses net present value analysis. C. uses internal rate of return analysis. D. uses profitability indexes.

32. The investment tax credit: A. increases the tax bill for the year in which the asset is purchased. B. has a provision for a cash refund. C. increases the base upon which CCA is calculated. D. increases the amount of CCA write-off available each year.

Foundations of Financial Management - 10th Canadian Edition by Block

33. Project A has a $5,000 net present value at a zero discount rate and an internal rate of return of 12%. Project B has an $8,000 net present value at a 0% discount rate and an IRR of return of 10%. If the projects are mutually exclusive, which one should be chosen? A. Project A because it has a higher internal rate of return. B. Project B if the cost of capital is less than the crossover point. C. Both projects if the net present value is positive. D. Neither project meets the investment criteria.

34. An investment tax credit (ITC) of $100 in comparison to CCA expense of $100 provides: A. the same tax shield benefits. B. less tax shield benefits. C. greater tax shield benefits. D. Cannot determine with the information given.

35. An asset just purchased, qualifies for a 20% CCA rate and qualifies for a 5% ITC. If the asset cost $60,000 what is the amortization base (UCC) in the second year before CCA is taken? A. $54,000 B. $51,000 C. $56,000 D. $48,000

36. Capital budgeting is primarily concerned with: A. capital formation in the economy. B. planning future financing needs. C. evaluating investment alternatives. D. minimizing the cost of capital.

37. If a firm is experiencing no capital rationing, it should accept all investment proposals: A. as long as it has available funds. B. that return an amount equal to or greater than the cost of capital. C. that return an amount greater than the cost of equity. D. that are available, regardless of return.

38. A characteristic of capital budgeting is: A. a large amount of money is always involved. B. the internal rate of return must be less than the cost of capital. C. the internal rate of return must be greater than the cost of capital. D. the time horizon is at least five years.

Foundations of Financial Management - 10th Canadian Edition by Block

39. With non-mutually exclusive projects: A. the payback period will select the best project. B. the net present value method will always select the best project. C. the internal rate of return method will always select the best project. D. the net present value and the internal rate of return methods will always accept or reject the same project.

40. If an old asset sells below book value (UCC) and the asset pool ends, from a tax standpoint: A. there is a decrease in cash flow. B. there is an increase in cash flow. C. there is no effect on cash flow. D. there is a decrease in net present value.

41. At higher tax rates, CCA amortization is: A. more beneficial. B. less beneficial. C. decreased. D. unaffected.

42. The first step in the capital budgeting process is: A. collection of data. B. idea development. C. assigning probabilities. D. determining cash flow.

43. NPV is superior to average accounting return as a capital budgeting technique because: A. it employs the accounting definition of income. B. it values each cash flow equally based on dollar value. C. it employs the actual cost of an investment. D. it employs cash flows.

44. The profitability index will give the same investment decision as: A. the payback period. B. the average accounting return. C. the net present value. D. It can be different from each of these techniques.

Foundations of Financial Management - 10th Canadian Edition by Block

45. A firm may adapt capital rationing because: A. it is hesitant to use external sources of financing. B. it wishes to maximize value. C. it is fearful of too much growth. D. it has a constraint on the amount of funds

46. The internal rate of return (IRR) assumes that funds are reinvested at the: A. cost of capital. B. yield on the investment. C. minimal acceptable rate to the firm. D. yield to maturity.

47. The internal rate of return (IRR) and net present value (NPV) methods: A. always give the same investment decision. B. never give the same investment decision. C. usually give the same investment decision. D. always give a decision different from the payback period method.

48. Capital rationing assumes that: A. a limited amount of capital is available. B. a limited number of investments are available. C. maximum value creation will be obtained. D. all projects are acceptable.

49. The modified internal rate of return (MIRR) assumes: A. inflows are invested at the traditional interest rate of return. B. inflows are reinvested at the cost of capital. C. outflows are funded with debt. D. outflows are funded with equity.

50. The internal rate of return is: A. less than the weighted average cost of capital. B. the discount rate that produces a project net present value of zero. C. the discount rate that produces a positive project net present value. D. unrelated to the weighted average cost of capital.

Foundations of Financial Management - 10th Canadian Edition by Block

51. Which of the following statements about the "payback period" is true? A. The payback period considers cash flows after the payback has been reached. B. The payback period considers the time value of money. C. The payback period uses discounted cash-flow techniques. D. The payback period fails to produce an objective decision to accept or reject an individual project.

52. Which statement is true about amortization? A. Amortization is a cash expense that provides tax shield benefits. B. The lesser the amortization expenses in earlier years, the higher the present value of the project. C. The CCA amortization schedules supersede other methods for tax purposes. D. Amortization is a cash flow that represents the annual cost of an asset.

53. The reason cash flow is used in capital budgeting is because: A. income rather than cash is used to purchase new machines. B. cash outlays need not be evaluated in terms of the present value of the resultant cash inflows. C. the tax shield provided from amortization ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines. D. cash flow includes accounting accruals.

54. The net present value method is a better method of evaluation than the internal rate of return method because: A. the NPV method discounts cash flows at the internal rate of return. B. the NPV method is a more liberal method of analysis. C. the NPV method discounts cash flows at higher than the firm's cost of capital. D. the NPV method allows the financial manager to select between mutually exclusive projects.

The Horne Robinson Inc. has the following investment opportunities. Assume the discount rate the firm uses is 10%:

Foundations of Financial Management - 10th Canadian Edition by Block

55. Under the payback period and assuming these machines are mutually exclusive, which machine(s) would Horne Robinson Inc. choose? A. Machine A B. Machine B C. Machine C D. Machine A and B

56. Under NPV evaluation and assuming these machines are mutually exclusive, which machine(s) would Horne Robinson Inc. choose? A. Machine A B. Machine B C. Machine C D. Machine A and B

Using a required rate of return of 12%.

57. What is this project's NPV if the initial capital investment is $7,162? A. $3,399 B. $12,000 C. $8,500 D. $3,000

58. What is this project's payback period if initial capital investment is $7,500? A. 3 years 3 months B. 5 years C. 9 years D. 4 years 2 months

Foundations of Financial Management - 10th Canadian Edition by Block

59. Capital budgeting is primarily concerned with: A. capital formation in the economy. B. planning future financing needs. C. evaluating investment alternatives. D. minimizing the cost of capital.

60. Assume a corporation has earnings before depreciation and taxes of $82,000, depreciation of $45,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company? A. $70,900 B. $82,000 C. $42,000 D. $37,000

61. Assume a project has earnings before depreciation and taxes of $15,000, depreciation of $25,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? A. $18,000 B. $19,000 C. A loss of $21,000 D. $25,000

62. Which of the following is not a time-adjusted method for ranking investment proposals? A. Net present value method B. Payback method C. Internal rate of return method D. Modified internal rate of return

63. The "payback method" has the following advantages: A. easy to understand, emphasis on liquidity, considers all cash flows. B. easy to understand, emphasis on liquidity, quick view of investment risk. C. easy to understand, uses the time value of money concept, quick view of investment risk. D. accepts all projects that may add value to the firm, emphasis on liquidity, quick view of investment risk.

64. There are several disadvantages to the payback method, among them: A. payback ignores the time value of money. B. payback emphasizes receiving money back as fast as possible for reinvestment. C. payback is basic to use and to understand. D. payback can be used in conjunction with time adjusted methods of evaluation.

Foundations of Financial Management - 10th Canadian Edition by Block

65. The payback method has several advantages, among them: A. payback indicates the optimum or most economic solution to a capital budgeting problem. B. payback ignores cash inflows after the payback period. C. payback is easy to calculate. D. payback utilizes the time value of money.

The Dammon Corp. has the following investment opportunities:

66. Under the payback method and assuming these machines are mutually exclusive, which machine(s) would Dammon Corp. choose? A. Machine A B. Machine B C. Machine C D. Machine A and B

67. Suppose that interest rates (and, therefore, the firm's Weighted Average Cost of Capital) increase. This would not change the capital budgeting choices a firm would make if it: A. uses payback period analysis. B. uses net present value analysis. C. uses internal rate of return analysis. D. uses profitability indexes.

68. You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return? A. 5% B. 6% C. 7% D. More than 7%

Foundations of Financial Management - 10th Canadian Edition by Block

69. You require an IRR of 14% to accept a project. If the project will yield $10,000 per year for 10 years, what is the maximum amount that you would be willing to invest in the project? A. Less than $50,000 B. More than $50,000 and less than $60,000 C. More than $60,000 and less than $70,000 D. More than $70,000

70. A long term investment: A. may use various discount rates. B. may ignore the discount rate. C. is easier to determine the discount rate than a short term investment. D. should use lower discount rates than a short term investment.

71. With a higher CCA rate, the present value of tax savings increases. True False

72. Under capital rationing, a firm will maximize profitability. True False

73. The first administrative consideration in any capital budgeting process is collection of data. True False

74. We add amortization to net income to arrive at a true profit picture. True False

75. It is not unusual for a corporate president, who deals with security analysts, to be as sensitive to after tax income as cash flow. True False

76. The payback period is easy to understand and places a heavy emphasis on liquidity. True False

Foundations of Financial Management - 10th Canadian Edition by Block

77. The payback period is not really a theoretically correct approach. True False

78. With non-mutually exclusive events and no capital rationing, we will usually arrive at the same conclusions using either the net present value or internal rate of return methods. True False

79. The internal rate of return is the average annual rate of return from the investment. True False

80. Non-mutually exclusive alternatives can be accepted at the same time. True False

81. It is the difference in the discount rate assumptions that can be significant in determining when to use the present value or internal rate of return methods. True False

82. Under the capital cost allowance system of amortization, cash flow tends to decline with the passage of time. True False

83. In a replacement decision, a book loss on an old asset can be a valuable feature. True False

84. Capital budgeting decisions involve a minimum time horizon of five years. True False

85. A good capital budgeting program requires that a number of steps be taken in the decision making process. The first step is the explanation of data. True False

Foundations of Financial Management - 10th Canadian Edition by Block

86. Possibly the most overlooked part of the capital budgeting process is the search for new opportunities through innovation and creative thinking. True False

87. In most capital budgeting decisions the emphasis is on reported earnings rather than cash flows. True False

88. Even though one project may have superior cash flow, management may choose a project that inflates earnings instead of cash flow. True False

89. The selection of a mutually exclusive project means that all other projects with a positive net present value may also be selected. True False

90. A rapid payback may be important to firms having rapid technological development. True False

91. To find the exact internal rate of return for projects with uneven cash flows, we can interpolate between two present value annuity factors. True False

92. The net present value profile's advantage over the internal rate of return method is that it does not require the time consuming trial and error calculations of the IRR. True False

93. The net present value profile allows a firm to examine the project's net present value over time. True False

94. The net present value profile examines the relationship of the discount rate to the net present value. True False

Foundations of Financial Management - 10th Canadian Edition by Block

95. The capital cost allowance rate for an asset is identical to the asset's estimated useful life. True False

96. The net present value profile's weakness is that it does not provide a decision for mutually exclusive investments. True False

97. CCA amortization schedules have superseded other amortization methods for tax purposes. True False

98. CCA standards have decreased the life span over which an asset may be amortized. True False

99. Most real estate property is amortized over a 10 year period. True False

100. Any asset with a life of 3 years or greater is entitled to a 10% investment tax credit. True False

101. The investment tax credit, when applicable, changes the amortization base for tax purposes. True False

102. The investment tax credit lowers the present value of the inflows from the CCA tax shield because of a decreased amortization base (UCC). True False

103. The cash inflow from the sale of an old asset decreases the cost of the new asset. True False

Foundations of Financial Management - 10th Canadian Edition by Block

104. A tax loss on the sale of the last asset in a CCA pool used in business or trade may be written off against ordinary income (even it is a capital loss). True False

105. Under CCA amortization you must first subtract out salvage value to determine the amortization base (UCC). True False

106. Under CCA amortization, the tax life of an asset and its economically useful life are assumed to be the same. True False

107. If an asset is sold for a price above its book value, and it is the last asset in a pool, the difference is considered taxable income to the firm. True False

108. An investment tax credit (ITC) is assumed to be earned at the rate of 2% per year up to 10%. True False

109. If an asset is sold before its useful life is complete, part of the ITC must be returned to the Canada Revenue Agency. True False

110. The internal rate of return is the interest rate that equates the cash outflows of an investment with the subsequent inflows. True False

111. Under the net present value method, cash flows are assumed to be reinvested at the firm's weighted average cost of capital. True False

Foundations of Financial Management - 10th Canadian Edition by Block

112. For high-IRR investments, it is perfectly acceptable to assume that reinvestment will occur at an equally high, if not higher, rate. True False

113. Capital budgeting is only a concern of finance and accounting personnel. True False

114. Use of the CCA tax shield formula assumes that the tax shields continue forever as long as there is at least one asset in it. True False

115. The payback method considers all cash flows. True False

116. A strength of the average accounting return is that it uses accounting numbers in its calculation. True False

117. The CCA tax shield formula produces the present value of all changes to a CCA pool. True False

118. If an asset is sold for a price above its book value and the asset pool ends, the difference is considered taxable income for the firm. True False

119. The modified internal rate of return (MIRR) assumes that inflows are reinvested at 80% of the internal rate of return. True False

120. A benefit of many new investments is the increased level of sales that can be obtained, and it is likely that incremental increases in working capital will result from new investments. True False

Foundations of Financial Management - 10th Canadian Edition by Block

121. Explain the Net Present Value (NPV) method of evaluating investment proposals. What are the advantages of this method in comparison with the other methods discussed in the text?

123. Explain the Profitability Index (PI) method of evaluating investment proposals.

124. The Net Present Value (NPI) method of evaluating investment proposals is superior to the other methods discussed in the text. Do you agree or disagree with this statement? Explain.

125. List the 5 steps in the decision making process of a good capital budgeting program.

Foundations of Financial Management - 10th Canadian Edition by Block

126. List the 5 methods for evaluating cash flows as described in the text.

128. Explain the payback period method for evaluating capital expenditures. What are the disadvantages and advantages of this method?

Foundations of Financial Management - 10th Canadian Edition by Block

129. The law firm of Bushmaster, Cobra and Asp is considering investing in a complete small business computer system. The initial investment will be $35,000 and the hardware, which will be used for 10 years with a salvage value of $5,000, and software of $20,000. In each of years 3, 5, and 7, $5,000 will be spent for additional software. Hardware has a CCR rate 45 percent and software is class 12 (100 percent). The computer system is expected to provide additional revenue of $15,000 per year for the next 10 years, and to reduce expenses by $10,000 per year for the same period. The firm's cost of capital is 12 percent and its tax rate is 40 percent. Based on a net present value analysis, should this investment be accepted?

Based on these calculations the investment should be made. However, one has to question the assumed 10-year life of the technology.

130. Tabletop Ranches, Inc. is considering the purchase of a new helicopter for $325,000. The firm's old helicopter has a book value of $85,000, but can only be sold for $60,000. The new helicopter will be subject to 25% CCA. It is expected to save $62,000 for 7 years after taxes through reduced fuel and maintenance expenses. Tabletop Ranch is in the 40% tax bracket and has a 12% cost of capital. Calculate the net present value of the helicopter purchase and state whether or not the firm should buy it.

Foundations of Financial Management - 10th Canadian Edition by Block

131. The Taylor Corporation is using a machine that originally cost $66,000. The machine has a book value of $66,000 and a current market value of $40,000. The asset is in the Class 8 CCA pool. It will have no salvage value after 5 years and the company tax rate is 40%. Jacqueline Elliott, the Chief Financial Officer of Taylor, is considering replacing this machine with a newer model costing $70,000. The new machine will cut operating costs by $10,000 each year for the next five years. Taylor's cost of capital is 8%. Should the firm replace the asset? (Use NPV methodology to solve this problem.)

132. A&B Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of $100,000. Their cash flows follow:

Evaluate and rank each alternative based on a) payback period, b) net present value (use a 10% discount rate), and c) internal rate of return.

Foundations of Financial Management - 10th Canadian Edition by Block

133. Creative Impulse has done development work on an exciting new product, Yuppo. To date, it has spent $1,000,000 on research and development and is wondering whether or not to continue the development and eventual production of Yuppo. The work to date has no value except to Creative Impulse for the further development and production of the product. It is expected that another $400,000 will be incurred in development work over the next year at which time it will be capitalized along with the equipment that will be purchased (one year from today) to produce the new product. The cost of the equipment is estimated at $1,000,000. Creative Impulse will house the equipment and new production process in an unused warehouse. The unused warehouse could have been rented out at $100,000 per year, but the company had elected to keep it unoccupied until now. Cash flow before taxes and CCA is estimated at $500,000 per year over the ten years of Yuppo's product life. Working capital requirements necessitated by this new product line will increase by $75,000. Potential salvage value of the Yuppo equipment is $100,000 eleven years from today.

Should Creative Impulse continue the development and production of Yuppo?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 12 Key

1. Which of the following is not a time-adjusted method for ranking investment proposals? A. Net present value method B. Payback period C. Internal rate of return method D. Profitability index

Accessibility: Keyboard Navigation Block - Chapter 12 #1 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 12 #2 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 12 #3 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #4 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #5 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-06 Establishing Cash Flows Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #6 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-16 Mutually Exclusive Projects Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

7. The _________ assumes returns are reinvested at the cost of capital. A. payback period B. internal rate of return C. net present value D. capital rationing

Accessibility: Keyboard Navigation Block - Chapter 12 #7 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-08 Net Present Value Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 12 #8 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-20 Capital Rationing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 12 #9 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-21 Net Present Value Profile Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #10 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-21 Net Present Value Profile Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #11 Difficulty: Hard Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #12 Difficulty: Hard Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

13. As the cost of capital increases: A. fewer projects are accepted. B. more projects are accepted. C. project selection remains unchanged. D. projects become more profitable.

Accessibility: Keyboard Navigation Block - Chapter 12 #13 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-17 Discounting Consideration Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #14 Difficulty: Medium Learning Objective: 12-06 Perform net present value analysis to assist in the decision-making process concerning long-run investments. Topic: 12-30 Comprehensive Investment Analysis (NPV) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #15 Difficulty: Medium Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #16 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-21 Net Present Value Profile Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #17 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-17 Discounting Consideration Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #18 Difficulty: Easy Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. Topic: 12-03 Accounting Flows Versus Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #19 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-08 Net Present Value Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #20 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #21 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #22 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #23 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-08 Net Present Value Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #24 Difficulty: Medium Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. Topic: 12-03 Accounting Flows Versus Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

25. The Dammon Corp. has the following investment opportunities:

Block - Chapter 12 #25 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #26 Difficulty: Medium Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #27 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-26 Investment Tax Credit Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 12 #28 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-20 Capital Rationing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #29 Difficulty: Medium Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. Topic: 12-03 Accounting Flows Versus Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

30. For CCA amortization, automobiles and light trucks fit into the: A. 30% category. B. 20% category. C. 10% category. D. 5% category.

Accessibility: Keyboard Navigation Block - Chapter 12 #30 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #31 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #32 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-26 Investment Tax Credit Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #33 Difficulty: Hard Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-15 Selection Strategy Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #34 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-26 Investment Tax Credit Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 12 #35 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-26 Investment Tax Credit Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

36. Capital budgeting is primarily concerned with: A. capital formation in the economy. B. planning future financing needs. C. evaluating investment alternatives. D. minimizing the cost of capital.

Accessibility: Keyboard Navigation Block - Chapter 12 #36 Difficulty: Easy Learning Objective: 12-01 Define capital budgeting decisions as long-run investment decisions. Topic: 12-02 The Notion of Resultant Cash Flows Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #37 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-20 Capital Rationing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #38 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #39 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-15 Selection Strategy Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #40 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Concept

41. At higher tax rates, CCA amortization is: A. more beneficial. B. less beneficial. C. decreased. D. unaffected.

Accessibility: Keyboard Navigation Block - Chapter 12 #41 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

42. The first step in the capital budgeting process is: A. collection of data. B. idea development. C. assigning probabilities. D. determining cash flow.

Accessibility: Keyboard Navigation Block - Chapter 12 #42 Difficulty: Easy Learning Objective: 12-01 Define capital budgeting decisions as long-run investment decisions. Topic: 12-01 Administrative Considerations Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #43 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-08 Net Present Value Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #44 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-13 Profitability Index Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #45 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-20 Capital Rationing Type: Concept

46. The internal rate of return (IRR) assumes that funds are reinvested at the: A. cost of capital. B. yield on the investment. C. minimal acceptable rate to the firm. D. yield to maturity.

Accessibility: Keyboard Navigation Block - Chapter 12 #46 Difficulty: Hard Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #47 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #48 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-20 Capital Rationing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #49 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-18 Modified Internal Rate of Return Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #50 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #51 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-15 Selection Strategy Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #52 Difficulty: Hard Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #53 Difficulty: Easy Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. Topic: 12-03 Accounting Flows Versus Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #54 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-15 Selection Strategy Type: Concept

The Horne Robinson Inc. has the following investment opportunities. Assume the discount rate the firm uses is 10%:

Block - Chapter 12

55. Under the payback period and assuming these machines are mutually exclusive, which machine(s) would Horne Robinson Inc. choose? A. Machine A B. Machine B C. Machine C D. Machine A and B

Block - Chapter 12 #55 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

56. Under NPV evaluation and assuming these machines are mutually exclusive, which machine(s) would Horne Robinson Inc. choose? A. Machine A B. Machine B C. Machine C D. Machine A and B

Block - Chapter 12 #56 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-08 Net Present Value Type: Concept

Using a required rate of return of 12%.

Block - Chapter 12

57. What is this project's NPV if the initial capital investment is $7,162? A. $3,399 B. $12,000 C. $8,500 D. $3,000

Block - Chapter 12 #57 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-08 Net Present Value Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

58. What is this project's payback period if initial capital investment is $7,500? A. 3 years 3 months B. 5 years C. 9 years D. 4 years 2 months

Block - Chapter 12 #58 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

59. Capital budgeting is primarily concerned with: A. capital formation in the economy. B. planning future financing needs. C. evaluating investment alternatives. D. minimizing the cost of capital.

Accessibility: Keyboard Navigation Block - Chapter 12 #59 Difficulty: Easy Learning Objective: 12-01 Define capital budgeting decisions as long-run investment decisions. Topic: 12-02 The Notion of Resultant Cash Flows Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #60 Difficulty: Medium Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #61 Difficulty: Hard Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #62 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #63 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #64 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #65 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

The Dammon Corp. has the following investment opportunities:

Block - Chapter 12

Foundations of Financial Management - 10th Canadian Edition by Block

66. Under the payback method and assuming these machines are mutually exclusive, which machine(s) would Dammon Corp. choose? A. Machine A B. Machine B C. Machine C D. Machine A and B

Block - Chapter 12 #66 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #67 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

68. You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return? A. 5% B. 6% C. 7% D. More than 7%

Accessibility: Keyboard Navigation Block - Chapter 12 #68 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 12 #69 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 12 #70 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-17 Discounting Consideration Type: Concept

71. With a higher CCA rate, the present value of tax savings increases. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #71 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Concept

72. Under capital rationing, a firm will maximize profitability. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #72 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-20 Capital Rationing Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

73. The first administrative consideration in any capital budgeting process is collection of data. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #73 Difficulty: Easy Learning Objective: 12-01 Define capital budgeting decisions as long-run investment decisions. Topic: 12-01 Administrative Considerations Type: Concept

74. We add amortization to net income to arrive at a true profit picture. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #74 Difficulty: Medium Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. Topic: 12-03 Accounting Flows Versus Cash Flows Type: Concept

75. It is not unusual for a corporate president, who deals with security analysts, to be as sensitive to after tax income as cash flow. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #75 Difficulty: Medium Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. Topic: 12-03 Accounting Flows Versus Cash Flows Type: Concept

76. The payback period is easy to understand and places a heavy emphasis on liquidity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #76 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

77. The payback period is not really a theoretically correct approach. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #77 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

78. With non-mutually exclusive events and no capital rationing, we will usually arrive at the same conclusions using either the net present value or internal rate of return methods. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #78 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-20 Capital Rationing Type: Concept

79. The internal rate of return is the average annual rate of return from the investment. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #79 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Memory

80. Non-mutually exclusive alternatives can be accepted at the same time. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #80 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-16 Mutually Exclusive Projects Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

81. It is the difference in the discount rate assumptions that can be significant in determining when to use the present value or internal rate of return methods. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #81 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-17 Discounting Consideration Type: Concept

82. Under the capital cost allowance system of amortization, cash flow tends to decline with the passage of time. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #82 Difficulty: Medium Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. Topic: 12-03 Accounting Flows Versus Cash Flows Type: Concept

83. In a replacement decision, a book loss on an old asset can be a valuable feature. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #83 Difficulty: Medium Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. Topic: 12-03 Accounting Flows Versus Cash Flows Type: Concept

84. Capital budgeting decisions involve a minimum time horizon of five years. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #84 Difficulty: Easy Learning Objective: 12-01 Define capital budgeting decisions as long-run investment decisions. Topic: 12-02 The Notion of Resultant Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

85. A good capital budgeting program requires that a number of steps be taken in the decision making process. The first step is the explanation of data. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #85 Difficulty: Medium Learning Objective: 12-01 Define capital budgeting decisions as long-run investment decisions. Topic: 12-01 Administrative Considerations Type: Concept

86. Possibly the most overlooked part of the capital budgeting process is the search for new opportunities through innovation and creative thinking. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #86 Difficulty: Medium Learning Objective: 12-01 Define capital budgeting decisions as long-run investment decisions. Topic: 12-01 Administrative Considerations Type: Concept

87. In most capital budgeting decisions the emphasis is on reported earnings rather than cash flows. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #87 Difficulty: Medium Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. Topic: 12-03 Accounting Flows Versus Cash Flows Type: Concept

88. Even though one project may have superior cash flow, management may choose a project that inflates earnings instead of cash flow. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #88 Difficulty: Medium Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. Topic: 12-03 Accounting Flows Versus Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

89. The selection of a mutually exclusive project means that all other projects with a positive net present value may also be selected. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #89 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-16 Mutually Exclusive Projects Type: Memory

90. A rapid payback may be important to firms having rapid technological development. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #90 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

91. To find the exact internal rate of return for projects with uneven cash flows, we can interpolate between two present value annuity factors. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #91 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Memory

92. The net present value profile's advantage over the internal rate of return method is that it does not require the time consuming trial and error calculations of the IRR. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #92 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-21 Net Present Value Profile Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

93. The net present value profile allows a firm to examine the project's net present value over time. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #93 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-21 Net Present Value Profile Type: Concept

94. The net present value profile examines the relationship of the discount rate to the net present value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #94 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-21 Net Present Value Profile Type: Concept

95. The capital cost allowance rate for an asset is identical to the asset's estimated useful life. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #95 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Memory

96. The net present value profile's weakness is that it does not provide a decision for mutually exclusive investments. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #96 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-21 Net Present Value Profile Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

97. CCA amortization schedules have superseded other amortization methods for tax purposes. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #97 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Concept

98. CCA standards have decreased the life span over which an asset may be amortized. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #98 Difficulty: Medium Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Concept

99. Most real estate property is amortized over a 10 year period. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #99 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-23 Capital Cost Allowance Type: Memory

100. Any asset with a life of 3 years or greater is entitled to a 10% investment tax credit. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #100 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-26 Investment Tax Credit Type: Memory

101. The investment tax credit, when applicable, changes the amortization base for tax purposes. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #101 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-26 Investment Tax Credit Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

102. The investment tax credit lowers the present value of the inflows from the CCA tax shield because of a decreased amortization base (UCC). TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #102 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-26 Investment Tax Credit Type: Memory

103. The cash inflow from the sale of an old asset decreases the cost of the new asset. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #103 Difficulty: Medium Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

104. A tax loss on the sale of the last asset in a CCA pool used in business or trade may be written off against ordinary income (even it is a capital loss). TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #104 Difficulty: Medium Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

105. Under CCA amortization you must first subtract out salvage value to determine the amortization base (UCC). TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #105 Difficulty: Medium Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

106. Under CCA amortization, the tax life of an asset and its economically useful life are assumed to be the same. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #106 Difficulty: Medium Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

107. If an asset is sold for a price above its book value, and it is the last asset in a pool, the difference is considered taxable income to the firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #107 Difficulty: Medium Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

108. An investment tax credit (ITC) is assumed to be earned at the rate of 2% per year up to 10%. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #108 Difficulty: Medium Learning Objective: 12-06 Perform net present value analysis to assist in the decision-making process concerning long-run investments. Topic: 12-31 Incremental CCA Tax Savings (Shields) Type: Concept

109. If an asset is sold before its useful life is complete, part of the ITC must be returned to the Canada Revenue Agency. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #109 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-26 Investment Tax Credit Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

110. The internal rate of return is the interest rate that equates the cash outflows of an investment with the subsequent inflows. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #110 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Memory

111. Under the net present value method, cash flows are assumed to be reinvested at the firm's weighted average cost of capital. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #111 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-08 Net Present Value Type: Concept

112. For high-IRR investments, it is perfectly acceptable to assume that reinvestment will occur at an equally high, if not higher, rate. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #112 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Concept

113. Capital budgeting is only a concern of finance and accounting personnel. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #113 Difficulty: Easy Learning Objective: 12-01 Define capital budgeting decisions as long-run investment decisions. Topic: 12-01 Administrative Considerations Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

114. Use of the CCA tax shield formula assumes that the tax shields continue forever as long as there is at least one asset in it. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #114 Difficulty: Medium Learning Objective: 12-06 Perform net present value analysis to assist in the decision-making process concerning long-run investments. Topic: 12-31 Incremental CCA Tax Savings (Shields) Type: Concept

115. The payback method considers all cash flows. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #115 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Memory

116. A strength of the average accounting return is that it uses accounting numbers in its calculation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #116 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-05 Average Accounting Return Type: Concept

117. The CCA tax shield formula produces the present value of all changes to a CCA pool. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #117 Difficulty: Medium Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

118. If an asset is sold for a price above its book value and the asset pool ends, the difference is considered taxable income for the firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #118 Difficulty: Medium Learning Objective: 12-05 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization). Topic: 12-27 Combining CCA with Cash Flow Analysis Type: Concept

119. The modified internal rate of return (MIRR) assumes that inflows are reinvested at 80% of the internal rate of return. FALSE

Accessibility: Keyboard Navigation Block - Chapter 12 #119 Difficulty: Easy Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. Topic: 12-18 Modified Internal Rate of Return Type: Memory

120. A benefit of many new investments is the increased level of sales that can be obtained, and it is likely that incremental increases in working capital will result from new investments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 12 #120 Difficulty: Medium Learning Objective: 12-06 Perform net present value analysis to assist in the decision-making process concerning long-run investments. Topic: 12-33 Other Resultant Costs Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

121. Explain the Net Present Value (NPV) method of evaluating investment proposals. What are the advantages of this method in comparison with the other methods discussed in the text? The net present value (NPV) of an investment discounts all the cash inflows over the life of the investment to determine whether they equal or exceed the required investment. If the present value of the inflows less the initial capital outflow is positive, value is added to the firm. The basic discount rate is usually the cost of capital to the firm. NPV is a superior method because it • Includes all cash flows • Utilizes time value of money concepts • Utilizes an objective evaluation tool (the cost of capital) • Can employ more than one discount rate (unlike the IRR method). The internal rate of return method, which also incorporates the time value of money in its analysis, is a special case of the NPV method. For theoretical reasons, the NPV method is preferred to the internal rate of return method. Additionally, more complex problems can be handled with the NPV method more easily than with the IRR without technical problems.

Block - Chapter 12 #121 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-08 Net Present Value Type: Concept

122. Explain the Internal Rate of Return (IRR) method of evaluating investment proposals. What are the advantages and disadvantages of this method in comparison with the other methods discussed in the text? The internal rate of return (IRR) calls for determining the yield on an investment; that is, calculating the discount rate that equates the cash outflows (cost) of an investment with the subsequent cash inflows. It is that discount rate that produces an NPV of zero. The IRR method, like the NPV method • Includes all cash flows • Utilizes time value of money concepts • Utilizes an objective evaluation tool (usually the cost of capital) However, it is not as effective a method as the NPV, because • Cumbersome trial-and-error or interpolation is required (automatically done with a financial calculator). • It may inappropriately suggest an incorrect decision between mutually exclusive projects. • Multiple discount rates can result causing confusion. • Unlike the NPV, more than one discount rate for different time periods cannot be utilized.

Block - Chapter 12 #122 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-11 Internal Rate of Return Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

123. Explain the Profitability Index (PI) method of evaluating investment proposals. The profitability index is the ratio of cash inflows to cash outflows in present value terms. It is an alternative presentation of the net present value method and is used to place returns from different size investments onto a common measuring standard. The PI is a variation of the NPV method.

Block - Chapter 12 #123 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-13 Profitability Index Type: Concept

124. The Net Present Value (NPI) method of evaluating investment proposals is superior to the other methods discussed in the text. Do you agree or disagree with this statement? Explain. The net present value, internal rate of return, and profitability index methods must have the profitability based on the time value of money equal or exceed the cost of capital for the project to be potentially acceptable. If profitability in these methods exceeds the cost of the investment, value will be added to the firm. These methods are similar and generally lead to the same decision. The profitability index is a variation of the NPV method. The IRR and NPV methods are clearly superior to the payback period and the average accounting return (AAR) methods, because they evaluate all the resultant cash flows from an investment decision and employ the time value of money. Furthermore, the acceptance of an investment when using the IRR and NPV methods is determined by the cost of capital. This is an objective criterion determined in the financial markets. The payback period and AAR methods fail to produce such an objective yardstick upon which to accept or reject an individual project. However, the IRR method does have some flaws when compared to the NPV method that may produce unclear results. These flaws include mutually exclusive projects, discounting considerations, and multiple internal rates. These reasons are why the NPV is a better methodology. The NPV method can also handle more complex problems that require more than one discount rate. The nature of the IRR method is that there can be only one discount rate.

Block - Chapter 12 #124 Difficulty: Hard Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-05 Average Accounting Return Topic: 12-07 Payback Period Topic: 12-08 Net Present Value Topic: 12-11 Internal Rate of Return Topic: 12-13 Profitability Index Topic: 12-18 Modified Internal Rate of Return Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

125. List the 5 steps in the decision making process of a good capital budgeting program. A good capital budgeting program requires that a number of steps be taken in the decision making process. 1. Search and discovery of investment opportunities 2. Collection of data 3. Evaluation of alternatives and decision making 4. Plan implementation 5. Ongoing reevaluation and adjustment

Block - Chapter 12 #125 Difficulty: Easy Learning Objective: 12-01 Define capital budgeting decisions as long-run investment decisions. Topic: 12-01 Administrative Considerations Type: Memory

126. List the 5 methods for evaluating cash flows as described in the text. Five methods for evaluating capital expenditures are: 1. Average accounting return (AAR) 2. Payback period 3. Net present value (NPV) 4. Internal rate of return (IRR) 5. Profitability index (PI

Block - Chapter 12 #126 Difficulty: Easy Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-14 Summary of Evaluation Methods Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

127. The average accounting return (AAR) is fairly easy to calculate and makes use of information readily prepared by the accounting conventions. Why is the AAR method for evaluating investments flawed? Firms frequently calculate the AAR, but it has serious flaws. • Asset value comes from the amount and timing of cash flows. AAR does not take this into consideration. • Accounting earnings, not cash flows are used. • All earnings are given equal treatment. (Equivalent cash flows in different years receive the same value. This is not correct based on the time value of money.) • Book values establish the value of the investment, not market values. • No objective evaluation yardstick is suggested, such as the cost of capital used by the NPV and IRR methods.

Block - Chapter 12 #127 Difficulty: Medium Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-05 Average Accounting Return Type: Concept

128. Explain the payback period method for evaluating capital expenditures. What are the disadvantages and advantages of this method? The payback period method computes the time required to recoup the initial investment. In using the payback period to select an investment, four important considerations are ignored. 1. There is no consideration of the amount of cash flow generated after the initial investment is recaptured. 2. The method fails to consider the time value of money. If we had two possible $10,000 investments with different timeline inflow patterns, the payback period would rank them equally. 3. The payback period method fails to definitively discern the optimum or most economic solution to a capital budgeting problem. 4. The payback period method may fail to accept projects that can add substantial value to the firm. The payback period has some features that help to explain its use by corporate management: 1. Easy to understand. 2. Heavy emphasis on liquidity (e.g., recoup initial investment quickly (3 to 5 years), or it will not qualify). 3. Provides an initial view of an investment's risk A rapid payback may be particularly important to firms in industries characterized by rapid technological developments or other sources of uncertainty. Given that some decisions may be justifiable only on the basis of cash flow estimates far in the future (and therefore relatively more uncertain), managers often opt for the decisions with the more predictable cash flow estimates.

Block - Chapter 12 #128 Difficulty: Hard Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Topic: 12-07 Payback Period Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Based on these calculations the investment should be made. However, one has to question the assumed 10-year life of the technology. PV (CCA) (Hardware)

PV (CCA) (Software)

Block - Chapter 12 #129 Difficulty: Medium Learning Objective: 12-06 Perform net present value analysis to assist in the decision-making process concerning long-run investments. Topic: 12-30 Comprehensive Investment Analysis (NPV) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

PV (CCA) (Helicopter)

Decision: NPV is negative. Do not purchase the new helicopter. Block - Chapter 12 #130 Difficulty: Hard Learning Objective: 12-06 Perform net present value analysis to assist in the decision-making process concerning long-run investments. Topic: 12-30 Comprehensive Investment Analysis (NPV) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

PV (CCA) (Machine)

Decision: NPV is positive, purchase the new machine. Block - Chapter 12 #131 Difficulty: Hard Learning Objective: 12-06 Perform net present value analysis to assist in the decision-making process concerning long-run investments. Topic: 12-30 Comprehensive Investment Analysis (NPV) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

132. A&B Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of $100,000. Their cash flows follow:

Evaluate and rank each alternative based on a) payback period, b) net present value (use a 10% discount rate), and c) internal rate of return.

Foundations of Financial Management - 10th Canadian Edition by Block

A) Payback period

Based on payback period, our choice is B. B) Net present value (NPV) PV of Inflows @ 10%

Based on net present value analysis, our first choice is D, followed by A, then B. We would not select alternative C. C) Internal rate of return (IRR) Alternative A:

Interpolate:

Foundations of Financial Management - 10th Canadian Edition by Block

IRR = 12% + [$18/$3,042 × 1%] = 12.01% Alternative B is already very close @ 10%

IRR = 10% + [$1,052/$1,606 × 1%] = 10.66% Alternative C is an annuity. (May use Appendix D)

IRR = 7% + [$2,505/$2,687 × 1%] = 7.93% Alternative D

IRR = 12% + [$1,040/$3,554 × 1%] = 12.29% Choose D, then A, then B. Choose C only if required rate of return is below 7.9%.

Block - Chapter 12 #132 Difficulty: Hard Learning Objective: 12-03 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index. Learning Objective: 12-06 Perform net present value analysis to assist in the decision-making process concerning long-run investments. Topic: 12-11 Internal Rate of Return Topic: 12-30 Comprehensive Investment Analysis (NPV) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Should Creative Impulse continue the development and production of Yuppo?

PV (CCA) (Yuppo)

Decision: NPV is positive, proceed with the development. Note: that the two annuities must be present valued another year to bring them to time zero.

Block - Chapter 12 #133 Difficulty: Hard Learning Objective: 12-06 Perform net present value analysis to assist in the decision-making process concerning long-run investments. Topic: 12-30 Comprehensive Investment Analysis (NPV) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 12 Summary Category

# of Ques tions

Accessibility: Keyboard Navigation

114

Block - Chapter 12

136

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 12-01 Define capital budgeting decisions as long-run investment decisions.

Learning Objective: 12-02 Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision.

Learning Objective: 1203 Evaluate investments by the average accounting return; the payback period; the internal rate of return; the net present value; and the profitability index.

Learning Objective: 12-04 Appraise the use of the cost of capital as the discount rate in capital budgeting analysis.

Learning Objective: 1205 Integrate the cash flows that result from an investment decision; including the aftertax operating benefits and the tax shield benefits of capital cost allowance (amortization).

Learning Objective: 12-06 Perform net present value analysis to assist in the decision-making process concerning longrun investments.

Topic: 12-01 Administrative Considerations

Topic: 12-02 The Notion of Resultant Cash Flows

Topic: 12-03 Accounting Flows Versus Cash Flows

Topic: 12-05 Average Accounting Return

Topic: 12-06 Establishing Cash Flows

Topic: 12-07 Payback Period

Topic: 12-08 Net Present Value

Topic: 12-11 Internal Rate of Return

Topic: 12-13 Profitability Index

Topic: 12-14 Summary of Evaluation Methods

Topic: 12-15 Selection Strategy

Topic: 12-16 Mutually Exclusive Projects

Topic: 12-17 Discounting Consideration

Topic: 12-18 Modified Internal Rate of Return

Topic: 12-20 Capital Rationing

Topic: 12-21 Net Present Value Profile

Topic: 12-23 Capital Cost Allowance

Topic: 12-26 Investment Tax Credit

Topic: 12-27 Combining CCA with Cash Flow Analysis

Topic: 12-30 Comprehensive Investment Analysis (NPV)

Topic: 12-31 Incremental CCA Tax Savings (Shields)

Topic: 12-33 Other Resultant Costs

Type: Concept

107

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 13 1. Risk is usually measured as the: A. potential loss. B. variability of outcomes around some expected value. C. probability of expected values. D. potential expected loss.

2. If three investment alternatives all have some degree of risk and different expected returns, which of the following measures could best be used to rank the risk levels of the projects? A. Coefficient of correlation B. Coefficient of variation C. Standard deviation of returns D. Net present value

3. The term "risk averse" means that: A. an individual refuses to take risks. B. most investors and businesspersons seek risk. C. an individual will seek to avoid risk or be compensated with a higher return. D. only investment proposals with no risk should be accepted.

4. In order to reduce risk in a firm, the firm would seek to enter a business that: A. has high positive correlation with its present business. B. has zero correlation with its present business. C. has high negative correlation with its present business. D. has high negative variation with its present business.

5. The "efficient frontier" indicates: A. alternatives with neutral combinations of risk and return. B. alternatives with the highest returns. C. alternatives with the best combination of risk and return. D. alternatives with no risk.

Foundations of Financial Management - 10th Canadian Edition by Block

6. Risk may be integrated into capital budgeting decisions by: A. adjusting the standard deviation of possible outcomes. B. determining the expected value. C. adjusting the discount rate. D. adjusting the time horizon.

7. Which of the following is a false statement? A. Risky investments may produce large losses. B. Risky investments may produce large gains. C. The coefficient of variation is a risk measure. D. Risk-averse investors cannot be induced to invest in risky assets.

8. If one project has a higher standard deviation than another: A. it has a greater risk. B. it has a higher expected value. C. it has more possible outcomes. D. it may be riskier, but this can only be determined by the coefficient of variation.

9. The firm's highest risk-adjusted discount should be applied to: A. the repair of old machinery. B. a new product in a related field. C. a new product in a foreign market. D. the purchase of new equipment.

10. The portfolio effect in capital budgeting refers to: A. the relationship of stocks to bonds. B. the degree of correlation between various investments. C. the coefficient of variation. D. the risk-adjusted discount rate.

11. An example of negative correlation may exist between the: A. forest products and housing industries. B. jewellery and discount furniture industries. C. steel and aluminum industries. D. oil and auto industries.

Foundations of Financial Management - 10th Canadian Edition by Block

12. A correlation coefficient of zero indicates: A. the projects have the same expected value. B. there is no correlation and no risk reduction between combined projects. C. there is no correlation, but some risk reduction when the projects are combined. D. the projects have the same standard deviation.

13. In determining the appropriate discount rate for an individual project, the financial manager will be most influenced by the: A. expected value. B. internal rate of return. C. standard deviation. D. coefficient of variation.

14. The coefficient of correlation: A. takes on values anywhere from 0 to + 1. B. takes on values anywhere from - 1 to 0. C. takes on values anywhere from - 1 to + 1. D. takes on values of 0 or larger.

15. Projects that are negatively correlated: A. cut down the maximum profit potential for the firm. B. increase the possible losses of the firm. C. are generally in the same industry. D. have an equal amount of risk.

16. The concept of being risk averse means: A. for a given situation investors would prefer relative uncertainty to certainty. B. investors would prefer investments with high standard deviations and greater opportunity for gain. C. that the lower the volatility the higher the standard deviation must be. D. that the greater the risk the higher the expected return must be.

17. The standard deviation can be defined as the: A. square root of the sum (D- )2P. B. square root of the sum (D- )P. C. square root of (D- )2P. D. square root of (D- )P.

Foundations of Financial Management - 10th Canadian Edition by Block

18. The coefficient of variation (V) can be defined as the: A. expected value multiplied by the standard deviation. B. standard deviation divided by the mean (expected value). C. mean (expected value) divided by the standard deviation. D. standard deviation squared, divided by the expected value.

19. Which investment has the least amount of risk? A. Standard deviation = $500, expected return = $5,000 B. Standard deviation = $700, expected return = $500 C. Standard deviation = $900, expected return = $800 D. Standard deviation = $400, expected return = $350

20. In order to evaluate risk, management may also set qualitative risk classes. Rank these four projects from the least to the most risky. 1. Completely new market in Canada 2. Completely new market in South America 3. Addition to normal product line 4. Repair to old machinery A. 4, 3, 1, 2 B. 1, 2, 3, 4 C. 3, 4, 1, 2 D. 2, 3, 4, 1

21. In a portfolio, risk is evaluated in a different way than with an individual project. In evaluating portfolio risk we: A. don't need to consider the impact of a given project on the overall risk of the firm. B. recognize that a risky investment will not create a portfolio with less risk. C. consider the risk of the project with the highest beta only. D. need to consider how the returns of the projects in the portfolio are correlated.

22. A "what if" simulation using a computer helps to: A. reduce the risk associated with a particular investment. B. determine the effects of changes in certain variables. C. increase the accuracy of the inputs. D. none of these answer options are true.

Foundations of Financial Management - 10th Canadian Edition by Block

23. An analytical tool which helps to organize the decision process by presenting a graphical comparison of investment choices is called a(an): A. module hierarchy diagram. B. "what if" simulation. C. decision tree. D. random simulation.

24. The lower the coefficient of correlation the greater the: A. risk when projects are combined. B. risk reduction when projects are combined. C. return when projects are combined. D. standard deviation when projects are combined.

25. Which of the following is a characteristic of beta? A. Beta measures only the volatility of returns on an individual bond relative to a bond market index. B. A beta of 1.0 is of equal risk with the market. C. A beta of greater than 1.0 has less risk than the market. D. Beta measures the correlation between the risk free rate and the market rate of risk.

26. Simulation models allow the planner to: A. consider unknown risks of mutually exclusive projects. B. test possible changes in each variable. C. generate a unique value for consideration. D. determine the risk in a Government of Canada Treasury Bill.

27. Which of the following is a common approach in dealing with uncertainty? A. Monte Carlo simulation B. Internal rate of return C. Net present value D. Beta analysis

Foundations of Financial Management - 10th Canadian Edition by Block

28. Firm X is considering a project and its analysts have projected the following outcomes and their probabilities.

What is the expected value of the outcomes? A. $3,123 B. $8,460 C. $8,873 D. Cannot be determined/depends upon which prediction is correct

29. A project has the following projected outcomes in dollars: $250, $350, and $500. The probabilities of their outcomes are 25%, 50%, and 25% respectively. What is the standard deviation of these outcomes? A. $363 B. $89 C. $94 D. $178

30. A project's coefficient of variation is 0.40. The project has a positive coefficient of correlation of 0.20. The expected value is $2,000. What is one standard deviation? A. $400.00 B. $500.00 C. $800.00 D. $1,000.00

31. Using progressively higher discount rates: A. tends to reduce early and late cash flows equally. B. tends to penalize early flows more than late flows. C. tends to lower net present value. D. reflects the decreasing nature of risk in the discount rate.

32. Using the risk-adjusted discount rate approach, projects with high coefficients of variation will have ______ net present values than projects with low coefficients of variation. A. somewhat higher B. substantially higher C. lower D. no change on

Foundations of Financial Management - 10th Canadian Edition by Block

33. A coefficient correlation of _____ provides no risk reduction. A. 0 B. -1 C. +1 D. +.5

34. A coefficient of _____ provides the greatest risk reduction. A. 0 B. -1 C. +1 D. +.5

35. Using the risk-adjusted discount rate approach, the firm's cost of capital is applied to projects with: A. normal risk. B. high risk. C. no risk. D. low risk.

36. Beta is a better risk measure than standard deviation when the firm: A. is effectively diversified. B. focused on total risk. C. uses the CAPM in its cost of capital calculation. D. has a beta that is close to 1.0.

37. The certainty equivalent approach: A. is only appropriate for analyzing cash flows with risk similar government securities. B. adjusts each cash flow based on a probability distribution. C. adjusts the discount to suit the risk of each cash flow. D. models the sequence of decisions required over time.

38. A Monte Carlo simulation model uses: A. random variables as inputs. B. a point estimate. C. the cost of capital. D. portfolio risk.

Foundations of Financial Management - 10th Canadian Edition by Block

39. Projects that are totally uncorrelated provide: A. no risk reduction. B. some risk reduction. C. extreme risk reduction. D. Need more information.

40. In order to reduce risk in a firm, the firm would seek to enter a business that: A. has high positive correlation with its present business. B. has zero correlation with its present business. C. has high negative correlation with its present business. D. has low correlation with its present business.

41. The "efficient frontier" indicates: A. alternatives with neutral combinations of risk and return. B. alternatives with the highest returns. C. alternatives with no risk. D. the best risk return line for a firm.

42. Which of the following is a true statement? A. Risky investments may produce large losses. B. Risky investments will not produce large gains. C. The coefficient of variation is not a risk measure. D. All risky investments have a high probability of succeeding.

43. Projects that are negatively correlated: A. increase the maximum profit potential for the firm. B. increase the possible losses of the firm. C. are generally in the same industry. D. provide a degree of risk reduction.

44. The concept of being risk averse means: A. for a given situation investors would prefer relative uncertainty to certainty. B. investors would prefer investments with high standard deviations and greater opportunity for gain. C. that the higher the risk the lower the expected return must be. D. investors prefer low risk to high risk investments.

Foundations of Financial Management - 10th Canadian Edition by Block

45. Which investment has the least amount of risk? A. Standard deviation = $800, expected return = $400 B. Standard deviation = $700, expected return = $3,000 C. Standard deviation = $1,000, expected return = $8,000 D. Standard deviation = $1,000, expected return = $7,000

46. In a portfolio, risk is evaluated in a different way than with an individual project. In evaluating portfolio risk we: A. need to consider the impact of a given project on the overall risk of the firm. B. recognize that a risky investment always creates a portfolio with less risk. C. need to ensure all the projects in the portfolio are positively correlated. D. only consider the average beta.

47. Simulation models allow the planner to: A. reduce the standard deviations of projects. B. test possible changes in each variable. C. deal with all uncertainty in forecasting outcomes. D. increase the standard deviations of projects.

Leland-Morgan Consulting is considering a project and its analysts have projected the following outcomes and their probabilities.

48. What is the expected value of the outcomes? A. $8,200 B. $6,400 C. $8,500 D. Cannot be determined until we know the actual outcome.

49. What is the standard deviation of the outcomes? A. $2,850 B. $4,200 C. $1,536 D. Cannot be determined with the information given.

Foundations of Financial Management - 10th Canadian Edition by Block

50. What is the coefficient of variation of the outcomes? A. 1.29 B. 0.19 C. 0.44 D. Cannot be determined with the information given

51. A project has the following projected outcomes: $100, $500, and $800. The probabilities of their outcomes are 10%, 50%, and 40% respectively. What is the standard deviation of these outcomes? A. $124 B. $214 C. $546 D. $580

52. A project's coefficient of variation is 0.50. The project has a positive coefficient of correlation of 0.20. The expected value is $3,000. What is the standard deviation? A. $600 B. $300 C. $1,200 D. $1,500

53. Using progressively higher discount rates: A. tends to penalize late flows more than early flows. B. tends to penalize early flows more than late flows. C. tends to increase net present value. D. is not reflective of risk expectations.

The following information was given regarding a proposed project at Field Corp. (FC).

54. This project's expected profit is ________. A. $5,000 B. $5,499 C. $8,250 D. $12,890

Foundations of Financial Management - 10th Canadian Edition by Block

55. This project's standard deviation is ___________. A. $5,626 B. $8,254 C. $7,462 D. $2,597

56. This project's coefficient of variation is ______. A. 0.80 B. 0.90 C. 1.67 D. 2.30

57. A project's total risk is measured by _________________________. A. Beta B. Sharpe Ratio C. Chi Square D. coefficient of variation

58. The W Equity portfolio has a standard deviation of returns of 8. The R Bond portfolio has a standard deviation of returns of 6. If the Cov of these portfolio is 5 what is this portfolio's coefficient of correlation? A. 0.1042 B. 0.889 C. 0.43 D. -0.1042

59. A basic assumption in financial theory is that most investors and managers are risk seekers. True False

60. In order to reduce risk, one should diversify into areas that are positively correlated with current areas of involvement. True False

61. Generally, because of the unpredictability of earnings, cyclical stocks are given higher price-earnings multiples than growth stocks. True False

Foundations of Financial Management - 10th Canadian Edition by Block

62. A firm might be willing to accept high risk in a given investment if the portfolio effect (for the whole firm) were beneficial. True False

63. If we are risk-averse, a risky investment with an 8% return will be preferred over a 10% risk-free investment. True False

64. Risk is not only measured in terms of losses, but also in terms of variability. True False

65. The coefficient of correlation represents the standard deviation divided by the expected value. True False

66. Generally, the higher the coefficient of variation a project has, the higher the discount rate it should be assigned. True False

67. The cost of capital is assumed to contain no risk for the firm. True False

68. Projects that are totally uncorrelated provide some overall reduction in portfolio risk. True False

69. The highest possible value for positive correlation is +1. True False

70. The investor's portfolio should always be on the efficient frontier. True False

Foundations of Financial Management - 10th Canadian Edition by Block

71. The efficient frontier is always along the left-most portion of the risk-return tradeoff diagram. True False

72. In considering the share price effect on risk-return trade-offs, our goal should always be to earn the highest return possible. True False

73. Projects with high positive correlation are sometimes valuable because they allow us to smooth out the overall performance of the firm during a business cycle. True False

74. The expected value is a weighted average of the outcomes multiplied by their probabilities. True False

75. Investment A may have a higher standard deviation than investment B and still have less risk. True False

76. A common stock with a beta of 1.0 is said to be of equal risk with the market. True False

77. Combining assets with highly correlated returns will reduce portfolio risk. True False

78. When choosing portfolios of assets, management should try to achieve the highest possible return at a given level of risk. True False

79. Selection of portfolio combinations from the efficient frontier will depend upon our willingness to assume risk. True False

Foundations of Financial Management - 10th Canadian Edition by Block

80. The capital budgeting decisions of a firm will have no effect on the share price of the common stock. True False

81. Choosing projects with returns equal to the company norm but having a higher level of risk will most likely lower the company's share price. True False

82. Computers are helpful for "what if" simulations, but so far they are not able to assess project risk. True False

83. Sensitivity analysis helps the financial planner to determine how sensitive shareholders will be to changes in investment strategy. True False

84. As the time horizon becomes shorter, more uncertainty enters the forecast. True False

85. As the time horizon increases, the standard deviation for each forecast of cash flow usually increases. True False

86. Simulation models allow the analyst to test possible changes in the variables used in the model. True False

87. Decision trees present a tabular or graphical comparison of projected decision outcomes. True False

88. Projects which are totally uncorrelated provide more overall risk reduction than negatively correlated projects. True False

Foundations of Financial Management - 10th Canadian Edition by Block

89. To account for risk an alternative to adjusting the discount rate is the certainty equivalent which adjusts the cash flows. True False

90. Systematic risk can be diversified away. However, unique risk cannot be diversified away. True False

91. An analyst's ability to diversify away risk diminishes over time. True False

92. Certainty equivalent approaches adjust project cash flows according to the project's probability distribution so that its NPV is equal to having no inherent risk. True False

93. A stock with a beta of 1 has systematic risk that is equal to the market. True False

94. Due to risk-aversion most investors require an increased potential for return in order to be induced to take larger risks. True False

Foundations of Financial Management - 10th Canadian Edition by Block

95. Cooper Construction is considering purchasing new, technologically advanced equipment. The equipment will cost $625,000 with a salvage value of $50,000 at the end of its useful life of 10 years. The equipment is expected to generate additional annual cash inflows with the following probabilities for the next 10 years:

A) What is the expected cash flow? B) Cooper's cost of capital is 10%. What is the expected net present value? C) Should Cooper buy the equipment?

96. Golden Corporation is considering the purchase of new equipment costing $200,000. The expected life of the equipment is 10 years. It is expected that the new equipment can generate an increase in net income of $35,000 per year for the next 10 years. The probabilities for the increase in net income depend on the state of the economy. After tax

The equipment can be amortized using straight-line amortization for tax purposes. Golden's cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment?

Foundations of Financial Management - 10th Canadian Edition by Block

97. Bill Broodiest, star quarterback for the Spring Bay Smashers, would like to invest a small portion of his earnings in stocks of one of three firms. His estimated dividends and the probabilities of their occurrence follow.

A) Calculate the expected cash flow for each. B) Calculate the coefficient of variation for each. C) Rank the three from the least risky to the most risky.

98. Red River Corporation is considering the purchase of new equipment costing $500,000. The expected life of the equipment is 10 years. It is expected that the new equipment can generate an increase in net income of $60,000 per year for the next 10 years. The probabilities for the increase in net income depend on the state of the economy. After tax

The equipment can be amortized using straight-line amortization for tax purposes. Red River's cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment? Would your decision change if the cost of capital was 9%? Why or why not?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 13 Key

1. Risk is usually measured as the: A. potential loss. B. variability of outcomes around some expected value. C. probability of expected values. D. potential expected loss.

Accessibility: Keyboard Navigation Block - Chapter 13 #1 Difficulty: Easy Learning Objective: 13-01 Describe the concept of risk based on the uncertainty of future cash flows. Topic: 13-01 Risk in Valuation Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #2 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #3 Difficulty: Easy Learning Objective: 13-02 Characterize most investors as risk averse. Topic: 13-02 The Concept of Risk Aversion Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #4 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #5 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-16 Evaluation of Combinations Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #6 Difficulty: Easy Learning Objective: 13-04 Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. Topic: 13-06 Risk-Adjusted Discount Rate Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #7 Difficulty: Medium Learning Objective: 13-02 Characterize most investors as risk averse. Topic: 13-02 The Concept of Risk Aversion Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #8 Difficulty: Medium Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #9 Difficulty: Medium Learning Objective: 13-04 Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. Topic: 13-08 Qualitative Measures Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #10 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #11 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #12 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #13 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #14 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #15 Difficulty: Hard Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #16 Difficulty: Medium Learning Objective: 13-02 Characterize most investors as risk averse. Topic: 13-02 The Concept of Risk Aversion Type: Memory

17. The standard deviation can be defined as the: A. square root of the sum (D- )2P. B. square root of the sum (D- )P. C. square root of (D- )2P. D. square root of (D- )P.

Block - Chapter 13 #17 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #18 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #19 Difficulty: Medium Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #20 Difficulty: Medium Learning Objective: 13-04 Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. Topic: 13-08 Qualitative Measures Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #21 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #22 Difficulty: Medium Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-10 Computer Simulation Models Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #23 Difficulty: Easy Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-12 Decision Trees Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #24 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #25 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-04 Risk in a Portfolio Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #26 Difficulty: Easy Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-10 Computer Simulation Models Type: Concept

27. Which of the following is a common approach in dealing with uncertainty? A. Monte Carlo simulation B. Internal rate of return C. Net present value D. Beta analysis

Accessibility: Keyboard Navigation Block - Chapter 13 #27 Difficulty: Easy Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-10 Computer Simulation Models Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

28. Firm X is considering a project and its analysts have projected the following outcomes and their probabilities.

What is the expected value of the outcomes? A. $3,123 B. $8,460 C. $8,873 D. Cannot be determined/depends upon which prediction is correct

Block - Chapter 13 #28 Difficulty: Medium Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #29 Difficulty: Medium Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #30 Difficulty: Hard Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #31 Difficulty: Medium Learning Objective: 13-04 Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. Topic: 13-07 Increasing Risk Over Time Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #32 Difficulty: Medium Learning Objective: 13-04 Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. Topic: 13-06 Risk-Adjusted Discount Rate Type: Concept

33. A coefficient correlation of _____ provides no risk reduction. A. 0 B. -1 C. +1 D. +.5

Accessibility: Keyboard Navigation Block - Chapter 13 #33 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

34. A coefficient of _____ provides the greatest risk reduction. A. 0 B. -1 C. +1 D. +.5

Accessibility: Keyboard Navigation Block - Chapter 13 #34 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Concept

35. Using the risk-adjusted discount rate approach, the firm's cost of capital is applied to projects with: A. normal risk. B. high risk. C. no risk. D. low risk.

Accessibility: Keyboard Navigation Block - Chapter 13 #35 Difficulty: Medium Learning Objective: 13-04 Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. Topic: 13-06 Risk-Adjusted Discount Rate Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #36 Difficulty: Medium Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-04 Risk in a Portfolio Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #37 Difficulty: Medium Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-09 Certainty Equivalents Type: Concept

38. A Monte Carlo simulation model uses: A. random variables as inputs. B. a point estimate. C. the cost of capital. D. portfolio risk.

Accessibility: Keyboard Navigation Block - Chapter 13 #38 Difficulty: Medium Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-10 Computer Simulation Models Type: Concept

39. Projects that are totally uncorrelated provide: A. no risk reduction. B. some risk reduction. C. extreme risk reduction. D. Need more information.

Accessibility: Keyboard Navigation Block - Chapter 13 #39 Difficulty: Hard Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #40 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-15 An Example of Portfolio Risk Reduction Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #41 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-16 Evaluation of Combinations Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #42 Difficulty: Medium Learning Objective: 13-01 Describe the concept of risk based on the uncertainty of future cash flows. Topic: 13-01 Risk in Valuation Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #43 Difficulty: Hard Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #44 Difficulty: Medium Learning Objective: 13-02 Characterize most investors as risk averse. Topic: 13-02 The Concept of Risk Aversion Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 13 #45 Difficulty: Medium Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #46 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #47 Difficulty: Easy Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-10 Computer Simulation Models Type: Concept

Leland-Morgan Consulting is considering a project and its analysts have projected the following outcomes and their probabilities.

Block - Chapter 13

Foundations of Financial Management - 10th Canadian Edition by Block

48. What is the expected value of the outcomes? A. $8,200 B. $6,400 C. $8,500 D. Cannot be determined until we know the actual outcome.

Block - Chapter 13 #48 Difficulty: Medium Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

49. What is the standard deviation of the outcomes? A. $2,850 B. $4,200 C. $1,536 D. Cannot be determined with the information given.

Block - Chapter 13 #49 Difficulty: Hard Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

50. What is the coefficient of variation of the outcomes? A. 1.29 B. 0.19 C. 0.44 D. Cannot be determined with the information given

Block - Chapter 13 #50 Difficulty: Hard Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #51 Difficulty: Medium Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #52 Difficulty: Hard Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 13 #53 Difficulty: Medium Learning Objective: 13-04 Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. Topic: 13-07 Increasing Risk Over Time Type: Concept

The following information was given regarding a proposed project at Field Corp. (FC).

Block - Chapter 13

54. This project's expected profit is ________. A. $5,000 B. $5,499 C. $8,250 D. $12,890

Block - Chapter 13 #54 Difficulty: Medium Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

55. This project's standard deviation is ___________. A. $5,626 B. $8,254 C. $7,462 D. $2,597

Block - Chapter 13 #55 Difficulty: Medium Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

56. This project's coefficient of variation is ______. A. 0.80 B. 0.90 C. 1.67 D. 2.30

Block - Chapter 13 #56 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

57. A project's total risk is measured by _________________________. A. Beta B. Sharpe Ratio C. Chi Square D. coefficient of variation

Accessibility: Keyboard Navigation Block - Chapter 13 #57 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 13 #58 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Concept

59. A basic assumption in financial theory is that most investors and managers are risk seekers. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #59 Difficulty: Easy Learning Objective: 13-02 Characterize most investors as risk averse. Topic: 13-02 The Concept of Risk Aversion Type: Concept

60. In order to reduce risk, one should diversify into areas that are positively correlated with current areas of involvement. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #60 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Concept

61. Generally, because of the unpredictability of earnings, cyclical stocks are given higher price-earnings multiples than growth stocks. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #61 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-17 The Share Price Effect Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

62. A firm might be willing to accept high risk in a given investment if the portfolio effect (for the whole firm) were beneficial. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #62 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Concept

63. If we are risk-averse, a risky investment with an 8% return will be preferred over a 10% risk-free investment. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #63 Difficulty: Easy Learning Objective: 13-02 Characterize most investors as risk averse. Topic: 13-02 The Concept of Risk Aversion Type: Concept

64. Risk is not only measured in terms of losses, but also in terms of variability. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #64 Difficulty: Easy Learning Objective: 13-01 Describe the concept of risk based on the uncertainty of future cash flows. Topic: 13-01 Risk in Valuation Type: Concept

65. The coefficient of correlation represents the standard deviation divided by the expected value. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #65 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

66. Generally, the higher the coefficient of variation a project has, the higher the discount rate it should be assigned. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #66 Difficulty: Easy Learning Objective: 13-04 Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. Topic: 13-06 Risk-Adjusted Discount Rate Type: Memory

67. The cost of capital is assumed to contain no risk for the firm. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #67 Difficulty: Easy Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-09 Certainty Equivalents Type: Memory

68. Projects that are totally uncorrelated provide some overall reduction in portfolio risk. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #68 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Concept

69. The highest possible value for positive correlation is +1. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #69 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

70. The investor's portfolio should always be on the efficient frontier. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #70 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Concept

71. The efficient frontier is always along the left-most portion of the risk-return tradeoff diagram. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #71 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-17 The Share Price Effect Type: Concept

72. In considering the share price effect on risk-return trade-offs, our goal should always be to earn the highest return possible. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #72 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-17 The Share Price Effect Type: Concept

73. Projects with high positive correlation are sometimes valuable because they allow us to smooth out the overall performance of the firm during a business cycle. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #73 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-16 Evaluation of Combinations Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

74. The expected value is a weighted average of the outcomes multiplied by their probabilities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #74 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Memory

75. Investment A may have a higher standard deviation than investment B and still have less risk. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #75 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-03 Actual Measurement of Risk Type: Concept

76. A common stock with a beta of 1.0 is said to be of equal risk with the market. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #76 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-04 Risk in a Portfolio Type: Concept

77. Combining assets with highly correlated returns will reduce portfolio risk. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #77 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

78. When choosing portfolios of assets, management should try to achieve the highest possible return at a given level of risk. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #78 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-13 The Portfolio Effect Type: Concept

79. Selection of portfolio combinations from the efficient frontier will depend upon our willingness to assume risk. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #79 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-16 Evaluation of Combinations Type: Concept

80. The capital budgeting decisions of a firm will have no effect on the share price of the common stock. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #80 Difficulty: Medium Learning Objective: 13-01 Describe the concept of risk based on the uncertainty of future cash flows. Topic: 13-01 Risk in Valuation Type: Concept

81. Choosing projects with returns equal to the company norm but having a higher level of risk will most likely lower the company's share price. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #81 Difficulty: Medium Learning Objective: 13-01 Describe the concept of risk based on the uncertainty of future cash flows. Topic: 13-01 Risk in Valuation Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

82. Computers are helpful for "what if" simulations, but so far they are not able to assess project risk. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #82 Difficulty: Medium Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-10 Computer Simulation Models Type: Concept

83. Sensitivity analysis helps the financial planner to determine how sensitive shareholders will be to changes in investment strategy. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #83 Difficulty: Medium Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-11 Sensitivity Analysis Type: Concept

84. As the time horizon becomes shorter, more uncertainty enters the forecast. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #84 Difficulty: Medium Learning Objective: 13-04 Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. Topic: 13-07 Increasing Risk Over Time Type: Concept

85. As the time horizon increases, the standard deviation for each forecast of cash flow usually increases. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #85 Difficulty: Medium Learning Objective: 13-04 Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. Topic: 13-07 Increasing Risk Over Time Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

86. Simulation models allow the analyst to test possible changes in the variables used in the model. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #86 Difficulty: Easy Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-10 Computer Simulation Models Type: Concept

87. Decision trees present a tabular or graphical comparison of projected decision outcomes. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #87 Difficulty: Easy Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-12 Decision Trees Type: Memory

88. Projects which are totally uncorrelated provide more overall risk reduction than negatively correlated projects. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #88 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Concept

89. To account for risk an alternative to adjusting the discount rate is the certainty equivalent which adjusts the cash flows. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #89 Difficulty: Medium Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-09 Certainty Equivalents Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

90. Systematic risk can be diversified away. However, unique risk cannot be diversified away. FALSE

Accessibility: Keyboard Navigation Block - Chapter 13 #90 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Concept

91. An analyst's ability to diversify away risk diminishes over time. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #91 Difficulty: Easy Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-14 Portfolio Risk Type: Concept

92. Certainty equivalent approaches adjust project cash flows according to the project's probability distribution so that its NPV is equal to having no inherent risk. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #92 Difficulty: Easy Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-09 Certainty Equivalents Type: Concept

93. A stock with a beta of 1 has systematic risk that is equal to the market. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #93 Difficulty: Easy Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta. Topic: 13-04 Risk in a Portfolio Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

94. Due to risk-aversion most investors require an increased potential for return in order to be induced to take larger risks. TRUE

Accessibility: Keyboard Navigation Block - Chapter 13 #94 Difficulty: Easy Learning Objective: 13-02 Characterize most investors as risk averse. Topic: 13-02 The Concept of Risk Aversion Type: Memory

A) What is the expected cash flow? B) Cooper's cost of capital is 10%. What is the expected net present value? C) Should Cooper buy the equipment? A)

C) Based on net present value analysis, Cooper should buy the equipment.

Block - Chapter 13 #95 Difficulty: Medium Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-12 Decision Trees Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

The equipment can be amortized using straight-line amortization for tax purposes. Golden's cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment?

Amortization Schedule:

Net present value is negative, reject the new equipment.

Block - Chapter 13 #96 Difficulty: Medium Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-12 Decision Trees Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

A) Calculate the expected cash flow for each. B) Calculate the coefficient of variation for each. C) Rank the three from the least risky to the most risky.

Foundations of Financial Management - 10th Canadian Edition by Block

Galaxy

B) Variance = 40,100 Standard deviation = 200.25 Coefficient of Variation = 200.25/930 = 0.215 C) Ranking = 1 Grasshopper

B) Variance = 127,280 Standard deviation = 356.76 Coefficient of Variation = 356.76/780 = 0.4573 C) Ranking = 3 Breathiest

B) Variance = 40,900 Standard deviation = 202.24 Coefficient of Variation = 202.24/890 = 0.227 C) Ranking = 2

Block - Chapter 13 #97 Difficulty: Medium Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context. Topic: 13-15 An Example of Portfolio Risk Reduction Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Net present value is negative, reject the new equipment. If cost of capital is 9%, net present value is positive (PV inflows $513,413), accept new equipment.

Block - Chapter 13 #98 Difficulty: Hard Learning Objective: 13-05 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help assess risk. Topic: 13-12 Decision Trees Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 13 Summary Category

# of Questi ons

Accessibility: Keyboard Navigation

Block - Chapter 13

100

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 13-01 Describe the concept of risk based on the uncertainty of future cash flows.

Learning Objective: 13-02 Characterize most investors as risk averse.

Learning Objective: 13-03 Analyze risk as standard deviation; coefficient of variation; or beta.

Learning Objective: 13-04 Integrate the basic methodology of riskadjusted discount rates for dealing with risk in capital budgeting analysis.

Learning Objective: 1305 Describe and apply the techniques of certainty equivalents; simulation models; sensitivity analysis; and decision trees to help asse ss risk.

Learning Objective: 13-06 Assess how a projects risk may be considered in a portfolio context.

Topic: 13-01 Risk in Valuation

Topic: 13-02 The Concept of Risk Aversion

Topic: 13-03 Actual Measurement of Risk

Topic: 13-04 Risk in a Portfolio

Topic: 13-06 Risk-Adjusted Discount Rate

Topic: 13-07 Increasing Risk Over Time

Topic: 13-08 Qualitative Measures

Topic: 13-09 Certainty Equivalents

Topic: 13-10 Computer Simulation Models

Topic: 13-11 Sensitivity Analysis

Topic: 13-12 Decision Trees

Topic: 13-13 The Portfolio Effect

Topic: 13-14 Portfolio Risk

Topic: 13-15 An Example of Portfolio Risk Reduction

Topic: 13-16 Evaluation of Combinations

Topic: 13-17 The Share Price Effect

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 14 1. Funds generated and retained from ongoing operations are considered: A. internally generated funds. B. needed for expansion. C. externally generated funds. D. to be part of the capital market.

2. The major supplier of funds for investment in the whole economy is: A. businesses. B. households. C. government. D. financial institutions.

3. Which of the following is not an example of indirect investment by a household? A. Investment in a mutual fund's shares B. Investment in an original offering of corporate securities C. Investment in life insurance D. Savings deposit in a bank

4. Before the mid-1990s the last federal budget surplus was in: A. 1967. B. 1973. C. 1987. D. 1995.

5. Which of the following users of long-term capital has been the biggest demander of new funds in the last 10 years? A. Corporations B. Provincial governments C. Federal government D. federal government Crown corporations

Foundations of Financial Management - 10th Canadian Edition by Block

6. Which of the following statements is not true with respect to organized securities exchanges? A. Organized exchanges have a physical location. B. Exchanges operate as "auction" markets. C. Stocks traded on exchanges are referred to as unlisted securities. D. Securities exchanges provide corporations and shareholders increased liquidity for their securities.

7. The purpose of secondary trading is to: A. provide liquidity and competition between investments. B. provide a market for securities not handled in primary trading. C. provide jobs for brokers and dealers. D. provide lower commissions than on the organized exchanges.

8. The over-the-counter market: A. trades mainly stocks of small companies. B. is made up of brokers buying and selling from their inventories. C. is a close-knit organization of dealers linked together by computers and a telecommunications network. D. is limited to high net worth investors.

9. Which of the following is not true about the over-the-counter market? A. The OTC market is a network of dealers connected by phone and computer. B. There is no central market location. C. The OTC market is a network of brokers acting as agents for buyers and sellers. D. The OTC is by far the largest market for bond trading.

10. The basic difference between brokers and dealers is that: A. brokers can trade only on organized exchanges and dealers can trade only over-the-counter. B. brokers own the securities they trade and dealers act as agent for buyer and seller. C. dealers own the securities they trade and brokers act as agent for buyer and seller. D. There is no difference.

11. The bulk of bond trading is generally done: A. on the TSE. B. on the regional exchanges. C. over-the-counter. D. on the Toronto Bond Exchange.

Foundations of Financial Management - 10th Canadian Edition by Block

12. Compared to the value of trading on the Toronto Stock Market the bond market is: A. at least 10 times as big. B. at least 3 times as big. C. about the same size. D. about half the size.

13. A relatively new Canadian stock exchange is the: A. Bourse de Montreal (ME). B. Canadian Securities Exchange (CSE). C. S&P/TSX Composite. D. Canadian Alliance of Traded Securities.

14. The percentage of world bond market represented by Canadian issues is approximately: A. 2%. B. 5%. C. 10%. D. 30%.

15. The efficient market hypothesis deals primarily with: A. random speculation in securities. B. the degree to which prices adjust to new information. C. degrees to which price movements are the result of past trends. D. how an investor can significantly outperform the market in general.

16. Which of the following is not a criterion for an efficient market? A. Prices adjust rapidly to new information. B. Large dollar amounts of securities can be absorbed without price destabilization. C. Each successive trade is made at a price close to the previous trade. D. Computerized handling of transactions.

17. Security markets are efficient when each of the following exist except: A. security prices follow the leading indicators such as the S&P/TSX Composite very closely. B. the markets can absorb large dollar amounts of stock without destabilizing the price. C. prices adjust rapidly to new information. D. there is a continuous market where each successive trade is made at a price close to the previous trade.

Foundations of Financial Management - 10th Canadian Edition by Block

18. Corporations prefer bonds over preferred stock for financing their operations because: A. preferred stocks require a dividend. B. bond interest rates change with the economy while stock dividends remain constant. C. the after tax cost of debt is less than the cost of preferred stock. D. bond dividends are typically high yield.

19. Which of the following is not a money market instrument? A. Treasury bills B. Commercial paper C. Bankers' acceptances D. Corporate bonds

20. Of the following, which is not a requirement for the initial listing of a stock on the TSX? A. A total of 1,000,000 freely traded shares. B. The stock must have traded on one of the smaller exchanges for at least two years. C. The firm must have net tangible assets of $2 million. D. There must exist 300 shareholders and earnings of at least $200,000.

21. The largest capital market in the world (in terms of dollar value) is located in: A. New York. B. London. C. Toronto. D. Tokyo.

22. Financial intermediaries serve which of the following purposes? A. Financial intermediaries prohibit investment in the capital markets by households. B. Confirm trades in the primary market. C. Allocate resources based upon need. D. Aid in the flow of funds through the economy.

23. Security markets provide liquidity: A. by allowing corporations to raise funds by selling new issues. B. by providing the widest range of information to investors. C. by allowing investors access to low-risk investments. D. by maintaining confidence in corporate governance of listed firms.

Foundations of Financial Management - 10th Canadian Edition by Block

24. The efficient market hypothesis has several forms. The weak form states that: A. past price data is unrelated to future prices. B. prices reflect all public information. C. all information both public and private is immediately reflected in stock prices. D. market efficiency is weakest during an economic downturn.

25. The semi-strong form of the efficient market hypothesis states that: A. past price data is unrelated to future prices. B. prices reflect all public information. C. all information both public and private is immediately reflected in stock prices. D. an investor can exploit public information to earn abnormal profits.

26. The strong form of the efficient market hypothesis states that: A. past price data is positively correlated to future prices. B. prices reflect all public information. C. all information both public and private is immediately reflected in stock prices. D. market efficiency is strongest during an economic upswing.

27. The largest source of new long-term funds for corporations during the last 10 years was: A. corporate bonds. B. common stock. C. predominantly corporate bonds. D. about equally split between common stock and bonds.

28. Canadian nonfinancial private corporation debt-to-equity ratios have: A. risen during times of high inflation. B. risen between 2001 and 2013. C. caused inflation to rise. D. risen and fallen inversely to inflation rates.

29. In an efficient market: A. all financial transactions have an NPV greater than zero. B. the investor does not receive abnormal returns consistently. C. the investor is not compensated properly for risk borne. D. information flow is exclusively through investment dealers.

Foundations of Financial Management - 10th Canadian Edition by Block

30. Which of the following is an internal source of funds? A. Cash flow from amortization B. Net loss C. Repurchase of debt securities D. Bank loan

31. Key components of a good, organized exchange include all of the following except that: A. confidence in corporate governance of listed firms; reliable accounting information; and strict, efficient regulation. B. ease of buying and selling with significant delays in transaction completion. C. transparency provided by the widest range of information. D. competitive bidding process, allowing equal access to information contained in share prices.

32. The three largest international capital markets are A. NYSE, NASDAQ OMX, Japan Exchange Group. B. London SE Group, NYSE, TMX Group. C. NASDAQ OMX, Hong Kong Exchanges, London SE Group D. NYSE, TMX Group, NASDAQ OMX

33. In the capital market, future legislation should pertain to which of the following areas? A. Gaining competitive advantage. B. Conflict of interest. C. Coordinated municipal legislation. D. Private equity placement.

34. When examining the size and efficiency of financial markets, we want to distinguish between: A. the number of securities outstanding and the trading activity of the market (a measure of its liquidity). B. the value of securities outstanding and the number of securities on the market. C. the number of brokers in the market and the trading activity of the market. D. the value of securities outstanding and the trading activity of the market.

35. What caused the decrease in asset-backed securities issues between 2001 and 2014? A. Inefficiency in foreign markets B. Liquidity demands by shareholders C. Sale of new derivatives in foreign countries D. Loss of investor confidence

Foundations of Financial Management - 10th Canadian Edition by Block

36. Foreign investors have preferred to invest in Canadian bonds due to all but one of the following reasons: A. Stable efficient markets. B. Less stringent regulation of securities markets. C. Political stability of Canada. D. Strength of the Canadian economy.

37. The accumulated debt of the federal government at its peak in 2014 was approximately: A. $600 billion. B. $200 billion. C. $40 billion. D. $30 billion.

38. "Preferred Share" funding in Canada is more significant than in the United States due to: A. trading volumes. B. weak stock market. C. size of the federal government's debt. D. the differences in the tax treatment of corporate dividends.

39. Evidence of market efficiency would include all but which of the following? A. Large volume of trades. B. Timely disclosure of financial results. C. Numerous security analysts. D. Highly successful trading strategies.

40. A random walk: A. suggests patterns from market cycles. B. allows for abnormal returns. C. suggests markets are not efficient. D. suggests non correlation between past and future price movements.

41. In general when interest rates are expected to rise, financial managers: A. try to lock in long-term financing at low cost. B. re-balance the company's debt structure towards more short-term debt. C. accept more risk. D. rely more on internal sources of funds rather than external sources.

Foundations of Financial Management - 10th Canadian Edition by Block

42. Alternative trading systems (ATS): A. include the NYSE. B. the open pit concept such as at the Chicago Board of Options Exchange (CBOE). C. are also known as "upstairs" trading floors. D. electronically match buy and sell orders automatically.

43. Well functioning capital market include the following attributes except? A. Liquidity B. Static prices C. Competitiveness D. Transparency

44. When global capital markets collectively react to international events like Enron's collapse, it is common to find: A. that there is no impact on multinational companies' ability to raise capital. B. a reduction in capital available to companies with investment grade credit ratings. C. that multinational firms are so diversified that they are not affected by this event. D. a reduction in t-bill activity.

45. The largest financial intermediary after banks is: A. insurance companies. B. mutual funds. C. pension funds. D. credit unions.

46. Financial instruments in the capital markets generally fall under what category in the balance sheet? A. Short-term liabilities and equities. B. Near cash assets. C. Marketable securities. D. Long-term liabilities and equities.

47. Over-the-counter markets trade: A. securities that have not met the listing requirements for an exchange. B. investor information on high quality securities. C. blue chip securities. D. private issues to high net worth investors.

Foundations of Financial Management - 10th Canadian Edition by Block

48. Government auctions treasury bills: A. daily. B. weekly. C. biweekly. D. monthly.

49. Which are the benefits of financial intermediaries? A. Increase market liquidity. B. Provide a profit for financial institutions. C. Act as solicitors for the banks. D. Charge lower transaction fees than banks.

50. The most significant security of the Canadian money market is: A. government of Canada treasury bills. B. commercial paper. C. asset-backed securities. D. bankers' acceptances.

51. The TSX competes with the NYSE for listings, to reduce the competitive advantage of the highly liquid NYSE,: A. the TSX has become Canada's sole equity exchange. B. the TSX has been urging a larger role for dealers acting as principals rather than brokers in stock trading. C. the TSX eliminated the open cry auction market. D. the TSX has eliminated "upstairs trading".

52. Non-resident holdings of Canadian securities are most significant in: A. the money market. B. the stock market. C. the bond market. D. the OTC market.

53. Indirect investment: A. is an investment in a private business. B. is an investment in a publically traded business. C. uses government funds to buy shares. D. uses a financial intermediary who invests funds.

Foundations of Financial Management - 10th Canadian Edition by Block

54. Which of the following statements is true with respect to organized securities exchanges? A. Organized exchanges are an example of a sole proprietorship. B. Exchanges operate as "auction" markets. C. Stocks traded on exchanges are referred to as unlisted securities. D. trades are conducted through insurance brokers who act as agents.

55. Which of the following is not true about the over-the-counter market? A. The OTC market is a network of dealers connected by phone and computer. B. There is a central market location. C. The OTC is by far the largest market for bond trading. D. Brokers who facilitate trades establish prices.

56. Security markets are efficient when each of the following exist except: A. there is a continuous market in which each successive trade is made at a price close to the previous price. B. the markets can absorb large dollar amounts of stock without destabilizing the price. C. prices adjust rapidly to new information. D. all of the trades occur between 9:30 am and 4:00 pm. other conditions must exist.

57. Which of the following is not a money market instrument? A. Treasury bills B. Government bonds with maturities of less than 3 years C. Bankers' acceptances D. Common shares

58. In an efficient market: A. all financial transactions have an NPV less than zero. B. the investor receives abnormal returns consistently. C. the investor is compensated properly for risk borne. D. prices adjust slowly to new information.

59. Which of the following is an internal source of funds? A. Retained earnings B. Net loss C. Repurchase of debt securities D. Bank loan

Foundations of Financial Management - 10th Canadian Edition by Block

60. The accumulated debt of the federal government and percentage of GDP this represented in 2014 was approximately: A. $600 billion, 32% of GDP. B. $600 billion, 70% of GDP. C. $440 billion, 68% of GDP. D. $330 billion, 36% of GDP.

61. The amount of Government of Canada bonds outstanding in foreign currencies during 2000 and 2013 respectively was approximately: A. $50 and $30 billion. B. $150 and $150 billion. C. $180 and $425 billion. D. $588 and $612 billion.

62. When global capital markets collectively react to international events like Enron's collapse, it is common to find: A. that there is a positive impact on multinational companies' ability to raise capital. B. an increase in capital available to companies with AAA grade credit ratings. C. that multinational firms, though diversified, are not affected by this event. D. a reduction in capital available to companies with investment grade credit ratings.

63. Resident holdings of Canadian securities are most significant in: A. the money market. B. the stock market. C. the bond market. D. the OTC market.

64. After the market failures as the new century began, further regulations were developed to: A. hold chief officers of a firm responsible for the accuracy of the financial statements. B. provide for independent auditors and boards of directors. C. restrict the accounting activities of audit firms in conflict of interest situations. D. implement new accounting standards to handle the expensing of stock options, disclosure of off-balancesheet financial exposures, and the treatment of derivative securities.

65. Upon entering the capital markets an investor might invest in common stocks, preferred stock, negotiable certificates of deposit, and convertible securities. True False

Foundations of Financial Management - 10th Canadian Edition by Block

66. When an investor buys shares in the stock market, he is purchasing shares from a company. True False

67. Households and the government are mainly considered to be suppliers of funds while corporations are generally considered users of funds. True False

68. The over-the-counter market is an informal collection of dealers connected by nationwide telephone, telex, e-mail and computer services. True False

69. The dealer in the over-the-counter market actually owns the stocks he trades and does not act as a gobetween like a member of the TSX or NYSE. True False

70. The headquarters for the OTC market is located in Montreal. True False

71. Often a large issue of debt is followed by a large amount of equity at the next financing in order to keep the debt-to-equity ratio in an appropriate range. True False

72. Canadian regulation of the securities industry is a provincial responsibility, with each province and territory reporting to a single federal securities commission. True False

73. A key variable of market efficiency is the certainty of the income stream. The more certain these streams are, the more efficient the market will be. True False

74. The efficient market hypothesis is based on the belief that the stock market is in short-run equilibrium. True False

Foundations of Financial Management - 10th Canadian Edition by Block

75. In a capital intensive economy, a shortage of capital could drive interest rates down and stock prices up. True False

76. Financial intermediaries channel funds into the capital markets from the household sector. True False

77. Capital markets consist of securities having maturities greater than one year. True False

78. The capital structure of the firm consists of long-term debt and equity. True False

79. Municipal securities are not a significant component of the capital markets. True False

80. In the new issues market for corporate capital, common shares account for the largest percentage of new funds raised. True False

81. One reason preferred stock has accounted for a significant amount of new funds raised is because of the dividend tax credit. True False

82. The strong form of the efficient market hypothesis states that prices reflect all information available to the public. True False

83. The efficient market hypothesis is generally concerned with the impact of information on the behaviour of stock prices. True False

Foundations of Financial Management - 10th Canadian Edition by Block

84. The weak form of the efficient market hypothesis states that an investor can profit by using past price data. True False

85. Without financial intermediaries the cost of funds would be about the same as with financial intermediaries. True False

86. Brokers on an organized stock exchange act as an agent for the person buying or selling securities. True False

87. Brokers actually own the securities they buy and sell on the floor of the exchange. True False

88. Many OTC dealers make markets in the same security. True False

89. There are more companies traded over-the-counter than on the Toronto Stock Exchange (TSX). True False

90. The bulk of Canadian government securities are traded on the Toronto Stock Exchange. True False

91. Markets are efficient when prices adjust rapidly to new information, continuous markets exist, and large dollar trades can be absorbed without large price movements. True False

92. Due to recent Canadian economic prosperity, Canadian government's and corporations' total financings in foreign currencies have decreased. True False

93. The average maturity on Government of Canada debt in 2014 was 6 years. True False

Foundations of Financial Management - 10th Canadian Edition by Block

94. In a three-sector economy consisting of business, government, and households, the major supplier of funds for investment is the household sector. True False

95. In the corporate securities market, the proportion of bond financing to equity financing is primarily influenced by the level of interest rates. True False

96. External financing requires increased disclosure of the firms operations and its plans to the capital markets. True False

97. Corporate securities represent about 60% of the total long-term securities issued by all long-term issuers. True False

98. The NASDAQ National Market is composed of large nation-wide companies that are traded in the over-thecounter market. True False

99. The TSX lists approximately 1,600 companies. True False

100. Due to a lack of certainty concerning their income stream, fixed-income securities trade in relatively inefficient markets. True False

101. Provincial and municipal governments account for approximately the same percentage of bond securities outstanding as the federal government. True False

102. The OTC market is a key market for international securities. True False

Foundations of Financial Management - 10th Canadian Edition by Block

103. Over the last decade, long-term federal government securities outstanding have grown at a faster rate than corporate debt securities outstanding. True False

104. Capital markets are becoming increasingly international as investors and issuers seek out the best riskreturn opportunities. True False

105. The capital markets serve as a way of allocating available capital to the most efficient user. True False

106. In 2008, less than 15 percent of the federal debt position was held by nonresidents. True False

107. The weak form of market efficiency states that all information, both private and public, is immediately reflected in stock prices. True False

108. The Bank of Canada sets rules for sales practices and the auction of government debt, within Canada. True False

109. The vast majority of trades in the bond market are with Government of Canada bonds, and in the money markets it is Government of Canada Treasury bills. True False

110. Between 2001 and 2013, corporate bonds have accounted for approximately 85% of all long-term corporate securities issued. True False

111. Between 2001 and 2013 common stock accounted for an insignificant proportion of long-term funds issued. True False

Foundations of Financial Management - 10th Canadian Edition by Block

112. Secondary market trading activity is further divided between organized exchanges and over-the-counter markets. True False

113. Amortization represents the majority of internally generated corporate funds. True False

114. The increase in retained earnings during recent economic expansions caused a dramatic reduction in the need for external funds. True False

115. Many Canadian international companies have listed their shares on more than one exchange outside of the country to gain access to these broader capital markets. True False

116. Alternative trading systems are exchanges that use the Internet to electronically match buy and sell orders automatically. True False

117. Good regulation requires a system that establishes strong enforcement of rules and standards with effective penalties for abuses. True False

118. Internal funds generated by corporations include retained earnings and non cash expenses such as amortization and deferred taxes. True False

119. Technical analysts generally support the notion of weak form efficiency in the stock market. True False

120. Random walk theory generally supports weak form market efficiency. True False

Foundations of Financial Management - 10th Canadian Edition by Block

121. IIROC is the regulatory body of investment dealers. It oversees the trading activity of the securities markets. True False

122. Over-the-counter securities are securities where dealers transact purchases and sales of securities by trading from their own inventory of securities. True False

123. Ontario Securities Commission requires detailed financial disclosures before securities may be sold to the public. True False

124. List 5 funding sources of nonfinancial institutions as described in the text.

125. Name the 7 types of financial intermediaries that channel funds into the capital markets. What is the function of these intermediaries and their relative importance?

126. List and briefly describe the 4 key components of a good organized exchange?

Foundations of Financial Management - 10th Canadian Edition by Block

127. Discuss the challenges Canadian Exchanges (e.g., TSX) face. What is the TSX doing to be more competitive on a global scale?

128. What are alternative trading systems and what advantages might they provide for investors?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 14 Key

1. Funds generated and retained from ongoing operations are considered: A. internally generated funds. B. needed for expansion. C. externally generated funds. D. to be part of the capital market.

Accessibility: Keyboard Navigation Block - Chapter 14 #1 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-10 Internal Versus External Sources of Funds Type: Concept

2. The major supplier of funds for investment in the whole economy is: A. businesses. B. households. C. government. D. financial institutions.

Accessibility: Keyboard Navigation Block - Chapter 14 #2 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #3 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

4. Before the mid-1990s the last federal budget surplus was in: A. 1967. B. 1973. C. 1987. D. 1995.

Accessibility: Keyboard Navigation Block - Chapter 14 #4 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-04 Government of Canada Securities Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #5 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-02 Competition for Funds in the Capital Markets Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #6 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #7 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-12 The Role of the Security Markets Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #8 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-15 The Over-the-Counter Markets Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #9 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-15 The Over-the-Counter Markets Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #10 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

11. The bulk of bond trading is generally done: A. on the TSE. B. on the regional exchanges. C. over-the-counter. D. on the Toronto Bond Exchange.

Accessibility: Keyboard Navigation Block - Chapter 14 #11 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-15 The Over-the-Counter Markets Type: Memory

12. Compared to the value of trading on the Toronto Stock Market the bond market is: A. at least 10 times as big. B. at least 3 times as big. C. about the same size. D. about half the size.

Accessibility: Keyboard Navigation Block - Chapter 14 #12 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-02 Competition for Funds in the Capital Markets Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

13. A relatively new Canadian stock exchange is the: A. Bourse de Montreal (ME). B. Canadian Securities Exchange (CSE). C. S&P/TSX Composite. D. Canadian Alliance of Traded Securities.

Accessibility: Keyboard Navigation Block - Chapter 14 #13 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

14. The percentage of world bond market represented by Canadian issues is approximately: A. 2%. B. 5%. C. 10%. D. 30%.

Accessibility: Keyboard Navigation Block - Chapter 14 #14 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-02 Competition for Funds in the Capital Markets Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #15 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #16 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #17 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-17 Market Efficiency Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 14 #18 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-06 Corporate Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

19. Which of the following is not a money market instrument? A. Treasury bills B. Commercial paper C. Bankers' acceptances D. Corporate bonds

Accessibility: Keyboard Navigation Block - Chapter 14 #19 Difficulty: Easy Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #20 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-17 Market Efficiency Type: Memory

21. The largest capital market in the world (in terms of dollar value) is located in: A. New York. B. London. C. Toronto. D. Tokyo.

Accessibility: Keyboard Navigation Block - Chapter 14 #21 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #22 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #23 Difficulty: Medium Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-12 The Role of the Security Markets Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #24 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #25 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #26 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #27 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-06 Corporate Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #28 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-09 Corporate Financing in General Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #29 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-17 Market Efficiency Type: Memory

30. Which of the following is an internal source of funds? A. Cash flow from amortization B. Net loss C. Repurchase of debt securities D. Bank loan

Accessibility: Keyboard Navigation Block - Chapter 14 #30 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-10 Internal Versus External Sources of Funds Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #31 Difficulty: Hard Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #32 Difficulty: Medium Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #33 Difficulty: Easy Learning Objective: 14-06 Examine the changing financial regulatory environment. Topic: 14-20 Securities Regulation Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #34 Difficulty: Hard Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #35 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-02 Competition for Funds in the Capital Markets Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #36 Difficulty: Medium Learning Objective: 14-06 Examine the changing financial regulatory environment. Topic: 14-20 Securities Regulation Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

37. The accumulated debt of the federal government at its peak in 2014 was approximately: A. $600 billion. B. $200 billion. C. $40 billion. D. $30 billion.

Accessibility: Keyboard Navigation Block - Chapter 14 #37 Difficulty: Medium Learning Objective: 14-06 Examine the changing financial regulatory environment. Topic: 14-20 Securities Regulation Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #38 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-06 Corporate Securities Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #39 Difficulty: Hard Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-17 Market Efficiency Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

40. A random walk: A. suggests patterns from market cycles. B. allows for abnormal returns. C. suggests markets are not efficient. D. suggests non correlation between past and future price movements.

Accessibility: Keyboard Navigation Block - Chapter 14 #40 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 14 #41 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-03 Government Securities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 14 #42 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

43. Well functioning capital market include the following attributes except? A. Liquidity B. Static prices C. Competitiveness D. Transparency

Accessibility: Keyboard Navigation Block - Chapter 14 #43 Difficulty: Easy Learning Objective: 14-06 Examine the changing financial regulatory environment. Topic: 14-20 Securities Regulation Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #44 Difficulty: Medium Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-17 Market Efficiency Type: Concept

45. The largest financial intermediary after banks is: A. insurance companies. B. mutual funds. C. pension funds. D. credit unions.

Accessibility: Keyboard Navigation Block - Chapter 14 #45 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #46 Difficulty: Easy Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 14 #47 Difficulty: Medium Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-15 The Over-the-Counter Markets Type: Memory

48. Government auctions treasury bills: A. daily. B. weekly. C. biweekly. D. monthly.

Accessibility: Keyboard Navigation Block - Chapter 14 #48 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-04 Government of Canada Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #49 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Concept

50. The most significant security of the Canadian money market is: A. government of Canada treasury bills. B. commercial paper. C. asset-backed securities. D. bankers' acceptances.

Accessibility: Keyboard Navigation Block - Chapter 14 #50 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-02 Competition for Funds in the Capital Markets Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #51 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-16 Challenges for the Canadian Exchanges Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

52. Non-resident holdings of Canadian securities are most significant in: A. the money market. B. the stock market. C. the bond market. D. the OTC market.

Accessibility: Keyboard Navigation Block - Chapter 14 #52 Difficulty: Easy Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #53 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #54 Difficulty: Medium Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #55 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-15 The Over-the-Counter Markets Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #56 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-18 Criteria of Efficiency Type: Concept

57. Which of the following is not a money market instrument? A. Treasury bills B. Government bonds with maturities of less than 3 years C. Bankers' acceptances D. Common shares

Accessibility: Keyboard Navigation Block - Chapter 14 #57 Difficulty: Easy Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #58 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-17 Market Efficiency Type: Memory

59. Which of the following is an internal source of funds? A. Retained earnings B. Net loss C. Repurchase of debt securities D. Bank loan

Accessibility: Keyboard Navigation Block - Chapter 14 #59 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-10 Internal Versus External Sources of Funds Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #60 Difficulty: Hard Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-04 Government of Canada Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #61 Difficulty: Hard Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-02 Competition for Funds in the Capital Markets Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 14 #62 Difficulty: Medium Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-17 Market Efficiency Type: Concept

63. Resident holdings of Canadian securities are most significant in: A. the money market. B. the stock market. C. the bond market. D. the OTC market.

Accessibility: Keyboard Navigation Block - Chapter 14 #63 Difficulty: Easy Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 14 #64 Difficulty: Medium Learning Objective: 14-06 Examine the changing financial regulatory environment. Topic: 14-20 Securities Regulation Type: Memory

65. Upon entering the capital markets an investor might invest in common stocks, preferred stock, negotiable certificates of deposit, and convertible securities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #65 Difficulty: Easy Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Concept

66. When an investor buys shares in the stock market, he is purchasing shares from a company. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #66 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-12 The Role of the Security Markets Type: Concept

67. Households and the government are mainly considered to be suppliers of funds while corporations are generally considered users of funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #67 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

68. The over-the-counter market is an informal collection of dealers connected by nationwide telephone, telex, e-mail and computer services. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #68 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-15 The Over-the-Counter Markets Type: Memory

69. The dealer in the over-the-counter market actually owns the stocks he trades and does not act as a gobetween like a member of the TSX or NYSE. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #69 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-15 The Over-the-Counter Markets Type: Memory

70. The headquarters for the OTC market is located in Montreal. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #70 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-15 The Over-the-Counter Markets Type: Memory

71. Often a large issue of debt is followed by a large amount of equity at the next financing in order to keep the debt-to-equity ratio in an appropriate range. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #71 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-09 Corporate Financing in General Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

72. Canadian regulation of the securities industry is a provincial responsibility, with each province and territory reporting to a single federal securities commission. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #72 Difficulty: Medium Learning Objective: 14-06 Examine the changing financial regulatory environment. Topic: 14-20 Securities Regulation Type: Memory

73. A key variable of market efficiency is the certainty of the income stream. The more certain these streams are, the more efficient the market will be. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #73 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-18 Criteria of Efficiency Type: Memory

74. The efficient market hypothesis is based on the belief that the stock market is in short-run equilibrium. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #74 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Memory

75. In a capital intensive economy, a shortage of capital could drive interest rates down and stock prices up. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #75 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

76. Financial intermediaries channel funds into the capital markets from the household sector. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #76 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Memory

77. Capital markets consist of securities having maturities greater than one year. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #77 Difficulty: Easy Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Memory

78. The capital structure of the firm consists of long-term debt and equity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #78 Difficulty: Easy Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Memory

79. Municipal securities are not a significant component of the capital markets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #79 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-05 Provincial and Municipal Government Bonds Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

80. In the new issues market for corporate capital, common shares account for the largest percentage of new funds raised. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #80 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-09 Corporate Financing in General Type: Memory

81. One reason preferred stock has accounted for a significant amount of new funds raised is because of the dividend tax credit. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #81 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-06 Corporate Securities Type: Concept

82. The strong form of the efficient market hypothesis states that prices reflect all information available to the public. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #82 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Memory

83. The efficient market hypothesis is generally concerned with the impact of information on the behaviour of stock prices. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #83 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

84. The weak form of the efficient market hypothesis states that an investor can profit by using past price data. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #84 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Memory

85. Without financial intermediaries the cost of funds would be about the same as with financial intermediaries. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #85 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Concept

86. Brokers on an organized stock exchange act as an agent for the person buying or selling securities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #86 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

87. Brokers actually own the securities they buy and sell on the floor of the exchange. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #87 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

88. Many OTC dealers make markets in the same security. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #88 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-05 Provincial and Municipal Government Bonds Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

89. There are more companies traded over-the-counter than on the Toronto Stock Exchange (TSX). TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #89 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-15 The Over-the-Counter Markets Type: Memory

90. The bulk of Canadian government securities are traded on the Toronto Stock Exchange. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #90 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-04 Government of Canada Securities Type: Memory

91. Markets are efficient when prices adjust rapidly to new information, continuous markets exist, and large dollar trades can be absorbed without large price movements. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #91 Difficulty: Medium Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-17 Market Efficiency Type: Memory

92. Due to recent Canadian economic prosperity, Canadian government's and corporations' total financings in foreign currencies have decreased. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #92 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-02 Competition for Funds in the Capital Markets Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

93. The average maturity on Government of Canada debt in 2014 was 6 years. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #93 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-03 Government Securities Type: Memory

94. In a three-sector economy consisting of business, government, and households, the major supplier of funds for investment is the household sector. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #94 Difficulty: Easy Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Memory

95. In the corporate securities market, the proportion of bond financing to equity financing is primarily influenced by the level of interest rates. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #95 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-09 Corporate Financing in General Type: Concept

96. External financing requires increased disclosure of the firms operations and its plans to the capital markets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #96 Difficulty: Medium Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

97. Corporate securities represent about 60% of the total long-term securities issued by all long-term issuers. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #97 Difficulty: Medium Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Memory

98. The NASDAQ National Market is composed of large nation-wide companies that are traded in the over-thecounter market. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #98 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

99. The TSX lists approximately 1,600 companies. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #99 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

100. Due to a lack of certainty concerning their income stream, fixed-income securities trade in relatively inefficient markets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #100 Difficulty: Medium Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-18 Criteria of Efficiency Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

101. Provincial and municipal governments account for approximately the same percentage of bond securities outstanding as the federal government. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #101 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-05 Provincial and Municipal Government Bonds Type: Memory

102. The OTC market is a key market for international securities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #102 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-15 The Over-the-Counter Markets Type: Memory

103. Over the last decade, long-term federal government securities outstanding have grown at a faster rate than corporate debt securities outstanding. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #103 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-02 Competition for Funds in the Capital Markets Type: Memory

104. Capital markets are becoming increasingly international as investors and issuers seek out the best riskreturn opportunities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #104 Difficulty: Medium Learning Objective: 14-01 Define primary; secondary; money; and capital markets. Topic: 14-01 The Structure Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

105. The capital markets serve as a way of allocating available capital to the most efficient user. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #105 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-02 Competition for Funds in the Capital Markets Type: Concept

106. In 2008, less than 15 percent of the federal debt position was held by nonresidents. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #106 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-04 Government of Canada Securities Type: Memory

107. The weak form of market efficiency states that all information, both private and public, is immediately reflected in stock prices. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #107 Difficulty: Medium Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Concept

108. The Bank of Canada sets rules for sales practices and the auction of government debt, within Canada. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #108 Difficulty: Medium Learning Objective: 14-06 Examine the changing financial regulatory environment. Topic: 14-20 Securities Regulation Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

109. The vast majority of trades in the bond market are with Government of Canada bonds, and in the money markets it is Government of Canada Treasury bills. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #109 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-18 Criteria of Efficiency Type: Memory

110. Between 2001 and 2013, corporate bonds have accounted for approximately 85% of all long-term corporate securities issued. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #110 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-08 Common Stock Type: Memory

111. Between 2001 and 2013 common stock accounted for an insignificant proportion of long-term funds issued. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #111 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-18 Criteria of Efficiency Type: Memory

112. Secondary market trading activity is further divided between organized exchanges and over-the-counter markets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #112 Difficulty: Medium Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-13 The Organization of the Security Markets Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

113. Amortization represents the majority of internally generated corporate funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #113 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-10 Internal Versus External Sources of Funds Type: Memory

114. The increase in retained earnings during recent economic expansions caused a dramatic reduction in the need for external funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #114 Difficulty: Medium Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-10 Internal Versus External Sources of Funds Type: Memory

115. Many Canadian international companies have listed their shares on more than one exchange outside of the country to gain access to these broader capital markets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #115 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

116. Alternative trading systems are exchanges that use the Internet to electronically match buy and sell orders automatically. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #116 Difficulty: Medium Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

117. Good regulation requires a system that establishes strong enforcement of rules and standards with effective penalties for abuses. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #117 Difficulty: Easy Learning Objective: 14-06 Examine the changing financial regulatory environment. Topic: 14-20 Securities Regulation Type: Memory

118. Internal funds generated by corporations include retained earnings and non cash expenses such as amortization and deferred taxes. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #118 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-10 Internal Versus External Sources of Funds Type: Memory

119. Technical analysts generally support the notion of weak form efficiency in the stock market. FALSE

Accessibility: Keyboard Navigation Block - Chapter 14 #119 Difficulty: Medium Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Concept

120. Random walk theory generally supports weak form market efficiency. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #120 Difficulty: Easy Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system. Topic: 14-19 The Efficient Market Hypothesis Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

121. IIROC is the regulatory body of investment dealers. It oversees the trading activity of the securities markets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #121 Difficulty: Easy Learning Objective: 14-06 Examine the changing financial regulatory environment. Topic: 14-20 Securities Regulation Type: Concept

122. Over-the-counter securities are securities where dealers transact purchases and sales of securities by trading from their own inventory of securities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #122 Difficulty: Easy Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-05 Provincial and Municipal Government Bonds Type: Memory

123. Ontario Securities Commission requires detailed financial disclosures before securities may be sold to the public. TRUE

Accessibility: Keyboard Navigation Block - Chapter 14 #123 Difficulty: Easy Learning Objective: 14-06 Examine the changing financial regulatory environment. Topic: 14-20 Securities Regulation Type: Memory

124. List 5 funding sources of nonfinancial institutions as described in the text. Retained earnings, capital consumption allowance, shares, long-term debt, short-term debt.

Block - Chapter 14 #124 Difficulty: Easy Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets. Topic: 14-10 Internal Versus External Sources of Funds Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

125. Name the 7 types of financial intermediaries that channel funds into the capital markets. What is the function of these intermediaries and their relative importance? The intermediaries are banks, trusteed pension funds, mutual funds, insurance companies/segregated funds, credit unions (caisses populaires), trust companies, and finance companies. Although the banks dominate the other intermediaries, increasingly pension and mutual funds play a vital and growing role in the capital markets. These financial intermediaries help make the flow of funds from one sector of the economy to another very efficient and competitive. They are able to assemble vast pools of funds and, through risk management techniques such as diversification and hedging, reduce risk. Also, because they can generate economies of scale, the cost of funds is lowered, and the efficient allocation of funds to the best users is accomplished at the lowest cost. The financial intermediary is very important in this three-sector economy. The intermediary is a key element in the allocation and reallocation of capital. Our economy could not possibly have developed to the extent that it has without this ability to move vast sums of capital efficiently. The ability to get a loan or to have numerous investment options is the product of a sophisticated financial environment.

Block - Chapter 14 #125 Difficulty: Medium Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves. Topic: 14-11 The Supply of Capital Funds Type: Concept

126. List and briefly describe the 4 key components of a good organized exchange? Key components of a good organized exchange include • Fair prices. Established by "auction" or a competitive bidding process • Transparency. Provided by the widest range of information (including pricing and trading volumes) • Liquidity. Available by ease of buying and selling on a timely basis • Integrity. Inspired by confidence in corporate governance of listed firms, reliable accounting information and strict, efficient regulation These components help establish an exchange's ability to raise external capital for the firm.

Block - Chapter 14 #126 Difficulty: Medium Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

127. Discuss the challenges Canadian Exchanges (e.g., TSX) face. What is the TSX doing to be more competitive on a global scale? The Canadian capital markets face several challenges. 1. In raising capital, corporations seek the most competitive market to ensure the least expensive sources of capital. That often means looking beyond Canada's borders, often to the capital markets of the United States. Well-functioning capital markets require secondary markets with good trading volumes to ensure that prices are fair and reliable. To address this threat from U.S. markets the Canadian markets have coordinated their efforts and have specialized. The TSX as the senior equities exchange is seeking links with other global markets to allow 24-hour trading and has allowed the trading of interlisted stocks in both Canadian and U.S. dollars. 2. In comparison to the New York markets, the secondary markets in Canada are thin, with fewer buyers and sellers. This condition makes it difficult to carry out large transactions without a significant price effect. The U.S. markets have more participants, a broader range of securities and investors with greater willingness to take risks. Dealers have played a much larger role in the organized exchanges, acting as specialists who make markets in given stocks. This has meant that a seller generally would have to give up shares at a lower price, on the TSX versus the NYSE, to make it marketable. The extremely liquid markets in the United States have tended to attract business away from Canadian markets. To reduce this relatively higher price of liquidity, the TSX has been urging a larger role for dealers acting as principals rather than brokers in stock trading. 3. Common share trading that takes place in the "upstairs rooms" of the investment dealers. The "upstairs rooms" of investment dealers refers to the practice of dealers matching large trades in shares between institutional investors through their own trading floors, without first putting the trade to the competitive pricing of the stock exchange. However the TSX has established an electronic call market for the Canadian markets to counteract "upstairs trading." With this system, institutional investors are able to trade large blocks of shares through a computer that matches buy and sell orders without disrupting prices and since orders quickly go through the TSX's books it is hoped that all investors will receive the best available prices.

Block - Chapter 14 #127 Difficulty: Hard Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-16 Challenges for the Canadian Exchanges Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

128. What are alternative trading systems and what advantages might they provide for investors? Alternative trading systems (ATS) or Electronic Communication Networks (ECNs) use the Internet to electronically match buy and sell orders automatically, although without a match there is no market made as in an organized exchange. These systems or networks are receiving the sanction of securities commissions, with participants including retail and institutional investors, brokers, and dealers. ATS may provide the advantages of: • Lower trading costs by creating better execution • More price transparency • "After hours" trading • Anonymity and reduced information leakage

Block - Chapter 14 #128 Difficulty: Hard Learning Objective: 14-04 Outline the organization of the securities markets. Topic: 14-14 The Organized Exchanges Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 14 Summary Category

# of Questions

Accessibility: Keyboard Navigation

123

Block - Chapter 14

128

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 14-01 Define primary; secondary; money; and capital markets.

Learning Objective: 14-02 Outline the primary participants raising funds in the capital markets.

Learning Objective: 14-03 Characterize the Canadian economy as three major sectors allocating funds among themselves.

Learning Objective: 14-04 Outline the organization of the securities markets.

Learning Objective: 14-05 Assess the concept of market efficiency and its benefits to the economic system.

Learning Objective: 14-06 Examine the changing financial regulatory environment.

Topic: 14-01 The Structure

Topic: 14-02 Competition for Funds in the Capital Markets

Topic: 14-03 Government Securities

Topic: 14-04 Government of Canada Securities

Topic: 14-05 Provincial and Municipal Government Bonds

Topic: 14-06 Corporate Securities

Topic: 14-08 Common Stock

Topic: 14-09 Corporate Financing in General

Topic: 14-10 Internal Versus External Sources of Funds

Topic: 14-11 The Supply of Capital Funds

Topic: 14-12 The Role of the Security Markets

Topic: 14-13 The Organization of the Security Markets

Topic: 14-14 The Organized Exchanges

Topic: 14-15 The Over-the-Counter Markets

Topic: 14-16 Challenges for the Canadian Exchanges

Topic: 14-17 Market Efficiency

Topic: 14-18 Criteria of Efficiency

Topic: 14-19 The Efficient Market Hypothesis

Topic: 14-20 Securities Regulation

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 15 1. The function of the managing investment dealer includes: A. forming an underwriting syndicate, preparing a prospectus, distributing shares to the selling group. B. form an underwriting syndicate, examine a prospectus, require full disclosure. C. preparing a prospectus, distributing shares to the selling group, buying the shares for long-term investment. D. prepare a prospectus, require full disclosure, buy the shares for long-term investment.

2. An investment dealer makes its money from: A. commissions from buyers. B. fees from other investment dealers in the syndicate. C. the spread between issue price and proceeds to the issuer. D. artificially supporting the share price during and after the offering.

3. Which of the following is considered an advantage (for the corporation) of going public? A. The president becomes a public relations man. B. Extensive and time-consuming reporting requirements. C. Increased liquidity for the corporation's shareholders. D. The cost of flotation.

4. Which of the following is not a key role of an investment dealer? A. Market maker. B. Underwriter. C. Acting as transfer agent. D. Agent in private placement.

5. The investment dealer's function involves all of the following except: A. take a portion of the risk in the distribution of an issue. B. always insure a company a given amount of equity can be sold so that long-range financial planning can be made accurately. C. make a market by buying and selling a security to insure a liquid market. D. contract to buy securities from the corporation and resell them to other security dealers and the public.

Foundations of Financial Management - 10th Canadian Edition by Block

6. In issuing stock, the term "spread" refers to: A. the profit the managing investment dealer gets for an issue of stock. B. the disparity between the initial asking price and the average price for the stock issued some months later. C. the difference between what the corporation gets for new issues of stock and what the public pays for the stock. D. the total cost to the corporation for issuing new stock.

7. All of the following are advantages of going public except: A. more funds are available to publicly traded firms. B. the fact a company is public helps in bank negotiations and marketing. C. publicly traded stocks afford the shareholders more liquidity. D. the firm disseminates more information to the public on corporate affairs.

8. All of the following are disadvantages of going public except: A. the firm may now become active in mergers and acquisitions. B. the company must make all information available to the public through filings to the securities commissions. C. an erosion in value may take place after the initial offering. D. there is a high cost associated with going public.

9. In a public distribution, the dealer group will generally: A. pay a higher price for shares than the public. B. pay a lower price for shares than the managing investment dealer. C. pay a higher price for shares than the managing investment dealer. D. pay a lower price for shares than members of the investment dealer syndicate group.

10. The market stabilization function usually: A. is performed by the company. B. lasts six to nine months. C. provides price support for the stock during the distribution period. D. is illegal.

11. Publicly traded companies generally have: A. more pressure for short-term performance. B. less pressure for short-term performance. C. very strong stock market performance. D. low distribution costs in selling securities.

Foundations of Financial Management - 10th Canadian Edition by Block

12. Which of the following is not an advantage of private placement? A. No expensive registration process. B. Higher interest rates. C. More flexibility in negotiation. D. No extensive public relations requirements.

13. The investment dealer: A. is responsible for the expansion in the profits of corporation selling shares. B. is reliant upon the personal selling of its employees. C. always performs all functions in the IPO process. D. is the one link between the corporation in need of funds and the investor.

14. Which of the following are advantages to private bond placement over public offerings? A. Higher interest costs. B. Greater flexibility in negotiating terms. C. Lower registration fees. D. Lower interest costs.

15. An investment dealer acting as an "underwriter": A. gives a "firm commitment" to purchase the securities from the corporation at a set price. B. causes the company to suffer a decline in earnings after taxes. C. may sell as many securities as possible and return the rest unsold. D. may give advice to management.

16. Dilution of earnings occurs because: A. a new issue of common stock creates more shares outstanding that reduces earnings per share temporarily. B. the company suffers a decline in earnings after taxes. C. the investment dealer collects an underwriting fee. D. poor financial performance leading to reduced earnings.

17. Market stabilization: A. is the action by the managing investment dealer to keep the price of newly issued securities from rising quickly. B. usually lasts 3-6 days but can last up to 60 days if a security is difficult to distribute. C. can always keep prices of securities from falling. D. is accomplished by repurchasing securities as the market price moves below the initial public offering price.

Foundations of Financial Management - 10th Canadian Edition by Block

18. Underpricing occurs: A. when the market anticipates a large profit. B. to improve the dealers commission structure. C. in small tertiary offerings. D. to aid in the market's reception of the securities.

19. Maxwell Corp. is coming to the market with a new offering of 300,000 shares, at $25 to the public. Maxwell will receive $22 per share. The firm has 1 million shares outstanding and earnings of $6 million. What is the amount of dilution in earnings per share? A. $2.00. B. $1.38. C. $1.77. D. No dilution occurs since new money is received by Maxwell.

20. The managing investment dealer is responsible for: A. putting a syndicate together to aid in the distribution and share the underwriting risk. B. determining the EPS of the company. C. stabilizing the offering after the distribution period. D. auditing the financial statements of the company.

21. When a firm sells a new issue through an investment dealer, the costs incurred: A. are the "give up" expense of the spread plus the legal and accounting fees, printing expense, and other small fees. B. are the spread to the underwriter that includes all the costs of legal and accounting fees, printing expense, and other small fees. C. are dependent upon the number of underwriters in the syndicate. D. include the existing audit and accounting fees.

22. The advantages of being publically traded include all of the following except: A. the corporation may tap the security markets for a greater amount of funds by selling securities directly to the public through a public placement. B. going public allows the firm to play the merger game, using marketable securities for the purchase of other firms. C. corporate information on profit margins and product lines must be divulged. D. shareholders of a heretofore private corporation may also sell part of their holdings if the corporation decides to go public.

Foundations of Financial Management - 10th Canadian Edition by Block

23. Leveraged buyout activity has been limited in Canada because: A. Canadian corporations are internationally held. B. Canadian corporations are more susceptible to cyclical swings in the economy. C. government legislation restricts leverage buyouts. D. Canadian corporations have high cash flow.

24. The amount of securities funding by private placement in the last decade has been: A. about the same as public offerings. B. about the same as rights offerings. C. somewhere between public offerings and rights offerings. D. less than public and rights offerings.

25. Which of the following is a characteristic of leveraged buyouts? A. Buyouts are usually financed by private equity. B. Corporate assets are often retained after the buyout is completed. C. Cash for the buyout are raised through private placement. D. Funds for the buyout are raised through securities markets.

26. Firm X needs to net $7,800,000 from the sale of common stock. Its investment dealer has informed the firm that the retail price will be $22 per share, and that the firm will receive $19 per share. Out-of-pocket costs are $100,000. How many shares must be sold? A. 410,526 B. 354,545 C. 359,091 D. 415,790

27. Bindex has net income of $2,500,000 and 1,000,000 shares outstanding. Its common stock is currently selling for $40 per share. It needs to raise $3,610,000 in funds for a new asset. Its investment dealer plans to sell an issue of common stock to the public for $38 for a spread of 5% on offer price. How much must Bindex's after-tax income increase to prevent dilution of EPS? A. $40,000 B. $237,500 C. $250,000 D. $361,000

Foundations of Financial Management - 10th Canadian Edition by Block

28. Raybac is about to go public. Its present shareholders own 500,000 shares. The new public issue will represent 800,000 shares. The shares will be priced at $25 to the public with a 4% spread. The out-of pocket costs will be $450,000. What is the net proceeds to the firm? A. $18,750,000 B. $19,200,000 C. $18,250,000 D. $19,550,000

29. Which of the following is not a recent trend in the investment industry? A. Consolidation of capital among a few investment dealers. B. Specialization of investment dealers. C. Increasing numbers of dealers because of high returns. D. The movement of non brokerage firms into the investment field.

30. The investment industry in Canada is: A. evenly distributed amongst over 200 firms. B. dominated by U.S. investment firms. C. dominated by only a few players. D. centred in Montreal.

31. ______________ occurs when a company is broken up into smaller divisions and sold for a profit. A. Liquidation B. Internal reorganization C. Bankruptcy D. Restructuring

32. A company's value, based on the assumption that its divisions being sold individually, is called ___________ value. A. book B. market C. breakup D. real

33. Investment dealers are responsible for all of the following except: A. packaging securities. B. offering securities. C. trading securities. D. selling securities.

Foundations of Financial Management - 10th Canadian Edition by Block

34. The investment dealer is responsible for: A. choosing the capital structure of the company. B. designing and packaging a security offering. C. designing the convertible feature of the bond issue. D. deciding if the company goes public.

35. The risk function of investment dealers is categorized under the: A. underwriting function. B. market maker function. C. advisor function. D. agent function.

36. The spread is the underwriter's compensation based on: A. the price of the security to the public. B. the net proceeds to the firm or the government. C. the price paid by the brokers. D. a fee schedule set by the securities commission.

37. The dilutive effect of a share issue occurs because: A. earnings fall initially. B. the number of shares increase. C. of the capital raised. D. share equity becomes more significant relative to debt.

38. An investment dealer spread is: A. commissions from buyers. B. fees from other investment dealers in the syndicate. C. artificially supporting the share price during and after the offering. D. included in the flotation cost.

39. Which of the following is considered an advantage (for the corporation) of going public? A. The president becomes a public relations man. B. Extensive and time-consuming reporting requirements. C. Access to large amounts of capital. D. Low cost of going public.

Foundations of Financial Management - 10th Canadian Edition by Block

40. The investment dealer's function involves: A. taking none of the risk in the distribution of an issue. B. always insuring a company a given amount of equity can be sold so that long-range financial planning can be made accurately. C. making a market by buying and selling a security to insure a liquid market. D. guaranteeing a set price for the security.

41. All of the following are characteristics of going private from public except: A. the interest rate, which is higher on the interest-bearing security. B. the fact a company is private helps in bank negotiations and marketing. C. private-traded stocks afford the shareholders more liquidity. D. the firm disseminates more information to the public on corporate affairs.

42. Which of the following is an advantage of private placement? A. No expensive registration process. B. Extensive public relations requirements. C. Low flexibility in negotiation. D. Higher audit fees.

43. Market stabilization: A. is the action by the managing investment dealer to keep the price of newly issued securities from falling below the issue price to the public. B. usually lasts 30-365 days if a security is difficult to distribute. C. always keeps prices of securities from falling. D. is similar to profit sharing.

44. Underpricing occurs: A. when additional shares are to be issued for companies with securities already privately traded. B. when the market anticipates a huge loss. C. in large primary offerings. D. when fraud is suspected.

45. Francis Corp. is coming to the market with a new offering of 1,000,000 shares, at $20 to the public. Francis Corp. will receive $17 per share. The firm has 2 million shares outstanding and earnings of $8 million. What is the amount of dilution in earnings per share? A. $1.85 B. $3.00 C. $10.00 D. $1.33

Foundations of Financial Management - 10th Canadian Edition by Block

46. Leveraged buyout activity has been limited in Canada because of: A. less resource based firms. B. less widely held companies. C. government legislation. D. poor financial performance.

47. Which of the following is a characteristic of leveraged buyouts? A. Buyouts are usually financed by new stock placement. B. Corporate assets remain in tact after buyout is completed. C. Funds for the buyout are raised through bank financing. D. Buyout targets have smooth cash flows throughout the year.

48. The Very Big Corporation needs to net $10,000,000 from the sale of common stock. Its investment dealer has informed the firm that the retail price will be $25 per share, and that the firm will receive $22 per share. Out-of-pocket costs are $300,000. How many shares must be sold? A. 454,545 B. 468,182 C. 412,000 D. 400,000

49. Vansteelandt Inc. has net income of $4,000,000 and 1,000,000 shares outstanding. Its common stock is currently selling for $50 per share. It needs to raise $2,000,000 in funds for a new asset. Its investment dealer plans to sell an issue of common stock to the public for $48 for a spread of 4% on offer price. How much must Vansteelandt's after tax income increase to prevent dilution of EPS? A. $173,612 B. $80,000 C. $41,667 D. $40,000

50. Laura's Design is about to go public. Its present shareholders own 800,000 shares. The new public issue will represent 1,200,000 shares. The shares will be priced at $30 to the public with a 5% spread. The out-of pocket costs will be $700,000. What are the net proceeds to the firm? A. $34,200,000 B. $36,000,000 C. $33,500,000 D. $11,400,000

Foundations of Financial Management - 10th Canadian Edition by Block

51. In 2008 the world dealt with the most dramatic financial crisis since the depression and bank failures of the 1930's. This crisis occurred because of all of the following except: A. increased leverage based on increasing property values in the subprime mortgage business. B. financial institutions accepted questionable credit instruments. C. there was a lack of effective oversight by the regulatory bodies. D. an increase in global interest rates.

52. General Corp. issued new shares at $37.60 with an underwriting fee of $2.22 per share. Calculate the underwriting spread on this new share issue. A. 4.56% B. 7.00% C. 5.90% D. 7.96%

Spring Fording Corp. (SFC) has 1,700,000 shares outstanding. Its most recent reported earnings were $8,500,000. SFC is considering issuing an additional 800,000 shares. The proceeds of the issue will be invested in a new plant which is expected to add an additional $1,000,000 in earnings.

53. SFC's most recent reported EPS is _____________. A. $3.40 B. $5.00 C. $6.40 D. $3.00

54. SFC's EPS following the issue would be _______________. A. $3.40 B. $3.80 C. $5.00 D. $6.40

55. SFC's EPS would be ________ without the addition of expected $1,000,000 in new earnings. A. $3.80 B. $3.40 C. $5.00 D. $6.40

Foundations of Financial Management - 10th Canadian Edition by Block

56. GHX Ltd. (GHX) needs to issue an additional $50,000,000 in common shares. GHX's investment banker has determined that the new shares could be issued at a retail price of $30 and the underwriting costs will be $2.25 a share. If other issuance costs would be $1,500,000 how many shares would GHX need to issue? A. 2,456,900 B. 1,855,856 C. 500,000 D. 4,888,999

57. The underwriter is someone who buys large new issues of stocks and then sells them to the public. True False

58. An underwriting syndicate is a group of investment dealers who help to distribute a new issue for a company. True False

59. When a firm issues new shares, it always results in dilution of earnings in the long run. True False

60. A market maker transacts in shares as a broker. True False

61. The whole area of investment underwriting is becoming more competitive. True False

62. Small investment dealers may handle distributions for relatively unknown corporations on a "best-efforts" basis. True False

63. The investment dealer serves in an agency function when a firm goes public. True False

64. The out-of-pocket cost to issue new common stock is always paid by the investment dealer. True False

Foundations of Financial Management - 10th Canadian Edition by Block

65. If a stock has a strong after-market, selling shareholders in the initial distribution will be pleased. True False

66. The term "underwriter" is synonymous with risk-taker or risk-bearer. True False

67. Private placement of debt has grown at about the same rate as public placement of debt. True False

68. When a company first goes public, a registration statement must be filed with the Toronto Stock Exchange. True False

69. An investment dealer acts as a middleperson between a corporation needing funds and investors with funds. True False

70. As a middleperson, the investment dealer is responsible for designing and packaging a security offering and selling it to the public. True False

71. Large well-established investment dealers often distribute new issues on a best-efforts basis. True False

72. Only a small amount of security issues are sold on a "best-efforts" basis. True False

73. It would not be unusual for an investment dealer syndicate to include as many as 15 investment houses in large offerings. True False

Foundations of Financial Management - 10th Canadian Edition by Block

74. The investment industry functions include merger and acquisition services, advisory services and international investment banking services. True False

75. The term "underpricing" describes the process of setting the spread between the participants of the investment dealer syndicate. True False

76. The purpose of an underwriting syndicate is only to distribute securities to the public. True False

77. Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage of the offering price. True False

78. Large investment houses are usually vertically integrated, acting as underwriter-dealer-broker and capturing more fees and commissions. True False

79. Privately placed bonds are the most popular method of raising debt. True False

80. Private placement eliminates the expensive registration process with the securities commission. True False

81. Even though the firm may pay a lower interest rate on a private placement, it will pay higher out-of-pocket costs than a public offering. True False

82. Bank purchases of investment dealers have nearly eliminated competition in the investment industry. True False

Foundations of Financial Management - 10th Canadian Edition by Block

83. Provinces and corporations rely heavily on international investment houses to raise funds. True False

84. Only the strong investment dealers with a strong capital base are in a position to compete in the international arena. True False

85. New share listings peaked on the Toronto Stock Exchange in 2007 before the market downturn. True False

86. The price performance of IPOs subsequent to the initial listing shows considerable volatility of returns. True False

87. An underpriced offering represents a permanent lost opportunity to the issuing firm. True False

88. The use of banks to finance leveraged buyouts has often caused a misdirection of capital. True False

89. Leveraged buyouts usually entail the use of a large proportion of debt to take control of the firm. True False

90. The investment industry has shifted its emphasis from mergers and acquisitions to underwriting new securities. True False

91. The movement of non-brokerage firms into the investment area has forced traditional securities firms to expand their capital base. True False

Foundations of Financial Management - 10th Canadian Edition by Block

92. Preferred share offerings have shown the greatest growth in the equity markets. True False

93. Because there is more uncertainty involved in the initial market reaction to common stock, a larger underwriting spread often exists for stocks, compared to other types of offerings. True False

94. Continued consolidation is not expected in the investment dealer industry, as market share and global competition have stabilized. True False

95. When underwriting on a "bought deal" basis, one dealer assumes all the risk and operates over a shorter time period. True False

96. Initial public offerings are far more significant than seasoned offerings. True False

97. The early returns from initial public offerings are highly predictable. True False

98. Investment dealers are hesitant to issue bonds when they perceive the interest rate to be low. True False

99. A branch of investment underwriting that has been very opportunistic in recent years has been the increased sales of foreign securities of companies formerly owned by the government. True False

100. Canadian securities firms are amongst the largest in the world. True False

Foundations of Financial Management - 10th Canadian Edition by Block

101. The underwriting spread is the guaranteed minimum profit to an investment dealer for each share distributed. True False

102. The investment business has changed from a competitive price-sensitive environment to one where relationships determine who gets the business. True False

103. In today's market environment, most investment houses specialize in underwriting and do not engage in the dealer-broker function. True False

104. Underwriting spread is the total compensation to members of the underwriting syndicate. True False

105. The managing underwriter is an investment dealer who is responsible for the pricing, prospectus and legal work involved in the sale of a new securities issue. True False

106. "Privatization" is when an Investment dealers that take a company public, but instead of selling companies owned by individuals, the investment dealers sell companies previously held by governments. True False

107. Define private placement and explain its advantages.

Foundations of Financial Management - 10th Canadian Edition by Block

108. List and describe the trends in the securities industry in Canada.

109. List and describe the advantages and disadvantages of public versus public financing.

110. Dixon Corporation is considering a public offering of common stock. The firm will offer one million shares of common stock for sale. The estimated selling price is $30 per share with Dixon Corp. receiving $26.25 per share after the offering. Registration fees are estimated at $275,000. A) What is the spread in dollars? In percent? B) What are the total expenses of the issue? C) If Dixon Corp. needs to generate $28 million, how many shares will have to be sold?

111. The Houston Corp. needs to raise money for an addition to its plant. It will issue 300,000 shares of new common stock. The new shares will be priced at $60 per share with an 8.5% spread on the offer price. Registration costs will be $150,000. Presently Houston Corp has earnings of $3 million and 750,000 shares outstanding. A) Compute the potential dilution from this new share issue. B) Compute the net proceeds to Houston Corp. C) What rate of return must be earned on the net proceeds so that no dilution of earnings per share occurs?

Foundations of Financial Management - 10th Canadian Edition by Block

112. Flyrite Company currently has net income of $3 million and 1.5 million common shares outstanding which sell for $20/share. Flyrite has decided to issue new stock to raise $4,000,000 to expand its operations. Flyrite's investment dealer will sell the stock for $18 with a spread of 7%. There will be a $60,000 registration cost. A) Calculate current EPS and PE ratio. B) How many shares will have to be sold to net $4 million? C) Calculate new EPS and stock price immediately after the sale if the PE ratio remains constant.

113. Vandenbosch Insurance Inc. currently has net income of $8 million and 2 million common shares outstanding which sell for $25/share. Vandenbosch has decided to issue new stock to raise $6,000,000 to expand its operations. Vandenbosch's investment dealer will sell the stock for $22 with a spread of 8%. There will be a $100,000 registration cost. A) Calculate current EPS and PE ratio. B) How many shares will have to be sold to net $6 million? C) Calculate new EPS and stock price immediately after the sale if the PE ratio remains constant.

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 15 Key

1. The function of the managing investment dealer includes: A. forming an underwriting syndicate, preparing a prospectus, distributing shares to the selling group. B. form an underwriting syndicate, examine a prospectus, require full disclosure. C. preparing a prospectus, distributing shares to the selling group, buying the shares for long-term investment. D. prepare a prospectus, require full disclosure, buy the shares for long-term investment.

Accessibility: Keyboard Navigation Block - Chapter 15 #1 Difficulty: Hard Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #2 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #3 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-14 Advantages of Being Public Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

4. Which of the following is not a key role of an investment dealer? A. Market maker. B. Underwriter. C. Acting as transfer agent. D. Agent in private placement.

Accessibility: Keyboard Navigation Block - Chapter 15 #4 Difficulty: Easy Learning Objective: 15-01 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing public. Topic: 15-02 The Role of the Investment Dealer Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #5 Difficulty: Easy Learning Objective: 15-01 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing public. Topic: 15-02 The Role of the Investment Dealer Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #6 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #7 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-13 Public versus Private Financing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #8 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-13 Public versus Private Financing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #9 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

10. The market stabilization function usually: A. is performed by the company. B. lasts six to nine months. C. provides price support for the stock during the distribution period. D. is illegal.

Accessibility: Keyboard Navigation Block - Chapter 15 #10 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-08 Market Stabilization Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #11 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-13 Public versus Private Financing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #12 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-18 Private Placement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #13 Difficulty: Easy Learning Objective: 15-01 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing public. Topic: 15-02 The Role of the Investment Dealer Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #14 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-18 Private Placement Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #15 Difficulty: Medium Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #16 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #17 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-08 Market Stabilization Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #18 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-06 Pricing the Security Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #19 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #20 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #21 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #22 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-14 Advantages of Being Public Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #23 Difficulty: Medium Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #24 Difficulty: Medium Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #25 Difficulty: Easy Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #26 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #27 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-06 Pricing the Security Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #28 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #29 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Concept

30. The investment industry in Canada is: A. evenly distributed amongst over 200 firms. B. dominated by U.S. investment firms. C. dominated by only a few players. D. centred in Montreal.

Accessibility: Keyboard Navigation Block - Chapter 15 #30 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

31. ______________ occurs when a company is broken up into smaller divisions and sold for a profit. A. Liquidation B. Internal reorganization C. Bankruptcy D. Restructuring

Accessibility: Keyboard Navigation Block - Chapter 15 #31 Difficulty: Easy Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Memory

32. A company's value, based on the assumption that its divisions being sold individually, is called ___________ value. A. book B. market C. breakup D. real

Accessibility: Keyboard Navigation Block - Chapter 15 #32 Difficulty: Medium Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Memory

33. Investment dealers are responsible for all of the following except: A. packaging securities. B. offering securities. C. trading securities. D. selling securities.

Accessibility: Keyboard Navigation Block - Chapter 15 #33 Difficulty: Easy Learning Objective: 15-01 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing public. Topic: 15-02 The Role of the Investment Dealer Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #34 Difficulty: Easy Learning Objective: 15-01 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing public. Topic: 15-02 The Role of the Investment Dealer Type: Memory

35. The risk function of investment dealers is categorized under the: A. underwriting function. B. market maker function. C. advisor function. D. agent function.

Accessibility: Keyboard Navigation Block - Chapter 15 #35 Difficulty: Easy Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #36 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #37 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #38 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #39 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-14 Advantages of Being Public Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #40 Difficulty: Easy Learning Objective: 15-01 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing public. Topic: 15-02 The Role of the Investment Dealer Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #41 Difficulty: Easy Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #42 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-18 Private Placement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #43 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-08 Market Stabilization Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #44 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-06 Pricing the Security Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #45 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

46. Leveraged buyout activity has been limited in Canada because of: A. less resource based firms. B. less widely held companies. C. government legislation. D. poor financial performance.

Accessibility: Keyboard Navigation Block - Chapter 15 #46 Difficulty: Medium Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #47 Difficulty: Easy Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #48 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 15 #49 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #50 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #51 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-10 The Securities Industry in Canada Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

52. General Corp. issued new shares at $37.60 with an underwriting fee of $2.22 per share. Calculate the underwriting spread on this new share issue. A. 4.56% B. 7.00% C. 5.90% D. 7.96%

Accessibility: Keyboard Navigation Block - Chapter 15 #52 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

Block - Chapter 15

53. SFC's most recent reported EPS is _____________. A. $3.40 B. $5.00 C. $6.40 D. $3.00

Accessibility: Keyboard Navigation Block - Chapter 15 #53 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

54. SFC's EPS following the issue would be _______________. A. $3.40 B. $3.80 C. $5.00 D. $6.40

Accessibility: Keyboard Navigation Block - Chapter 15 #54 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

55. SFC's EPS would be ________ without the addition of expected $1,000,000 in new earnings. A. $3.80 B. $3.40 C. $5.00 D. $6.40

Accessibility: Keyboard Navigation Block - Chapter 15 #55 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 15 #56 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

57. The underwriter is someone who buys large new issues of stocks and then sells them to the public. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #57 Difficulty: Easy Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Memory

58. An underwriting syndicate is a group of investment dealers who help to distribute a new issue for a company. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #58 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

59. When a firm issues new shares, it always results in dilution of earnings in the long run. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #59 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

60. A market maker transacts in shares as a broker. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #60 Difficulty: Easy Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Memory

61. The whole area of investment underwriting is becoming more competitive. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #61 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-10 The Securities Industry in Canada Type: Memory

62. Small investment dealers may handle distributions for relatively unknown corporations on a "best-efforts" basis. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #62 Difficulty: Medium Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

63. The investment dealer serves in an agency function when a firm goes public. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #63 Difficulty: Easy Learning Objective: 15-01 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing public. Topic: 15-02 The Role of the Investment Dealer Type: Memory

64. The out-of-pocket cost to issue new common stock is always paid by the investment dealer. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #64 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Memory

65. If a stock has a strong after-market, selling shareholders in the initial distribution will be pleased. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #65 Difficulty: Easy Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Concept

66. The term "underwriter" is synonymous with risk-taker or risk-bearer. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #66 Difficulty: Easy Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Memory

67. Private placement of debt has grown at about the same rate as public placement of debt. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #67 Difficulty: Medium Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

68. When a company first goes public, a registration statement must be filed with the Toronto Stock Exchange. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #68 Difficulty: Medium Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-13 Public versus Private Financing Type: Memory

69. An investment dealer acts as a middleperson between a corporation needing funds and investors with funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #69 Difficulty: Easy Learning Objective: 15-01 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing public. Topic: 15-02 The Role of the Investment Dealer Type: Memory

70. As a middleperson, the investment dealer is responsible for designing and packaging a security offering and selling it to the public. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #70 Difficulty: Easy Learning Objective: 15-01 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing public. Topic: 15-02 The Role of the Investment Dealer Type: Memory

71. Large well-established investment dealers often distribute new issues on a best-efforts basis. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #71 Difficulty: Medium Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

72. Only a small amount of security issues are sold on a "best-efforts" basis. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #72 Difficulty: Easy Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Concept

73. It would not be unusual for an investment dealer syndicate to include as many as 15 investment houses in large offerings. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #73 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Concept

74. The investment industry functions include merger and acquisition services, advisory services and international investment banking services. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #74 Difficulty: Easy Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Memory

75. The term "underpricing" describes the process of setting the spread between the participants of the investment dealer syndicate. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #75 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-06 Pricing the Security Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

76. The purpose of an underwriting syndicate is only to distribute securities to the public. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #76 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Memory

77. Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage of the offering price. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #77 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

78. Large investment houses are usually vertically integrated, acting as underwriter-dealer-broker and capturing more fees and commissions. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #78 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Memory

79. Privately placed bonds are the most popular method of raising debt. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #79 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-18 Private Placement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

80. Private placement eliminates the expensive registration process with the securities commission. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #80 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-18 Private Placement Type: Memory

81. Even though the firm may pay a lower interest rate on a private placement, it will pay higher out-of-pocket costs than a public offering. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #81 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-18 Private Placement Type: Memory

82. Bank purchases of investment dealers have nearly eliminated competition in the investment industry. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #82 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-10 The Securities Industry in Canada Type: Memory

83. Provinces and corporations rely heavily on international investment houses to raise funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #83 Difficulty: Easy Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-10 The Securities Industry in Canada Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

84. Only the strong investment dealers with a strong capital base are in a position to compete in the international arena. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #84 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-10 The Securities Industry in Canada Type: Memory

85. New share listings peaked on the Toronto Stock Exchange in 2007 before the market downturn. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #85 Difficulty: Medium Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Memory

86. The price performance of IPOs subsequent to the initial listing shows considerable volatility of returns. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #86 Difficulty: Medium Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-17 Initial Public Offerings Type: Memory

87. An underpriced offering represents a permanent lost opportunity to the issuing firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #87 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

88. The use of banks to finance leveraged buyouts has often caused a misdirection of capital. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #88 Difficulty: Easy Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Concept

89. Leveraged buyouts usually entail the use of a large proportion of debt to take control of the firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #89 Difficulty: Medium Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-19 Going Private and Leveraged Buyouts Type: Concept

90. The investment industry has shifted its emphasis from mergers and acquisitions to underwriting new securities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #90 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-10 The Securities Industry in Canada Type: Memory

91. The movement of non-brokerage firms into the investment area has forced traditional securities firms to expand their capital base. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #91 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-10 The Securities Industry in Canada Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

92. Preferred share offerings have shown the greatest growth in the equity markets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #92 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-11 Underwriting Activity in Canada Type: Memory

93. Because there is more uncertainty involved in the initial market reaction to common stock, a larger underwriting spread often exists for stocks, compared to other types of offerings. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #93 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Memory

94. Continued consolidation is not expected in the investment dealer industry, as market share and global competition have stabilized. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #94 Difficulty: Easy Learning Objective: 15-01 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing public. Topic: 15-02 The Role of the Investment Dealer Type: Memory

95. When underwriting on a "bought deal" basis, one dealer assumes all the risk and operates over a shorter time period. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #95 Difficulty: Medium Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

96. Initial public offerings are far more significant than seasoned offerings. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #96 Difficulty: Easy Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-17 Initial Public Offerings Type: Concept

97. The early returns from initial public offerings are highly predictable. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #97 Difficulty: Easy Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-17 Initial Public Offerings Type: Memory

98. Investment dealers are hesitant to issue bonds when they perceive the interest rate to be low. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #98 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

99. A branch of investment underwriting that has been very opportunistic in recent years has been the increased sales of foreign securities of companies formerly owned by the government. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #99 Difficulty: Medium Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-20 Mergers, Acquisitions, and Privatization Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

100. Canadian securities firms are amongst the largest in the world. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #100 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-10 The Securities Industry in Canada Type: Concept

101. The underwriting spread is the guaranteed minimum profit to an investment dealer for each share distributed. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #101 Difficulty: Medium Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

102. The investment business has changed from a competitive price-sensitive environment to one where relationships determine who gets the business. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #102 Difficulty: Easy Learning Objective: 15-02 Classify the various roles of investment dealers. Topic: 15-03 Enumeration of Functions Type: Memory

103. In today's market environment, most investment houses specialize in underwriting and do not engage in the dealer-broker function. FALSE

Accessibility: Keyboard Navigation Block - Chapter 15 #103 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

104. Underwriting spread is the total compensation to members of the underwriting syndicate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #104 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-05 The Spread Type: Concept

105. The managing underwriter is an investment dealer who is responsible for the pricing, prospectus and legal work involved in the sale of a new securities issue. TRUE

Accessibility: Keyboard Navigation Block - Chapter 15 #105 Difficulty: Easy Learning Objective: 15-03 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return. Topic: 15-04 The Distribution Process Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 15 #106 Difficulty: Easy Learning Objective: 15-06 Describe a leveraged buyout. Topic: 15-20 Mergers, Acquisitions, and Privatization Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

107. Define private placement and explain its advantages. Private placement refers to the selling of securities directly to insurance companies, pension funds, and wealthy individuals rather than through the security markets. The financing device may be employed by a growing firm that wishes to avoid or defer an initial public stock offering or by a publicly traded company that wishes to incorporate private funds into its financing package. New equity raised privately through the facilities of the TSX represented slightly under 15% of all equity raised. Advantages of private placement include: 1 No lengthy, expensive registration process with the securities commissions. 2 Firm has considerably greater flexibility in negotiating with one or a handful of insurance companies, pension funds, or bankers than is possible in a public offering. 3. Because there is no securities registration or underwriting, the initial costs of a private placement may be considerably lower than those of a public issue. However, on an interest-bearing security, the interest rate is usually higher to compensate the investor for holding a less liquid obligation.

Block - Chapter 15 #107 Difficulty: Hard Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-18 Private Placement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

108. List and describe the trends in the securities industry in Canada. Trends in the securities industry in Canada include: 1. A movement toward the integration of services. Large investment firms have moved to combine their banking and investment trading operations with the aid of computerized trading systems. Immense trading floors combine the trading operations of the equity, debt, money, and forward markets. Specialized sections for derivatives and corporate banking have been set up in New York, the world's largest financial market. Derivatives present an alternative to the risk-reduction capabilities of the insurance business. 2. A trend in the investment industry in Canada has been the movement to global trading units. With growing international trade investment, dealers have expanded to other countries, following their clients. Canadian investment dealers operate in the large capital markets of the world, raising capital for Canadian governments and corporations. Often the debt issues of the provinces and other borrowers are sold in the Euromarkets and the U.S markets. These international markets, besides offering access to large capital pools, have highly skilled professionals, more services than the Canadian markets, and provide greater liquidity for the securities. This all translates into cost savings. 3. Canadian banks have also moved to create North American discount brokerage services with the purchases of U.S. firms. This is a result of the dramatic increase in participation in the capital markets by the retail investor. 4. The globalization of the capital markets is also leading to 24-hour trading in many financial assets. Trading desks of the large firms already pass their "book" of securities from Toronto to Tokyo to London and back to Toronto so that clients can adjust their portfolios of financial assets at any time. The demands of the worldwide competitive capital markets are leading Canadian investment firms to integrate and specialize in the services in which they enjoy the best advantage. Sometimes this can best be done in Canadian capital markets, and sometimes it can best be done in other capital markets around the globe.

Block - Chapter 15 #108 Difficulty: Hard Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-10 The Securities Industry in Canada Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

109. List and describe the advantages and disadvantages of public versus public financing. Advantages of being a public company: 1. The corporation may tap the security markets for a greater amount of funds by selling securities directly to the public through a public placement. With millions of individual shareholders in the country, combined with hundreds of institutional investors, the greatest pool of funds is channeled toward publicly traded securities. 2. The attendant prestige of a public security may be helpful in bank negotiations, executive recruitment, and the marketing of products. 3. Shareholders of a heretofore private corporation may also sell part of their holdings if the corporation decides to go public. The shareholder is able to achieve a higher degree of liquidity and to diversify his or her portfolio. A publicly traded stock with an established price may also be helpful for estate-planning purposes. 4. Going public allows the firm to play the merger game, using marketable securities for the purchase of other firms. The high visibility of a public offering may even make the firm a potential recipient of attractive offers for its own securities. This may not be viewed as an advantage by firms that do not wish to be acquired. Disadvantages of being a public company: 1. The company must make all information available to the public through a securities' commission filing. Not only is this tedious, time-consuming, and expensive, but also important corporate information on profit margins and product lines must be divulged. For Canadian firms that are also listed on the New York Stock Exchange, the filings required by the U.S. Securities and Exchange Commission are even more extensive than those required by Canadian regulators. 2. Because of the need to provide information, a company president must become a public relations representative to all interested members of the securities industry. 3. There is tremendous pressure for short-term performance placed on the firm by security analysts and large institutional investors. Quarter-to-quarter earnings reports can become more important to top management than providing a long-run stewardship plan for the company. A capital budgeting decision calling for the selection of alternative A—carrying a million dollars higher net present value than alternative B—may be discarded in favour of the latter because alternative B adds two cents more to next quarter's earnings per share. 4. In a number of cases, the blessings of having a publicly quoted security may become quite the opposite. Although a security may have had an enthusiastic reception in a strong new issues market, a dramatic erosion in value may later occur, causing embarrassment and anxiety for shareholders and employers. 5. There is a high cost of going public. For example, for issues of under a million dollars, the underwriting spread plus the out-of-pocket cost may run up to 18 percent of gross proceeds.

Block - Chapter 15 #109 Difficulty: Hard Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds. Topic: 15-13 Public versus Private Financing Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

$3.75/$30.00 = 12.5% spread B) Total Expenses

$28,275,000/$26.25 = 1,077,142.86 shares to be sold to cover fees

Block - Chapter 15 #110 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-05 The Spread Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Potential dilution of earnings per share is $1.14 per share B) $60 × 8.5% = $5.10 spread

C) Desired EPS is $4.00 from part A:

7.35% is the required return on the new proceeds for no dilution of EPS. Block - Chapter 15 #111 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

New stock price = $1.722 × 10 = $17.22

Block - Chapter 15 #112 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

New stock price = $3.476 × 6.25 = $21.73

Block - Chapter 15 #113 Difficulty: Medium Learning Objective: 15-04 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. Topic: 15-07 Dilution Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 15 Summary Category

# of Questi ons

Accessibility: Keyboard Navigation

106

Block - Chapter 15

114

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 1501 Characterize investment dealers as intermediaries between corporations and governments in need of funds and the investing publi c.

Learning Objective: 15-02 Classify the various roles of investment dealers.

Learning Objective: 1503 Outline the distribution process; the allocation of securities among syndicate participants; and the calculation of the spread as cost or a return.

Learning Objective: 1504 Analyze the dealers role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and mark et share price.

Learning Objective: 15-05 Appraise the pros and cons of going public versus going private when raising funds.

Learning Objective: 15-06 Describe a leveraged buyout.

Topic: 15-02 The Role of the Investment Dealer

Topic: 15-03 Enumeration of Functions

Topic: 15-04 The Distribution Process

Topic: 15-05 The Spread

Topic: 15-06 Pricing the Security

Topic: 15-07 Dilution

Topic: 15-08 Market Stabilization

Topic: 15-10 The Securities Industry in Canada

Topic: 15-11 Underwriting Activity in Canada

Topic: 15-13 Public versus Private Financing

Topic: 15-14 Advantages of Being Public

Topic: 15-17 Initial Public Offerings

Topic: 15-18 Private Placement

Topic: 15-19 Going Private and Leveraged Buyouts

Topic: 15-20 Mergers, Acquisitions, and Privatization

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 16 1. The initial value of a bond is its: A. par value. B. coupon value. C. bond indenture. D. market value.

2. A junk bond is: A. a low yield AAA rated security. B. a fraudulent security. C. rated below investment grade. D. unsecured bond.

3. The term debenture refers to: A. long-term, secured debt. B. long-term, unsecured debt. C. the after-acquired property clause. D. a 100-page document covering the specific terms of the offering.

4. During poor economic conditions, the spread between yields on high-grade and low-grade bonds: A. decreases. B. stays the same. C. increases. D. are inversely related.

5. The underwriting cost on a new bond issue: A. is an immediate outflow and immediate tax write-off. B. is an immediate tax write-off with a deferred outflow. C. is a deferred outflow and deferred tax write-off. D. is an immediate outflow and deferred tax write-off.

Foundations of Financial Management - 10th Canadian Edition by Block

6. Prices of existing bonds move _________ as market interest rates move _________. A. down; down B. up; up C. up; down D. Bond prices don't move as market interest rates move.

7. A bond "Call Feature" allows: A. the corporation to call in or force in the debt issue before maturity. B. at the option of the bondholder, bonds can be changed into common stock. C. the bond holder to call the issuer for a change of interest payments. D. the corporation to call the holder in order to pay off the bond in installments.

8. The document that outlines the covenants and duties existing between bondholders and the issuing corporation is called: A. an indenture. B. a debenture. C. secured debt. D. protective covenants.

9. The "call" provision on some bonds allows: A. the bondholder to redeem the bond earlier than maturity, but usually involves a call premium. B. the corporation to request additional capital contributions from the bondholder. C. the corporation to redeem the bonds earlier than maturity but usually for a premium over the par value. D. the bondholder to convert the bond into preferred stock.

10. A bond with a coupon rate of 7.5%, maturing in 10 years at a value of $1,000, and current market price of $776 will have a current yield to maturity of: A. 11.3%. B. 10.4%. C. 9.7%. D. 7.5%.

11. Leasing is a popular form of financing because: A. lease provisions are generally less restrictive than a bond indenture. B. the lessor likely does not have experience with the equipment being leased. C. the lessee may be financially able to purchase. D. the lease is slower to finalize then a bond.

Foundations of Financial Management - 10th Canadian Edition by Block

12. A serial bond repayment plan involves a: A. lump-sum payment at maturity. B. conversion of debt to common stock. C. an early redemption of all debt. D. series of installments to retire the debt over the life of the issue.

13. Which of the following best represents the hierarchy of creditor and shareholder claims? A. Common stock, senior secured debt, subordinated debentures. B. Senior debentures, subordinated debentures, junior secured debt. C. Senior secured debt, subordinated debentures, common stock. D. Preferred stock, secured debt, debentures.

14. A "subordinated debenture": A. must be transferred with the bond to which it is attached. B. is used mainly by railroad companies and usually specifies equipment as collateral. C. entitles the bondholder to purchase shares of common stock at a specific price. D. is an unsecured bond with an inferior claim on assets in the event of liquidation.

15. A bond with a call provision would generally be sold to yield: A. less than a non-callable bond of similar character. B. the same as a similar non-callable bond. C. more than a non-callable bond of similar character. D. the same as similar convertible bonds.

16. The value of the bond redeemed on the maturity date is the: A. par value. B. coupon value. C. bond indenture. D. market value.

17. An indenture is: A. the section of a corporation's bylaws pertaining to bond issues. B. the summary of the essential features of a share issue. C. the contract between a corporation and a trustee acting for bondholders. D. the underwriting contract.

Foundations of Financial Management - 10th Canadian Edition by Block

18. Which of the following is the lowest in priority of claims against a bankrupt firm? A. A junior mortgage bond B. A senior debenture C. Common stock D. A subordinated debenture

19. Which of the following is considered to be the most significant measure in determining the return on a bond? A. Yield to maturity B. Coupon rate C. Present value D. Current yield

20. Short-term bond yields are generally __________________ than long-term bond yields whereas long-term bond prices are generally _________________ than short-term bond prices. A. more volatile; less volatile B. less volatile; more volatile C. less volatile; less volatile D. more volatile; more volatile

21. A bond with a coupon rate of 8.2% paid semi-annually, maturing in 5 years at a value of $1,000 and a current market price of $720, will have a yield to maturity of: A. 25.8%. B. 16.7%. C. 11.4%. D. 8.2%.

22. Bond refunding occurs when: A. interest rates in the market are sufficiently less than the coupon rate on the old bond. B. interest rates in the market have risen over the coupon rates on the old bond. C. the price of the old bond is less than par. D. the sinking fund has accumulated enough money to retire the bond issue.

23. In the net present value of the refunding decision, what discount rate is used? A. The aftertax cost of capital. B. The aftertax cost of new debt. C. The aftertax cost of the old debt. D. The before tax cost of the new debt.

Foundations of Financial Management - 10th Canadian Edition by Block

24. A bond's rating can depend on all of the following except: A. the corporation's debt-equity ratio. B. the corporation's size. C. the ability of the firm to make interest payments. D. the coupon rate on the bond.

25. Many bonds have some orderly preplanned system of repayment. Which of the following apply? A. Sinking funds B. No coupon bonds C. Income bonds D. Common funds

26. With regards to interest rates and bond prices it can be said that: A. a 1% change in interest rates will cause a greater change in long-term bond prices than short-term prices. B. a 1% change in interest rates will cause a greater change in short-term bond prices than long-term prices. C. long-term rates are more volatile than short-term rates. D. a decrease in interest rates will cause bond prices to fall.

27. In the event of a bankruptcy, the priority of claims (highest to lowest) on the assets of the company is: A. secured senior debt, unsecured senior debt, preferred shareholders, common shareholders. B. common shareholders, preferred shareholders, unsecured senior debt, secured senior debt. C. unsecured senior debt, secured junior debt, preferred shareholders, common shareholders. D. unsecured subordinate debt, secured junior debt, preferred shareholders, common shareholders.

28. The dollar interest received divided by the market price of the bond is called the: A. par value. B. coupon rate. C. current yield. D. yield to maturity.

29. Which of the following bonds offers the most security to the bondholder? A. Junior mortgage bonds B. Senior mortgage bonds C. Debenture bond D. Income bond

Foundations of Financial Management - 10th Canadian Edition by Block

30. Which of the following are advantages of leasing? A. A lease obligation may be substantially more restrictive than the provisions of a bond indenture. B. There is a down payment like a purchase. C. The negative effects of obsolescence may be reduced. D. The ability to use the leased asset as collateral in a bond.

31. Which one of these conditions must be met for a lease to qualify as a capital lease? A. The lease contains a bargain purchase price at the end of the lease. B. The lease must have a value of at least $10 million. C. The lease must have a life of 10 years. D. The lease is a buyback lease.

32. An operating lease: A. has a lease term equal to 75% or more of the estimated property. B. is usually short-term and is often cancellable at the option of the lessee. C. must show up on the balance sheet. D. must be classified as current assets and flow through operating expenses.

33. Long-term financing leases currently: A. show up on the balance sheet. B. appear in the footnotes to the annual report. C. appear on the company's income statement. D. do not appear on any financial statements.

34. Which of the following is not a characteristic of a zero-coupon bond? A. It doesn't pay interest. B. It is sold at a deep discount from face value. C. The annual increase in the bond's price is not taxable as ordinary income. D. It provides a means for corporations to take annual deductions without current cash outflow.

35. Strip bonds: A. provide no annual interest payments. B. have highly stable prices even with changing interest rates. C. provide an investor with tax-free income until maturity. D. eliminate the risk of default to the holder.

Foundations of Financial Management - 10th Canadian Edition by Block

36. Floating rate bonds: A. have interest payments based on coupon rates. B. have no capacity for constant market value. C. usually have very broad limits that interest payments cannot exceed. D. have a floating maturity date.

37. Which of the following is an advantage of floating rate to investors? A. They allow for locking in a multiplier of the initial investment. B. Their prices tend to be highly stable regardless of interest rate changes. C. They are sold at a deep discount. D. Investors always earn greater returns.

38. In the bond refunding decision, which of the following represents an inflow? A. Call premium B. Interest savings C. The underwriting cost on the new issue. D. Interest charges

39. Which of the following does not represent a tax implication in the bond refunding decision? A. Call premium B. Cost savings in lower interest rates. C. Underwriting costs of new issue. D. Interest charges

40. Janex Corp. is refunding $8 million worth of 13% debt. The new bonds will be issued for 8%. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium? A. $260,000 B. $400,000 C. $468,000 D. $720,000

41. Which of the following is not an advantage of debt? A. Debt is paid back in "cheaper" dollars during inflationary periods. B. Bondholders have no control over the actions of management. C. Cost of debt can lower the weighted overall cost of capital. D. All of these are advantages.

Foundations of Financial Management - 10th Canadian Edition by Block

42. Ajax Corp. has a bond with a coupon rate of 12%, maturing in 15 years at $1,000 per bond. The current market price is $960. What is the current yield? A. 12.8% B. 12.6% C. 12.0% D. 11.5%

43. A bond with a $114 annual coupon, maturing in 10 years at a value of $1,000 has a current market price of $920. What is the yield to maturity of the bond? A. 9.5% B. 11.4% C. 12.9% D. 13.4%

44. A call provision, which allows the corporation to force an early maturity on a bond issue, usually contains all but which of the following characteristics? A. Most bonds must be outstanding at least 5 years before being called. B. After the call date, the call premium tends to decline over time. C. The provision typically calls for debt conversion into common stock. D. The corporation will pay a premium over par for the bonds.

45. The disadvantages of debt include all but which of the following? A. Debt may have to be paid back with "cheaper" dollars. B. Interest and principal payments must be met. C. Indenture agreements may place burdensome restrictions on the firm. D. Too much debt may depress the firm's share price.

46. Which of the following is not a form of yield on a bond? A. Coupon rate (nominal yield) B. Current yield C. Dividend yield D. Yield to maturity

47. AA bond is rated lower than a _____ bond. A. AAA B. A C. A(low) D. A(high)

Foundations of Financial Management - 10th Canadian Edition by Block

48. The higher the tax rate, the ______ the net underwriting cost on the new bond issue. A. higher B. lower C. higher or lower D. substantially higher

49. Floating rate bonds are most likely to be popular when it is anticipated that: A. interest rates will stay the same. B. interest rates will go down. C. interest rates will go up. D. short-term interest rates will be higher than long-term interest rates.

50. A Eurobond is a: A. bond payable in the investor's currency but sold outside the borrower's country. B. bond payable in the investor's currency but sold inside the borrower's country. C. bond payable in the borrower's currency and sold inside the borrower's country. D. bond payable in the borrower's currency but sold outside the borrower's country.

51. Under the reporting rules for leasing, the lease-versus-purchase decision is appropriate for: A. a financing lease. B. a short-term operating lease. C. a capital lease. D. all kinds of leases.

52. In the lease-versus-purchase decision, one of the advantages is: A. the tax shield provided by the lease payment. B. the lower interest rate on the lease than on a loan to buy the asset. C. the ability to use the after-tax cost of debt rather than the weighted average cost of capital in the decision. D. the ability to savings from purchasing the equipment.

53. The higher the bond rating: A. the higher the interest rate on a bond. B. the lower the interest rate on the bond. C. the higher the call premium. D. the lower the call premium.

Foundations of Financial Management - 10th Canadian Edition by Block

54. Which independent bond rating company is a leader in the United States? A. Royal Bank Dominion Securities B. TD Waterhouse C. S&P D. Canadian Rating

55. To prevent the weakening of debt holder claims, an indenture includes: A. a maturity date. B. a call provision. C. a conversion option. D. restrictive covenants.

56. The best measure of an investor's rate of return is: A. the coupon rate. B. the current yield. C. the yield to maturity. D. nominal yield.

57. Investment grade bonds are rated: A. A and above. B. BBB and above. C. BB and above. D. B and above.

58. In general, floating rate bonds have their interest rate payment adjusted: A. daily. B. weekly. C. quarterly. D. annually.

59. A call feature allows: A. the bondholder to redeem the bond before the maturity date. B. the corporation to redeem the bond before the maturity date. C. the corporation to convert the bond to common shares. D. the bondholder to demand increased collateral.

Foundations of Financial Management - 10th Canadian Edition by Block

60. From the corporate issuer viewpoint, a zero-coupon bond allows the firm to: A. receive deferred income for tax purposes. B. reduce the multiplier of the initial investment. C. defer payment obligations. D. take advantage of low volatility.

61. A debenture represents: A. unsecured debt. B. secured debt. C. a long document covering every detail of a bond issue. D. debt that is subordinate.

62. Which of the following is not a form of out-of-court settlement for a financially distressed firm? A. Extension B. Composition C. Assignment D. Reversion

63. The first priority in liquidation under the bankruptcy laws is to pay: A. senior debt. B. cost of administering the bankruptcy procedures. C. secured debt. D. trade creditors.

64. If the liquidation value of the assets is less than the creditor claims, then the: A. common shareholders will receive partial payment. B. preferred shareholders will receive partial payment. C. general creditors will receive partial payment. D. general creditors will receive complete payment.

65. An internal reorganization means that: A. a possible redesign of management and the capital structure may be necessary. B. a merger partner may be found. C. is frequently carried out in the banking industry. D. a liquidation is likely to follow.

Foundations of Financial Management - 10th Canadian Edition by Block

66. An external reorganization: A. is a frequently used form of out-of-court settlement. B. often calls for old creditors and shareholders to make concessions to insure that a feasible arrangement is established. C. often calls for a creditor committee to be established. D. is necessary for a successful liquidation.

67. Which of the following is a form of an in-court settlement? A. Assignment B. Extension C. Composition D. Bankruptcy

68. Under an extension settlement: A. creditors agree to accept a fractional settlement on their original claim. B. creditors run the business. C. a new schedule of repayment is developed. D. assets are liquidated by going through formal court action.

69. Financial failure of a firm may be assessed when: A. the firm's liabilities are greater than the market value of its assets. B. a firm can pay its bills but has a positive net worth. C. the firm's cash flow is declining. D. the firm's equity is greater than the liabilities.

70. If an out-of-court settlement cannot be reached, the reorganization alternative can be examined. Under this alternative,: A. capital structure is redesigned by replacing equity accounts with debt. B. a creditor committee may run the business. C. creditors may accept a fraction of their original loans. D. a merger partner may be found for the firm.

71. Formal liquidation is recommended when reorganization is not feasible and out-of-court settlements cannot be reached. Which is the order of priority for claims against the firm? A. Secured creditors, taxes, wages, lawyer's fees, unsecured creditors. B. Secured creditors, lawyer's fees, source deductions, wages, unsecured creditors. C. Lawyer's fees, wages, source deductions, secured creditors, unsecured creditors. D. Source deductions, lawyer's fees, secured creditors, wages, unsecured creditors.

Foundations of Financial Management - 10th Canadian Edition by Block

72. When a financially distressed firm is experiencing technical insolvency,: A. it has a negative net worth. B. it cannot sell its assets. C. it cannot meet its obligations as they come due. D. it cannot negotiate with its creditors.

73. A bankrupt firm: A. has a negative net worth. B. cannot sell its assets. C. can meet its obligations as they come due. D. may continue operating, as if it were solvent.

74. One type of out-of-court settlement in which creditors are requested to accept a new repayment schedule is called a(an): A. composition. B. extension. C. arrangement. D. expansion.

75. Under the term of a composition,: A. all creditors must agree. B. small dissenting creditors may be paid in full immediately. C. a creditor committee may be formed. D. a new share class is composed.

76. In order for an assignment to take place: A. creditors must agree on liquidation values. B. the court must determine claims priorities. C. formal bankruptcy proceedings must have begun. D. More than one of these are true.

77. In an internal reorganization, current management will be evaluated and: A. a merger partner may be found. B. the debt to total assets ratio of the firm may be reduced. C. income bonds may be replaced with longer-term bonds. D. additional managers will be hired.

Foundations of Financial Management - 10th Canadian Edition by Block

78. When a reorganization plan requires a merger partner, it is likely that: A. no strong, financially sound firm will assume the management and financial obligations of the bankrupt firm. B. the bankrupt firm's capital structure will be redesigned. C. old creditors and shareholders will be asked to make concessions. D. the new partner will accept the status quo.

79. Which of the following is a likely combination of activities in the handling of a financially distressed firm? A. Merger, composition, liquidation. B. Internal reorganization, merger, liquidation. C. Composition, extension, creditor committee. D. Extension, liquidation, reverse takeover.

80. A bond with a coupon rate of 8.0%, maturing in 10 years at a value of $1,000, and current market price of $753 will have a current yield to maturity of: A. 2.9%. B. 12.5%. C. 9.7%. D. 8.0%.

81. Leasing is a popular form of financing because: A. leased equipment does not appear on a company's balance sheet. B. leasing is usually less expensive. C. the lessee may not be financially able to purchase. D. the lease is easier to finalize then a purchase.

82. A bond with a coupon rate of 7.5% paid semi-annually, maturing in 5 years at a value of $1,000, and a current market price of $710, will have a yield to maturity of: A. 16.2%. B. 25.6%. C. 12.8%. D. 7.5%.

83. A bond's rating does not depend on: A. the corporation's debt-equity ratio. B. the corporation's size. C. the ability of the firm to make interest payments. D. the corporations relationship with the investment dealer.

Foundations of Financial Management - 10th Canadian Edition by Block

84. Many bonds have some orderly preplanned system of repayment. Which of the following do not apply? A. Sinking funds B. Serial bonds C. Single sum payment D. Compensating fund balance

85. Which of the following are advantages of leasing? A. A lease obligation may be substantially less restrictive than the provisions of a bond indenture. B. Leases may be terminated by the lessor at any time in the contract. C. Ownership transfers to the lessee automatically on the first payment. D. Leases allow the lender to monetize the asset.

86. Which one of these conditions must be met for a lease to qualify as a capital lease? A. The lease contains a bargain purchase price at the end of the lease. B. The lease term is equal to 70% or more of the estimated life of the leased property. C. The present value of the minimum lease payments equals 80% or more of the fair value of the leased property at the inception of the lease. D. Management classifies the lease as operating.

87. Floating rate bonds: A. have interest payments based on some overall market rate. B. have the capacity for highly variable market value. C. usually have very narrow limits that interest payments cannot exceed. D. have flexible maturity dates.

88. Morgan Corp. is refunding $6 million worth of 12% debt. The new bonds will be issued for 6%. The corporation's tax rate is 35%. The call premium is 8%. What is the net cost of the call premium? A. $360,000 B. $480,000 C. $312,000 D. $234,000

89. Laura's Design Inc. has a bond with a coupon rate of 12%, maturing in 12 years at $1,000 per bond. The current market price is $940. What is the current yield? A. 13.0% B. 12.6% C. 12.0% D. 11.5%

Foundations of Financial Management - 10th Canadian Edition by Block

90. A bond with a $95 annual coupon, maturing in 10 years at a value of $1,000 has a current market price of $950. What is the yield to maturity of the bond? A. 10.9% B. 10.3% C. 9.5% D. 9.4%

Railway Co. (RC) issued bonds in 2015 that mature 10 years from today. The bonds have annual coupons of $35 and are currently trading at $910.85.

91. RC nominal coupon rate is ______. A. 4.0% B. 3.50% C. 2.30% D. 5.60%

92. RC's current yield is ________. A. 3.50% B. 3.0% C. 3.84% D. 3.96%

93. Bart purchased a zero coupon bond at $728.84. If the bond matures in 10 years, what is its Yield-toMaturity? A. 3.22% B. 4.35% C. 6.44% D. 7.29%

94. You purchased a bond at $900. Its pays an annual coupon of $100 and matures in 10 years. If this bonds yield-to-maturity is 11.75%, what is the bonds nominal coupon rate? A. 8.57% B. 5.78% C. 12.75% D. 10.00%

Foundations of Financial Management - 10th Canadian Edition by Block

95. A bond has 5 years to mature. It pays 5.60% semi-annually. If other bonds with similar risks are yield 6.2%, paid semi-annually, what is the maximum price you would pay for this bond? A. $974.54 B. $1,254.86 C. $887.97 D. $847.47

96. A bond indenture is a bond with no specific collateral securing it. True False

97. Bonds may be recalled only if there is a specific call provision in the bond. True False

98. The value of bonds will move opposite interest rates. True False

99. The stated interest payment divided by the par value of a bond is called the coupon rate. True False

100. The fact that interest payments on debt are fixed is both an advantage and a drawback. True False

101. The call feature is usually advantageous to the bondholder. True False

102. The call premium tends to increase with the passage of time. True False

103. A bondholder may have paper losses as large as 30-40% or more at some point between the time of issue and redemption. True False

Foundations of Financial Management - 10th Canadian Edition by Block

104. The yield to maturity is the internal rate of return on a bond. True False

105. When interest rates rise, bond refunding becomes quite popular. True False

106. The payment of a call premium may generally be taken as an immediate tax write-off. True False

107. A significant question when making a bond refunding decision is "will interest rates go lower?" True False

108. In an inflationary economy, debt must be paid back with "more expensive dollars." True False

109. An operating lease is generally a long-term, non-cancellable obligation. True False

110. A finance lease has many of the characteristics of a long-term debt obligation. True False

111. Par value and maturity value on a bond generally are the same. True False

112. If you expect interest rates to go up, you should buy a long-term bond now. True False

113. The cost of capital is generally not used as the discount rate in a bond-refunding decision. True False

Foundations of Financial Management - 10th Canadian Edition by Block

114. If a company has promised to pay interest on debt, it must pay the interest even if it shows no profit for the year, or else it may go bankrupt. True False

115. Long-term interest rates are generally higher than short-term interest rates. True False

116. Bonds may be secured by different classes of assets such as airplanes. True False

117. A financing lease usually calls for an annual expense deduction equal to the lease payment. True False

118. A capital lease is the same as an operating lease. True False

119. Costs of bond refunding are the call premium and the underwriting cost on the new bond issue. True False

120. The costs of bond refunding are the call premium, and the underwriting costs on the old and new bond issue. True False

121. A Eurobond is a bond payable in the borrower's currency but sold outside the borrower's country. True False

122. Lease obligations currently appear only in the footnotes of Canadian corporate financial statements. True False

Foundations of Financial Management - 10th Canadian Edition by Block

123. The essence of the treatment of long-term, non-cancellable leases is the same as if the company had borrowed the money and bought the asset. True False

124. The inclusion of leases on the balance sheet as an asset and liability has lowered firm's debt to asset ratio. True False

125. A bond can only be easily refunded if it has a call feature. True False

126. Refunding a bond occurs when the company sells more bonds of the same series with maturity and coupon equal to the bonds sold earlier. True False

127. An after-acquired property clause means that any new property acquired is placed under the original mortgage. True False

128. Generally the greater the protection offered a given class of bondholders, the higher will be the interest rate on the bonds. True False

129. Under a sinking fund provision, money is set aside every year until the bond matures, then the money is used to repay the principal. True False

130. Long-term bond prices are more volatile than short-term bond prices given an equal percentage change in the interest rate. True False

131. Leasing land provides a tax advantage to the lessee in that lease payments are tax deductible, while there is no deduction for amortization for a landowner. True False

Foundations of Financial Management - 10th Canadian Edition by Block

132. Strip bonds are sold at a deep discount primarily because investors are not interested in them. True False

133. The primary advantage of investing in floating rate bonds is that the bonds will maintain a stable market value within a reasonable limit. True False

134. Strip bonds are sold at face value. True False

135. The difference between the initial bond price and the maturity value is amortized for tax purposes over the life of a zero-coupon bond. True False

136. The advantage of a strip bond to an investor is that the annual increase in the bond is taxable as ordinary income. True False

137. A floating rate bond's price is inversely related to the changes in interest rates. True False

138. A floating rate bond has a reasonably stable price but actual interest payments received change often over the life of the bond. True False

139. During economic upswings, spreads between bonds of different ratings tend to widen. True False

140. The decline in the interest paying capability of corporate borrowers has translated to a dramatic increase in defaults on corporate obligations. True False

Foundations of Financial Management - 10th Canadian Edition by Block

141. If a corporation offers greater protection to a given class of bondholders, it must raise the interest rate on its bonds to make them more attractive. True False

142. One current trend in the bond market is toward more secured debt, as investors become increasingly wary of defaults on unsecured debt. True False

143. The prices of strip bonds tend to react violently to large swings in interest rates. True False

144. In a sale-and-leaseback arrangement, a firm would sell an asset it already owns to another party and then lease the asset back from that party. True False

145. Under the borrowing-purchasing decision compared to leasing, we must consider not only the amount of the payment but also separate out those items that are tax deductible. True False

146. The decision to lease rather than purchase will not be affected by the method of amortization used under the purchase method. True False

147. In the lease-versus-purchase decision, the discount rate used in the present value analysis is the after-tax cost of debt. True False

148. When a company defaults on a secured debt, it is rare for the secured asset to be sold and the proceeds distributed to the debtor. True False

149. Debentures are commonly issued by small corporations. True False

Foundations of Financial Management - 10th Canadian Edition by Block

150. Bonds with a call premium generally trade at higher yields than bonds without call premiums. True False

151. A firm may be technically insolvent even though it has a positive net worth. True False

152. A composition means a distressed firm will be given more time to pay its bills. True False

153. An assignment is a form of out-of-court liquidation. True False

154. An internal reorganization may be considered when a merger partner is found for the firm. True False

155. After assets against which liens are held are disposed of, secured creditors participate equally with unsecured creditors. True False

156. A composition is an alternative to formal bankruptcy proceedings in which creditors agree to accept a portion of their original claims. True False

157. A majority of creditors must refuse to accept an out-of-court settlement before formal bankruptcy proceedings will begin. True False

158. A creditor committee may be established to run a business when management's only other alternative to prevent bankruptcy is composition. True False

Foundations of Financial Management - 10th Canadian Edition by Block

159. Management of a firm may accept a creditor committee only as a last resort before bankruptcy. True False

160. Bankruptcy proceedings may be initiated either by the distressed company or its creditors. True False

161. A firm in bankruptcy may be either liquidated or reorganized, but not both. True False

162. In a liquidation, each claim against the assets of the firm will be satisfied equally. True False

163. Internal reorganization may involve a change in the firm's capital structure. True False

164. Federal, provincial, and local taxes due have a first priority claim against assets in a bankruptcy proceeding. True False

165. An out-of-court settlement will hardly ever involve both extension and composition. True False

166. Bankruptcy refers to a circumstance where a firm is unable to pay its bills as they come due. True False

167. In an extension settlement, creditors agree to allow the firm more time to meet its financial obligations. True False

168. Establishing a creditor committee to run the business is a type of in-court settlement. True False

Foundations of Financial Management - 10th Canadian Edition by Block

169. Both an extension and a creditor committee cannot be established. True False

170. In the priority of claims in bankruptcy liquidation, taxes due at the federal or provincial level have rights of first payment. True False

171. Generally when a firm is considered bankrupt, the liquidation value of the assets is less than the book value of the assets. True False

172. The three highest priority levels in bankruptcy include the cost of administering the proceedings, past wages due to workers, and overdue interest payments to creditors. True False

173. A debenture is a bond that has as part of its underlying contract collateral. True False

174. Negative pledges limit an issuer from issuing more debt that has security (collateral) pledges ahead of existing debts. True False

175. The after acquired property clause is a requirement in a bond issue stipulating that any new equipment purchased after the issue be placed under the original mortgage. True False

176. Eurocurrencies are units of currency deposited in banks outside of the country issuing the currencies. True False

177. Under a sinking-fund provision, semi-annual or annual contributions are made by the corporation into a fund administered by the trustee for purposes of debt retirement. True False

Foundations of Financial Management - 10th Canadian Edition by Block

178. List and discuss reasons why a firm might decide to lease instead of purchase equipment.

179. List and describe 4 out-of-court settlement alternatives for financially distressed firms.

180. List and describe the 3 bases on which bond yields are quoted. Use a $1,000 bond paying $100/year for 10 years and currently selling in the market for $900 as the basis for your example.

182. Describe the characteristics of a zero-coupon rate bond.

Foundations of Financial Management - 10th Canadian Edition by Block

183. Describe the characteristics of a Strip Bond.

184. Describe the characteristics of a Floating-Rate Bond.

185. Describe the characteristics of a Eurobond.

186. Discuss the advantages and disadvantages of debt as a financing method.

Foundations of Financial Management - 10th Canadian Edition by Block

187. Gray House is issuing bonds with 10.5% coupon rates that will mature 15 years from today. The bonds pay interest semi-annually and the bond is currently selling for $980. Calculate: A) nominal yield B) current yield C) yield to maturity

188. Dairy Corp. has a $10 million bond obligation outstanding which it is considering refunding. The bonds were issued at 12% and the interest rates on similar bonds have declined to 10%. The bonds have 12 years of their 20-year maturity remaining. Dairy will pay a call premium of 6% and will incur underwriting costs of $400,000 immediately. There is no underwriting cost consideration on the old bond. The company is in a 40% tax bracket. There is no overlap interest period. Should the old issue be refunded?

189. Shannon Corporation has two bonds outstanding. Both bonds have coupon rates of 10% and one has a maturity of 10 years, while the other has a maturity of 20 years. Interest is paid semi-annually. Calculate the following for both bonds. A) If market rates for bonds of equal risk fell to 8% what would be the maximum price an investor would be willing to pay for these bonds? B) If market rates for bonds of equal risk remained at 10%, what would be the bonds' current worth? C) If market rates for bonds of equal risk rose to 12%, what would be the bonds' theoretical value?

Foundations of Financial Management - 10th Canadian Edition by Block

190. It is time for the renewal of existing photocopying equipment at Runt Ltd. New equipment will cost $95,000 and this amount can be borrowed from the local bank at 7 percent interest with annual payments at the end of the year. The CCA rate on the equipment would be 20 percent. The equipment will be salvaged in 5 years for $24,000. The current equipment is worth $12,500. Runt could also lease the equipment with annual lease payments of $20,000 payable at the beginning of each year, which would avoid the annual maintenance expense of $1,250 involved if they purchase the equipment. Cost of capital is 14 percent. The tax rate is 40 percent. Should Runt Ltd. lease or borrow to purchase the photocopying equipment?

Foundations of Financial Management - 10th Canadian Edition by Block

191. The trustee in the bankruptcy settlement for the Edsel Corp. lists the following book values and liquidation values for the assets of the corporation. Liabilities and shareholders' claims are shown below.

Assume the administrative costs of bankruptcy, workers allowable wages and source deductions add up to $100,000. (Administrative costs $75,000) Indicate how much (in dollars) the following parties will receive in liquidation: A) Common shareholders B) Secured creditor holding the first lien C) Senior unsecured debt holder

Foundations of Financial Management - 10th Canadian Edition by Block

192. Robinson's Golf and Relaxation World is issuing bonds with 9% coupon rates that will mature 10 years from today. The bonds pay interest annually and the bond is currently selling for $950. Calculate: A) nominal yield B) current yield C) yield to maturity

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 16 Key

1. The initial value of a bond is its: A. par value. B. coupon value. C. bond indenture. D. market value.

Accessibility: Keyboard Navigation Block - Chapter 16 #1 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-02 The Debt Contract Type: Memory

2. A junk bond is: A. a low yield AAA rated security. B. a fraudulent security. C. rated below investment grade. D. unsecured bond.

Accessibility: Keyboard Navigation Block - Chapter 16 #2 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

3. The term debenture refers to: A. long-term, secured debt. B. long-term, unsecured debt. C. the after-acquired property clause. D. a 100-page document covering the specific terms of the offering.

Accessibility: Keyboard Navigation Block - Chapter 16 #3 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

4. During poor economic conditions, the spread between yields on high-grade and low-grade bonds: A. decreases. B. stays the same. C. increases. D. are inversely related.

Accessibility: Keyboard Navigation Block - Chapter 16 #4 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-08 Bond Ratings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #5 Difficulty: Easy Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-10 A Capital Budgeting Problem Type: Memory

6. Prices of existing bonds move _________ as market interest rates move _________. A. down; down B. up; up C. up; down D. Bond prices don't move as market interest rates move.

Accessibility: Keyboard Navigation Block - Chapter 16 #6 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #7 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

8. The document that outlines the covenants and duties existing between bondholders and the issuing corporation is called: A. an indenture. B. a debenture. C. secured debt. D. protective covenants.

Accessibility: Keyboard Navigation Block - Chapter 16 #8 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-02 The Debt Contract Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #9 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

10. A bond with a coupon rate of 7.5%, maturing in 10 years at a value of $1,000, and current market price of $776 will have a current yield to maturity of: A. 11.3%. B. 10.4%. C. 9.7%. D. 7.5%.

Accessibility: Keyboard Navigation Block - Chapter 16 #10 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #11 Difficulty: Easy Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-31 Advantages of Leasing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #12 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #13 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #14 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #15 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

16. The value of the bond redeemed on the maturity date is the: A. par value. B. coupon value. C. bond indenture. D. market value.

Accessibility: Keyboard Navigation Block - Chapter 16 #16 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-02 The Debt Contract Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #17 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-02 The Debt Contract Type: Memory

18. Which of the following is the lowest in priority of claims against a bankrupt firm? A. A junior mortgage bond B. A senior debenture C. Common stock D. A subordinated debenture

Accessibility: Keyboard Navigation Block - Chapter 16 #18 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

19. Which of the following is considered to be the most significant measure in determining the return on a bond? A. Yield to maturity B. Coupon rate C. Present value D. Current yield

Accessibility: Keyboard Navigation Block - Chapter 16 #19 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #20 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #21 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #22 Difficulty: Easy Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-09 The Refunding Decision Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #23 Difficulty: Easy Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-09 The Refunding Decision Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #24 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-08 Bond Ratings Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

25. Many bonds have some orderly preplanned system of repayment. Which of the following apply? A. Sinking funds B. No coupon bonds C. Income bonds D. Common funds

Accessibility: Keyboard Navigation Block - Chapter 16 #25 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #26 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #27 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

28. The dollar interest received divided by the market price of the bond is called the: A. par value. B. coupon rate. C. current yield. D. yield to maturity.

Accessibility: Keyboard Navigation Block - Chapter 16 #28 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Memory

29. Which of the following bonds offers the most security to the bondholder? A. Junior mortgage bonds B. Senior mortgage bonds C. Debenture bond D. Income bond

Accessibility: Keyboard Navigation Block - Chapter 16 #29 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-02 The Debt Contract Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #30 Difficulty: Easy Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-31 Advantages of Leasing Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #31 Difficulty: Medium Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-30 Capital Lease versus Operating Lease Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #32 Difficulty: Easy Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-30 Capital Lease versus Operating Lease Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #33 Difficulty: Easy Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-29 Leasing as a Form of Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #34 Difficulty: Hard Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-12 Zero-Coupon Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #35 Difficulty: Easy Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-13 Strip Bond Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #36 Difficulty: Easy Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-15 Floating-Rate Bond Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #37 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-15 Floating-Rate Bond Type: Memory

38. In the bond refunding decision, which of the following represents an inflow? A. Call premium B. Interest savings C. The underwriting cost on the new issue. D. Interest charges

Accessibility: Keyboard Navigation Block - Chapter 16 #38 Difficulty: Medium Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-09 The Refunding Decision Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #39 Difficulty: Medium Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-09 The Refunding Decision Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #40 Difficulty: Medium Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-09 The Refunding Decision Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #41 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-28 Advantages and Disadvantages of Debt Type: Memory

42. Ajax Corp. has a bond with a coupon rate of 12%, maturing in 15 years at $1,000 per bond. The current market price is $960. What is the current yield? A. 12.8% B. 12.6% C. 12.0% D. 11.5%

Accessibility: Keyboard Navigation Block - Chapter 16 #42 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

43. A bond with a $114 annual coupon, maturing in 10 years at a value of $1,000 has a current market price of $920. What is the yield to maturity of the bond? A. 9.5% B. 11.4% C. 12.9% D. 13.4%

Accessibility: Keyboard Navigation Block - Chapter 16 #43 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #44 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #45 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-28 Advantages and Disadvantages of Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

46. Which of the following is not a form of yield on a bond? A. Coupon rate (nominal yield) B. Current yield C. Dividend yield D. Yield to maturity

Accessibility: Keyboard Navigation Block - Chapter 16 #46 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

47. AA bond is rated lower than a _____ bond. A. AAA B. A C. A(low) D. A(high)

Accessibility: Keyboard Navigation Block - Chapter 16 #47 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-08 Bond Ratings Type: Concept

48. The higher the tax rate, the ______ the net underwriting cost on the new bond issue. A. higher B. lower C. higher or lower D. substantially higher

Accessibility: Keyboard Navigation Block - Chapter 16 #48 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-10 A Capital Budgeting Problem Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #49 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-15 Floating-Rate Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #50 Difficulty: Hard Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-18 Eurobond Market Type: Concept

51. Under the reporting rules for leasing, the lease-versus-purchase decision is appropriate for: A. a financing lease. B. a short-term operating lease. C. a capital lease. D. all kinds of leases.

Accessibility: Keyboard Navigation Block - Chapter 16 #51 Difficulty: Easy Learning Objective: 16-06 Analyze a lease versus borrow-to-purchase decision. Topic: 16-32 Lease-versus-Purchase Decision Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #52 Difficulty: Easy Learning Objective: 16-06 Analyze a lease versus borrow-to-purchase decision. Topic: 16-32 Lease-versus-Purchase Decision Type: Memory

53. The higher the bond rating: A. the higher the interest rate on a bond. B. the lower the interest rate on the bond. C. the higher the call premium. D. the lower the call premium.

Accessibility: Keyboard Navigation Block - Chapter 16 #53 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-08 Bond Ratings Type: Memory

54. Which independent bond rating company is a leader in the United States? A. Royal Bank Dominion Securities B. TD Waterhouse C. S&P D. Canadian Rating

Accessibility: Keyboard Navigation Block - Chapter 16 #54 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-08 Bond Ratings Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

55. To prevent the weakening of debt holder claims, an indenture includes: A. a maturity date. B. a call provision. C. a conversion option. D. restrictive covenants.

Accessibility: Keyboard Navigation Block - Chapter 16 #55 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-03 Restrictive Covenants Type: Memory

56. The best measure of an investor's rate of return is: A. the coupon rate. B. the current yield. C. the yield to maturity. D. nominal yield.

Accessibility: Keyboard Navigation Block - Chapter 16 #56 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

57. Investment grade bonds are rated: A. A and above. B. BBB and above. C. BB and above. D. B and above.

Accessibility: Keyboard Navigation Block - Chapter 16 #57 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

58. In general, floating rate bonds have their interest rate payment adjusted: A. daily. B. weekly. C. quarterly. D. annually.

Accessibility: Keyboard Navigation Block - Chapter 16 #58 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-15 Floating-Rate Bond Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #59 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #60 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-12 Zero-Coupon Bond Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

61. A debenture represents: A. unsecured debt. B. secured debt. C. a long document covering every detail of a bond issue. D. debt that is subordinate.

Accessibility: Keyboard Navigation Block - Chapter 16 #61 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Concept

62. Which of the following is not a form of out-of-court settlement for a financially distressed firm? A. Extension B. Composition C. Assignment D. Reversion

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63. The first priority in liquidation under the bankruptcy laws is to pay: A. senior debt. B. cost of administering the bankruptcy procedures. C. secured debt. D. trade creditors.

Accessibility: Keyboard Navigation Block - Chapter 16 #63 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #64 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #65 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #66 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

67. Which of the following is a form of an in-court settlement? A. Assignment B. Extension C. Composition D. Bankruptcy

Accessibility: Keyboard Navigation Block - Chapter 16 #67 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

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Accessibility: Keyboard Navigation Block - Chapter 16 #69 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #70 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #71 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #72 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

73. A bankrupt firm: A. has a negative net worth. B. cannot sell its assets. C. can meet its obligations as they come due. D. may continue operating, as if it were solvent.

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74. One type of out-of-court settlement in which creditors are requested to accept a new repayment schedule is called a(an): A. composition. B. extension. C. arrangement. D. expansion.

Accessibility: Keyboard Navigation Block - Chapter 16 #74 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #75 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #76 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

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Foundations of Financial Management - 10th Canadian Edition by Block

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80. A bond with a coupon rate of 8.0%, maturing in 10 years at a value of $1,000, and current market price of $753 will have a current yield to maturity of: A. 2.9%. B. 12.5%. C. 9.7%. D. 8.0%.

Accessibility: Keyboard Navigation Block - Chapter 16 #80 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #81 Difficulty: Easy Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-31 Advantages of Leasing Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #82 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #83 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-08 Bond Ratings Type: Memory

84. Many bonds have some orderly preplanned system of repayment. Which of the following do not apply? A. Sinking funds B. Serial bonds C. Single sum payment D. Compensating fund balance

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Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #85 Difficulty: Easy Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-31 Advantages of Leasing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #86 Difficulty: Medium Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-30 Capital Lease versus Operating Lease Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 16 #87 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-15 Floating-Rate Bond Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #88 Difficulty: Medium Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-10 A Capital Budgeting Problem Type: Concept

89. Laura's Design Inc. has a bond with a coupon rate of 12%, maturing in 12 years at $1,000 per bond. The current market price is $940. What is the current yield? A. 13.0% B. 12.6% C. 12.0% D. 11.5%

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90. A bond with a $95 annual coupon, maturing in 10 years at a value of $1,000 has a current market price of $950. What is the yield to maturity of the bond? A. 10.9% B. 10.3% C. 9.5% D. 9.4%

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Railway Co. (RC) issued bonds in 2015 that mature 10 years from today. The bonds have annual coupons of $35 and are currently trading at $910.85.

Block - Chapter 16

Foundations of Financial Management - 10th Canadian Edition by Block

91. RC nominal coupon rate is ______. A. 4.0% B. 3.50% C. 2.30% D. 5.60%

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92. RC's current yield is ________. A. 3.50% B. 3.0% C. 3.84% D. 3.96%

Accessibility: Keyboard Navigation Block - Chapter 16 #92 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

93. Bart purchased a zero coupon bond at $728.84. If the bond matures in 10 years, what is its Yield-toMaturity? A. 3.22% B. 4.35% C. 6.44% D. 7.29%

Accessibility: Keyboard Navigation Block - Chapter 16 #93 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 16 #94 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 16 #95 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

96. A bond indenture is a bond with no specific collateral securing it. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #96 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-02 The Debt Contract Type: Memory

97. Bonds may be recalled only if there is a specific call provision in the bond. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #97 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

98. The value of bonds will move opposite interest rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #98 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

99. The stated interest payment divided by the par value of a bond is called the coupon rate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #99 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Memory

100. The fact that interest payments on debt are fixed is both an advantage and a drawback. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #100 Difficulty: Easy Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-28 Advantages and Disadvantages of Debt Type: Concept

101. The call feature is usually advantageous to the bondholder. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #101 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Concept

102. The call premium tends to increase with the passage of time. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #102 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

103. A bondholder may have paper losses as large as 30-40% or more at some point between the time of issue and redemption. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #103 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

104. The yield to maturity is the internal rate of return on a bond. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #104 Difficulty: Easy Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Memory

105. When interest rates rise, bond refunding becomes quite popular. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #105 Difficulty: Medium Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-09 The Refunding Decision Type: Concept

106. The payment of a call premium may generally be taken as an immediate tax write-off. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #106 Difficulty: Medium Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-10 A Capital Budgeting Problem Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

107. A significant question when making a bond refunding decision is "will interest rates go lower?" TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #107 Difficulty: Medium Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-09 The Refunding Decision Type: Memory

108. In an inflationary economy, debt must be paid back with "more expensive dollars." FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #108 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-28 Advantages and Disadvantages of Debt Type: Concept

109. An operating lease is generally a long-term, non-cancellable obligation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #109 Difficulty: Easy Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-30 Capital Lease versus Operating Lease Type: Memory

110. A finance lease has many of the characteristics of a long-term debt obligation. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #110 Difficulty: Easy Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-29 Leasing as a Form of Debt Type: Memory

111. Par value and maturity value on a bond generally are the same. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #111 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-02 The Debt Contract Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

112. If you expect interest rates to go up, you should buy a long-term bond now. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #112 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

113. The cost of capital is generally not used as the discount rate in a bond-refunding decision. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #113 Difficulty: Medium Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-10 A Capital Budgeting Problem Type: Concept

114. If a company has promised to pay interest on debt, it must pay the interest even if it shows no profit for the year, or else it may go bankrupt. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #114 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-01 The Expanding Role of Debt Type: Concept

115. Long-term interest rates are generally higher than short-term interest rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #115 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-02 The Debt Contract Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

116. Bonds may be secured by different classes of assets such as airplanes. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #116 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-04 Security Provisions Type: Memory

117. A financing lease usually calls for an annual expense deduction equal to the lease payment. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #117 Difficulty: Medium Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-30 Capital Lease versus Operating Lease Type: Memory

118. A capital lease is the same as an operating lease. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #118 Difficulty: Easy Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-30 Capital Lease versus Operating Lease Type: Memory

119. Costs of bond refunding are the call premium and the underwriting cost on the new bond issue. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #119 Difficulty: Easy Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-10 A Capital Budgeting Problem Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

120. The costs of bond refunding are the call premium, and the underwriting costs on the old and new bond issue. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #120 Difficulty: Easy Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-10 A Capital Budgeting Problem Type: Memory

121. A Eurobond is a bond payable in the borrower's currency but sold outside the borrower's country. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #121 Difficulty: Easy Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-18 Eurobond Market Type: Memory

122. Lease obligations currently appear only in the footnotes of Canadian corporate financial statements. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #122 Difficulty: Medium Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-29 Leasing as a Form of Debt Type: Memory

123. The essence of the treatment of long-term, non-cancellable leases is the same as if the company had borrowed the money and bought the asset. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #123 Difficulty: Medium Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-29 Leasing as a Form of Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

124. The inclusion of leases on the balance sheet as an asset and liability has lowered firm's debt to asset ratio. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #124 Difficulty: Medium Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-29 Leasing as a Form of Debt Type: Memory

125. A bond can only be easily refunded if it has a call feature. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #125 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

126. Refunding a bond occurs when the company sells more bonds of the same series with maturity and coupon equal to the bonds sold earlier. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #126 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Concept

127. An after-acquired property clause means that any new property acquired is placed under the original mortgage. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #127 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-04 Security Provisions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

128. Generally the greater the protection offered a given class of bondholders, the higher will be the interest rate on the bonds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #128 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-04 Security Provisions Type: Memory

129. Under a sinking fund provision, money is set aside every year until the bond matures, then the money is used to repay the principal. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #129 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

130. Long-term bond prices are more volatile than short-term bond prices given an equal percentage change in the interest rate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #130 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

131. Leasing land provides a tax advantage to the lessee in that lease payments are tax deductible, while there is no deduction for amortization for a landowner. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #131 Difficulty: Medium Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-31 Advantages of Leasing Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

132. Strip bonds are sold at a deep discount primarily because investors are not interested in them. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #132 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-13 Strip Bond Type: Memory

133. The primary advantage of investing in floating rate bonds is that the bonds will maintain a stable market value within a reasonable limit. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #133 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-15 Floating-Rate Bond Type: Memory

134. Strip bonds are sold at face value. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #134 Difficulty: Easy Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-13 Strip Bond Type: Memory

135. The difference between the initial bond price and the maturity value is amortized for tax purposes over the life of a zero-coupon bond. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #135 Difficulty: Hard Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-12 Zero-Coupon Bond Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

136. The advantage of a strip bond to an investor is that the annual increase in the bond is taxable as ordinary income. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #136 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-13 Strip Bond Type: Concept

137. A floating rate bond's price is inversely related to the changes in interest rates. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #137 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-15 Floating-Rate Bond Type: Concept

138. A floating rate bond has a reasonably stable price but actual interest payments received change often over the life of the bond. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #138 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-15 Floating-Rate Bond Type: Concept

139. During economic upswings, spreads between bonds of different ratings tend to widen. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #139 Difficulty: Hard Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-08 Bond Ratings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

140. The decline in the interest paying capability of corporate borrowers has translated to a dramatic increase in defaults on corporate obligations. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #140 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-01 The Expanding Role of Debt Type: Concept

141. If a corporation offers greater protection to a given class of bondholders, it must raise the interest rate on its bonds to make them more attractive. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #141 Difficulty: Hard Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-08 Bond Ratings Type: Concept

142. One current trend in the bond market is toward more secured debt, as investors become increasingly wary of defaults on unsecured debt. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #142 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

143. The prices of strip bonds tend to react violently to large swings in interest rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #143 Difficulty: Medium Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-13 Strip Bond Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

144. In a sale-and-leaseback arrangement, a firm would sell an asset it already owns to another party and then lease the asset back from that party. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #144 Difficulty: Easy Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-30 Capital Lease versus Operating Lease Type: Memory

145. Under the borrowing-purchasing decision compared to leasing, we must consider not only the amount of the payment but also separate out those items that are tax deductible. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #145 Difficulty: Easy Learning Objective: 16-06 Analyze a lease versus borrow-to-purchase decision. Topic: 16-32 Lease-versus-Purchase Decision Type: Memory

146. The decision to lease rather than purchase will not be affected by the method of amortization used under the purchase method. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #146 Difficulty: Easy Learning Objective: 16-06 Analyze a lease versus borrow-to-purchase decision. Topic: 16-32 Lease-versus-Purchase Decision Type: Concept

147. In the lease-versus-purchase decision, the discount rate used in the present value analysis is the after-tax cost of debt. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #147 Difficulty: Easy Learning Objective: 16-06 Analyze a lease versus borrow-to-purchase decision. Topic: 16-32 Lease-versus-Purchase Decision Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

148. When a company defaults on a secured debt, it is rare for the secured asset to be sold and the proceeds distributed to the debtor. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #148 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-04 Security Provisions Type: Memory

149. Debentures are commonly issued by small corporations. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #149 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

150. Bonds with a call premium generally trade at higher yields than bonds without call premiums. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #150 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

151. A firm may be technically insolvent even though it has a positive net worth. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #151 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

152. A composition means a distressed firm will be given more time to pay its bills. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #152 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

153. An assignment is a form of out-of-court liquidation. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #153 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

154. An internal reorganization may be considered when a merger partner is found for the firm. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #154 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

155. After assets against which liens are held are disposed of, secured creditors participate equally with unsecured creditors. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #155 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

156. A composition is an alternative to formal bankruptcy proceedings in which creditors agree to accept a portion of their original claims. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #156 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

157. A majority of creditors must refuse to accept an out-of-court settlement before formal bankruptcy proceedings will begin. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #157 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

158. A creditor committee may be established to run a business when management's only other alternative to prevent bankruptcy is composition. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #158 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

159. Management of a firm may accept a creditor committee only as a last resort before bankruptcy. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #159 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

160. Bankruptcy proceedings may be initiated either by the distressed company or its creditors. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #160 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

161. A firm in bankruptcy may be either liquidated or reorganized, but not both. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #161 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

162. In a liquidation, each claim against the assets of the firm will be satisfied equally. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #162 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

163. Internal reorganization may involve a change in the firm's capital structure. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #163 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

164. Federal, provincial, and local taxes due have a first priority claim against assets in a bankruptcy proceeding. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #164 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

165. An out-of-court settlement will hardly ever involve both extension and composition. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #165 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

166. Bankruptcy refers to a circumstance where a firm is unable to pay its bills as they come due. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #166 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

167. In an extension settlement, creditors agree to allow the firm more time to meet its financial obligations. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #167 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

168. Establishing a creditor committee to run the business is a type of in-court settlement. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #168 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

169. Both an extension and a creditor committee cannot be established. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #169 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

170. In the priority of claims in bankruptcy liquidation, taxes due at the federal or provincial level have rights of first payment. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #170 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

171. Generally when a firm is considered bankrupt, the liquidation value of the assets is less than the book value of the assets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #171 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

172. The three highest priority levels in bankruptcy include the cost of administering the proceedings, past wages due to workers, and overdue interest payments to creditors. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #172 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

173. A debenture is a bond that has as part of its underlying contract collateral. FALSE

Accessibility: Keyboard Navigation Block - Chapter 16 #173 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Concept

174. Negative pledges limit an issuer from issuing more debt that has security (collateral) pledges ahead of existing debts. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #174 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-03 Restrictive Covenants Type: Concept

175. The after acquired property clause is a requirement in a bond issue stipulating that any new equipment purchased after the issue be placed under the original mortgage. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #175 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-04 Security Provisions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

176. Eurocurrencies are units of currency deposited in banks outside of the country issuing the currencies. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #176 Difficulty: Easy Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-18 Eurobond Market Type: Memory

177. Under a sinking-fund provision, semi-annual or annual contributions are made by the corporation into a fund administered by the trustee for purposes of debt retirement. TRUE

Accessibility: Keyboard Navigation Block - Chapter 16 #177 Difficulty: Easy Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-06 Methods of Repayment Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

178. List and discuss reasons why a firm might decide to lease instead of purchase equipment. Major reasons for the popularity of leasing include the following: 1. The lessee may lack sufficient funds or the credit capability to purchase the asset from a manufacturer that is willing, however, to accept a lease agreement or to arrange a lease obligation with a third party. 2. The provisions of a lease obligation may be substantially less restrictive than those of a bond indenture. 3. There may be no down payment requirement, as would generally be the case in the purchase of an asset (leasing allows for a larger indirect loan). 4. The lessor may possess particular expertise in a given industry—allowing for expert product selection, maintenance, and eventual resale. Through this process the negative effects of obsolescence may be lessened. 5. Creditor claims on certain types of leases, such as real estate, are restricted in bankruptcy and reorganization proceedings. Leases on chattels (non-real-estate items) have no such limitation. 5. There are also some tax factors to be considered. Where one party to a lease is in a higher tax bracket than the other party, certain tax advantages, such as an investment tax credit, may be better utilized. For example, a wealthy party may purchase an asset and take an investment tax credit then lease the asset to another party in a lower tax bracket for actual use. 6. Also, lease payments on the use of land are tax deductible, whereas land ownership does not allow a similar deduction for amortization. 7. A firm may wish to engage in a sale-and-leaseback arrangement to provide it with an infusion of capital while allowing it to continue to use the asset. Even though the dollar costs of a leasing arrangement are often higher than the dollar costs of owning an asset, the advantages just cited may outweigh the direct cost factors.

Block - Chapter 16 #178 Difficulty: Hard Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. Topic: 16-31 Advantages of Leasing Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

179. List and describe 4 out-of-court settlement alternatives for financially distressed firms. Out-of-court settlements may take many forms. Four alternatives were examined in the text. 1. An extension in which creditors agree to allow the firm more time to meet its financial obligations. A new repayment schedule is developed subject to the acceptance of the creditors. 2. A composition, under which creditors agree to accept a fractional settlement of their original claim. They may be willing to do this because they believe the firm is unable to meet its total obligations, and they wish to avoid formal bankruptcy procedures. In the case of either a proposed extension or a composition, some creditors may not agree to go along with the arrangements. If their claims are relatively small, major creditors may allow them to be paid off immediately and in full to hold the agreement together. If their claims are large, no out-ofcourt settlement may be possible and formal bankruptcy proceedings may be necessary. 3. A creditor committee may be established to run the business. Here, the parties involved judge that management can no longer effectively conduct the affairs of the firm. Once the creditors' claims have been partially or fully settled, a new management team may be brought in to replace the creditor committee. The outgoing management may be willing to accept the imposition of a creditor committee only when formal bankruptcy proceedings appear likely and they wish to avoid that stigma. There are also circumstances in which creditors are unwilling to form such a committee because they fear lawsuits from other dissatisfied creditors or from common or preferred shareholders. 4. An assignment, in which liquidation of assets occurs without going through formal court action. To effect an assignment, creditors must agree on liquidation values and the relative priority of claims. This is not easy. In actuality, there may be combinations of two or more of the just described out-of-court procedures. For example, there may be an extension as well as a composition, or a creditor committee may help to establish one or more of the alternatives.

Block - Chapter 16 #179 Difficulty: Medium Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

180. List and describe the 3 bases on which bond yields are quoted. Use a $1,000 bond paying $100/year for 10 years and currently selling in the market for $900 as the basis for your example. Bond yields are quoted on three different bases: coupon rate, current yield, and yield to maturity. To illustrate we apply each to a $1,000 par value bond paying $100 per year interest for 10 years and currently selling in the market for $900. Coupon Rate (Nominal Yield) Stated interest payment divided by the par value is the coupon rate. Generally the coupon rate is fixed under the terms of the indenture. $100/1000 = 10% Current Yield The stated interest payment divided by the current price of the bond gives the current yield. The current yield is focused short-term and does not consider the time to maturity. $100/$900 = 11.11% Yield to Maturity The interest rate that equates future interest payments and the payment at maturity to the current market price is the yield to maturity. This represents the concept of the internal rate of return. It is the most instructive yield calculation. In our illustration we determine an internal rate of 11.75%. This is the discount rate, we call yield (YTM) that equates the annual interest payments of $100 for 10 years and the final payment of $1,000 to the current price (PV) of $900.

Block - Chapter 16 #180 Difficulty: Hard Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

181. List and rank from highest to lowest the 8 possible ratings a bond can have, as determined by Dominion Bond Rating Service and S&P's rating service. What factors determine these ratings? What influence do the ratings have? Bonds receive ratings on the basis of the corporation's management, its ability to make interest payments, consistency of performance, size, working capital position, financial ratios, and a number of other factors. The rating service calculates ratios such as profit margins, coverage ratios, debt to equity, and total liabilities to equity. There is also a close examination of the debt indenture to identify the protection afforded the debt holder. The rating systems of Dominion Bond Rating Service and S&P's Rating Service are outlined below: Description Highest AAA, AA, A, BBB Speculative or medium quality BB, B, CCC Default D A higher rating indicates a lower amount of risk. The higher the rating assigned a given issue, the lower the interest payments required to satisfy potential investors. A major corporation may be able to issue a bond with a considerably lower yield to maturity because it is rated AA by the Dominion Bond Rating Service, but a smaller, riskier firm may qualify for only a BB rating and be forced to pay a higher rate. The yield spread between higher- and lower-rated bonds varies with economic conditions. If investors are pessimistic about the economy, they might accept as much as 3 percent less to hold high-quality securities, though in normal times the spread might be only 1 percent.

Block - Chapter 16 #181 Difficulty: Hard Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-08 Bond Ratings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

182. Describe the characteristics of a zero-coupon rate bond. Zero-Coupon Rate Bond • With a zero-coupon rate bond, there is no interest payment; the bonds are sold at a deep discount from face value. • The return to the investor is the difference between the investor's cost and the face value received at the end of the life of the bond. • The zero-coupon bond has had limited appeal in Canada. • Zero-coupon bonds have been issued in Canadian dollars in the eurobond market. • Canadian companies have issued zero-coupon bonds in the U.S. and Canadian markets based on cash flow considerations in recent years. • The issuing corporation receives the immediate cash inflow, without any outflow until the bonds mature. • The difference between the initial bond price and the maturity value may be amortized for tax purposes by the corporation over the life of the bond. This means that the corporation takes annual deductions without current cash outflow.

Block - Chapter 16 #182 Difficulty: Hard Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-12 Zero-Coupon Bond Type: Concept

183. Describe the characteristics of a Strip Bond. Strip Bond • A strip bond is arranged by an investment dealer and is based on government securities and, more recently, on corporate bonds. • The actual coupons and the face value of the security are sold separately with differing maturities to suit the investor. The securities are sold at a fraction of face value and are ultimately redeemed at full value. • The investor receives no interest but a fixed return on the initial investment. There is no need to be concerned about reinvesting coupon payments at possibly lower rates of return. • The major drawback is that the difference in value between the purchase price and the maturity must be amortized on a straight-line basis as interest income over the number of years to maturity, and tax must be paid annually on this interest income, even though the bondholder does not have a cash return until maturity. • Strip bonds are favoured by institutes with tax-exempt or -deferred status, and those who like to more precisely match their assets (the bonds) with their future liabilities. • The prices of strip bonds tend to be highly volatile when there are changes in interest rates, due to the fact there is no annual interest payment to modify the effects of interest rate changes in the marketplace.

Block - Chapter 16 #183 Difficulty: Hard Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-13 Strip Bond Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

184. Describe the characteristics of a Floating-Rate Bond. Floating Rate Bond • Floating-rate bonds, popular in European capital markets, allow the interest rate paid on the bond to change with market conditions (usually monthly or quarterly). The interest rate is usually tied to some overall market rate, such as the yield on Treasury bills or the prime rate. Thus, a bond that was initially issued to pay 6 percent may lower the interest payments to 4 percent during some years and raise them to 9 percent in others. • The investor has a constant (or almost constant) market value for the security, even though interest rates vary. The one exception that can cause a change to this principle is that floating-rate bonds often have broad limits that interest payments cannot exceed. For example, the interest rate on a 6 percent initial offering may not be allowed to go over 13 percent or below 4 percent. If long-term interest rates dictated an interest payment of 15 percent, the payment would still remain at 13 percent. This could cause some short-term loss in market value. To date, floating-rate bonds have been relatively free of this problem. • Floating-rate bonds still represent a relatively small percentage of the total market of new debt offerings.

Block - Chapter 16 #184 Difficulty: Hard Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-15 Floating-Rate Bond Type: Concept

185. Describe the characteristics of a Eurobond. Eurobond • A eurobond is a bond issued and traded outside the country, payable in currency that is not legal tender of the trading country. • International investment dealer syndicates place eurobonds all over the world. These issues allow corporations to tap the resources of this large market of funds. Although these issues in euros carry exchange risk, an issue in Canadian dollars in the euromarket would not be subject to exchange rate fluctuations. • Eurocurrencies are units of currency deposited in banks outside of the country issuing the currencies. Of such deposits, the U.S. eurodollar is the most prevalent. • Disclosure requirements in the eurobond market are less demanding than those of Canadian domestic regulatory agencies. • Investors in eurobonds are generally not able to rely on bond rating agencies, though Moody's and S&P's have been rating selected eurobond issues for a fee. An example might be a bond of a Canadian corporation that is payable in U.S. dollars and sold in London, Paris, Tokyo, or Singapore.

Block - Chapter 16 #185 Difficulty: Hard Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-18 Eurobond Market Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

186. Discuss the advantages and disadvantages of debt as a financing method. Advantages of Debt • The financial obligation is clearly specified and is of a fixed nature (with the exception of floating-rate bonds). • In an inflationary economy, debt may be paid back with cheaper dollars with declined purchasing power. • The use of debt, to the extent that it does not strain the risk position of the firm, may lower the cost of capital to the firm with its low aftertax cost. • Interest payments are tax-deductible Disadvantages of Debt • Interest and principal payment obligations are set by contract and must be met regardless of the economic position of the firm. • Bond indenture agreements may place burdensome restrictions on the firm to maintain financial ratios. Bondholders may take virtual control of the firm if important indenture provisions are not met. • Utilized beyond a given point, debt may depress outstanding common stock values.

Block - Chapter 16 #186 Difficulty: Hard Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zero-coupon rate bonds; floating-rate bonds; and real return bonds. Topic: 16-28 Advantages and Disadvantages of Debt Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 16 #187 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 16 #188 Difficulty: Medium Learning Objective: 16-03 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined. Topic: 16-10 A Capital Budgeting Problem Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 16 #189 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 16 #190 Difficulty: Hard Learning Objective: 16-06 Analyze a lease versus borrow-to-purchase decision. Topic: 16-32 Lease-versus-Purchase Decision Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

A) Common shareholders will receive nothing. The liquidation value of the assets is less than the liabilities. B) The secured creditor holding the first lien will receive $185,294 in total, determined as $150,000 from the sale of machinery and equipment plus $35,294 in the allocation process as shown below.

c) Senior unsecured debt = $88,235 (see table above)

Block - Chapter 16 #191 Difficulty: Hard Learning Objective: 16-01 Identify and describe the key features of long-term debt. Topic: 16-05 Unsecured Debt Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

C) FV = $1,000 PV = -950 PMT = $90 n = 10 Compute i = 9.11

Block - Chapter 16 #192 Difficulty: Medium Learning Objective: 16-02 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services. Topic: 16-07 Bond Prices, Yields, and Ratings Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 16 Summary Category

# of Quest ions

Accessibility: Keyboard Navigation

177

Block - Chapter 16

193

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 16-01 Identify and describe the key features of long-term debt.

Learning Objective: 1602 Differentiate bond yields and prices as influenced by how corporations and governments are rated by bond rating services.

Learning Objective: 1603 Analyze the decision of whether or not to call in and reissue debt (refund the obligation) when interest rates have declined.

Learning Objective: 16-04 Outline some of the features of innovative forms of raising long-term financing; including zerocoupon rate bonds; floating-rate bonds; and real return bonds.

Learning Objective: 16-05 Outline the characteristics of long-term lease financing that make it an alternative form of longterm financing.

Learning Objective: 16-06 Analyze a lease versus borrow-to-purchase decision.

Topic: 16-01 The Expanding Role of Debt

Topic: 16-02 The Debt Contract

Topic: 16-03 Restrictive Covenants

Topic: 16-04 Security Provisions

Topic: 16-05 Unsecured Debt

Topic: 16-06 Methods of Repayment

Topic: 16-07 Bond Prices, Yields, and Ratings

Topic: 16-08 Bond Ratings

Topic: 16-09 The Refunding Decision

Topic: 16-10 A Capital Budgeting Problem

Topic: 16-12 Zero-Coupon Bond

Topic: 16-13 Strip Bond

Topic: 16-15 Floating-Rate Bond

Topic: 16-18 Eurobond Market

Topic: 16-28 Advantages and Disadvantages of Debt

Topic: 16-29 Leasing as a Form of Debt

Topic: 16-30 Capital Lease versus Operating Lease

Topic: 16-31 Advantages of Leasing

Topic: 16-32 Lease-versus-Purchase Decision

Type: Concept

Type: Memory

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Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 17 1. The effect of a rights offering on a shareholder is: A. to increase his/her wealth. B. to increase his/her wealth only if the new stock is purchased. C. to decrease his/her wealth unless the stock is purchased. D. to decrease his/her wealth if nothing is done.

2. Preferred stock may be good for a company because it: A. expands the capital base of the firm without diluting the common stock ownership. B. does not require interest payment in times of financial trouble, but are tax-deductible when dividends are paid. C. is not as costly as common stock or bonds. D. gives up no control even when dividend payments are missed.

3. The subscription price is generally _______ than the rights-on price and _______ than the ex-rights price. A. higher; higher B. higher; lower C. lower; higher D. lower; lower

4. Given that there are 4,000,000 shares outstanding in a corporation, how many shares will be required for a minority group of shareholders to elect 3 of the 11 members on the board of directors? (Assume cumulative voting required) A. 800,001 B. 1,000,001 C. 1,090,910 D. 1,000,000

5. A stock sells for $45 rights-on, the subscription price is $41. Seven rights are required to purchase one share. The value of a right is: A. $5.50. B. $0.50. C. $5.00. D. $0.57.

Foundations of Financial Management - 10th Canadian Edition by Block

6. Ten rights are necessary to purchase one share of stock $84. A right sells for $6.30. The ex-rights value of the stock is: A. $147. B. $105. C. $63. D. $154.

7. The most important feature of the preemptive right is that the rights: A. may be sold for profit. B. afford shareholders protection against dilution. C. may be cumulatively voted. D. are non-transferable.

8. If a corporate charter includes a provision for preemptive rights, the shareholders: A. must sell their shares to the company. B. get first option to buy additional issues of common shares. C. may purchase existing treasury shares. D. cannot utilize cumulative voting procedures.

9. A proxy is: A. a device for circumventing regular voting procedures. B. a coupon attached to each share of stock and used by the shareholder in casting his vote on current issues. C. an authorization of a registered shareholder to another person to act in his place at the general meeting. D. a warrant allowing a shareholder to purchase a specified number of additional shares at a given price.

10. Which of the following statements is true with respect to cumulative voting? A. Cumulative voting requires 33% of board members to be re-elected every three years. B. Cumulative voting gives majority shareholders a better chance of being represented on the board of directors. C. If 6 directors are to be elected and you own 100 shares, you may vote all 100 votes for one director and none for the others. D. If 6 directors are to be elected and you own 100 shares, you may vote all 600 votes for one director and none for the others.

11. Advantages that the American Depositary Receipts (ADRs) have over investing in actual shares of a foreign stock include all but the following; A. ADRs are an effective barrier to foreign currency risk. B. Unlike direct foreign stock, ADRs have financial statements presented in a US GAAP or IFRS format. C. Dividends are paid in dollars and easier to collect than actual shares of foreign stock. D. ADRs are more liquid and less expensive than buying foreign stock directly.

Foundations of Financial Management - 10th Canadian Edition by Block

12. If a preferred stock is of the cumulative type,: A. the dividends must be paid on an equal basis with common so long earnings permit. B. the dividends cannot be passed if they are not earned. C. the cumulative voting rule applies in the exercise of the voting privilege. D. unpaid dividends of one period must be carried forward and paid in subsequent periods before anything can be paid to common shareholders.

13. A share is said to sell "ex-rights": A. when the period in which the subscription privilege is to be exercised has expired. B. when transfer of share ownership no longer carries with it the privilege of subscription. C. after the rights have all been exercised and the new issue is completely sold. D. after the terms of the subscription have been made public.

14. "Preemptive rights" means that: A. existing shareholders can prevent management from issuing additional common stock. B. common shareholders can "preempt" preferred shareholders for dividends. C. existing common stock shareholders are guaranteed an opportunity to retain their proportional share of ownership of the firm. D. management can preempt the right of shareholders to receive dividends if earnings are down.

15. Which of the following actions will provide the shareholders with the least total wealth when a company makes a rights offering? A. Exercise the rights for new shares. B. Sell the rights themselves and hold existing shares and cash. C. Exercise the rights and sell the shares. D. Do no sell or exercise the rights.

16. Which of the following is not a true statement? A. Common shareholders have a residual claim to income. B. Bondholders may force a corporation into bankruptcy for failure to make interest payments. C. Common shareholders are legally entitled to some dividend. D. A minority interest can still elect members to the board of directors under cumulative voting even though someone else owns 51% of the stock.

17. The purpose of cumulative voting is: A. to maintain majority control of the board of directors. B. to allow minority shareholders the possibility of a voice on the board of directors. C. to obstruct unfriendly mergers and takeover efforts. D. to prevent the dilution of common stock through preemptive rights offerings.

Foundations of Financial Management - 10th Canadian Edition by Block

18. Which of the following is not true about preferred stock? A. 100% of dividends are nontaxable to other corporations which hold preferred stock. B. The aftertax cost is higher than debt with the same yield. C. Dividends are legal obligations of the firm. D. Preferred stocks are often cumulative in respect to dividends.

19. Why do companies tend to issue preferred stock less then commons stock and bonds? A. Flotation cost of preferred stock is low compared to bonds. B. Preferred dividends are considered regular (fixed) obligations but are not tax-deductible. C. Preferred shareholders are entitled to receive stipulated dividends before common shareholders. D. Preferred stock typically has cumulative dividends.

20. Preferred stock is often sold by companies: A. wanting to balance their capital structures. B. that have a small amount of debt relative to equity. C. looking for the taxable advantages of preferred dividends over common share dividends. D. that want to reduce dividend payments and avoid bankruptcy.

21. Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative. The dividend is $6.50 per share and has not been paid for 3 years. If Kuhns retained earnings and after tax income this year total $3 million, what could be the maximum payment to the preferred shareholders on a per share basis? A. $19.50 per share B. $15.00 per share C. $13.00 per share D. $6.50 per share

22. Under normal operating conditions the board of directors elected by: A. the common shareholders. B. the preferred shareholders. C. the bondholders. D. the board of directors.

23. The disadvantage of a rights offering is: A. current shareholders are protected against dilution. B. the firm has a built-in market of knowledgeable investors. C. distribution costs are lower than a public offering. D. shareholders who do not exercise or sell rights will have their ownership diluted.

Foundations of Financial Management - 10th Canadian Edition by Block

24. Which of the following statements about floating rate preferred stock is true? A. The dividend rate changes quarterly relative to money market rates. B. The price of the stock will fluctuate with the market. C. The dividend rate is tied to the inflation rate. D. The conversion rate changes annually relative to bankers' acceptance rates.

25. A rights offering: A. gives a firm a built-in market for new securities. B. will likely lead to considerably higher distribution costs. C. will increase the shareholder's total valuation. D. is the least expensive way to raise capital.

26. The floating rate feature on preferred stock allows the shareholders: A. to receive more dividends than the quoted yield when the firm enjoys a good year. B. to pay lower taxes when the dividend yield increases. C. to receive dividends which the corporation did not pay in previous years. D. to receive a higher or lower dividend yield depending on current competitive market conditions.

27. Which of the following is not a very common feature of preferred stock? A. Cumulative dividends B. Voting rights C. Call feature D. Conversion feature

28. Which of the following is the correct order of corporate issues based on risk and return? (Most risk-return to least risk-return) A. Common stock, subordinated debentures, secured debt, treasury bills. B. Preferred stock, common stock, subordinated debentures, secured debt. C. Common stock, long-term government bonds, secured debt, subordinated debt. D. Common stock, secured debt, subordinated debentures, preferred stock.

29. Which of the following is not true about rights trading on organized exchanges? A. Rights trade at low prices B. Continuous trading of a right for long periods of time (similar to stocks) C. Rights trading tends to surge during bull markets D. The period during which rights may be bought, sold, or exercised is usually four to six weeks after what is termed the ex-rights date.

Foundations of Financial Management - 10th Canadian Edition by Block

30. The Jersey Corp. is considering four investments. Which provide the highest aftertax return for Jersey Corp. If it is in the 40% tax bracket? A. Government of Canada bonds at 12.0% B. Corporate bonds at 13.2% C. Municipal bonds at 8.4% D. Preferred stock at 10.8%

31. Firm X has 150,000 outstanding shares and 9 directors. Joe Stone owns 37,500 shares of firm X. How many directors can Joe elect with cumulative voting? A. 0 B. 1 C. 2 D. 3

32. Firm Y has 5,000,000 outstanding shares. There are 11 directors on the firm's board. The Bubba family owns 20% the firm's stock. How many directors can the Bubba family elect by themselves if firm Y uses majority voting? A. 0 B. 1 C. 2 D. 3

33. A rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm to acquire the company is called: A. a preemptive right. B. a poison pill. C. ex-rights. D. rights-on.

34. All of the following statements are true except: A. poison pills discourage hostile takeovers. B. poison pills discourage potential high takeover bids. C. shareholders have to approve the acceptance of poison pill strategies before a corporation can use them. D. many institutional investors are opposed to the poison pill.

Foundations of Financial Management - 10th Canadian Edition by Block

35. XYZ corporation is issuing preferred stock yielding 10%, and ABC Corporation is considering buying the stock. XYZ's tax rate is 20% and ABC's tax rate is 34%. What is the aftertax preferred yield for ABC? A. 3.4% B. 10.0% C. 6.6% D. 8.98%

36. The following are primary purchasers of preferred stock except: A. corporate investors. B. insurance companies. C. pension funds. D. individual investors.

37. A coattail provision is: A. an anti-takeover device. B. designed to bring all shareholders a similar price offer. C. a motivational tool for employees. D. a means of placing shares in friendly hands.

38. To the corporate investor, preferred stock offers which of the following advantages? A. A slightly higher yield than debt. B. 25% of preferred dividends are tax-exempt. C. 100% of preferred dividends are tax-exempt. D. Less risk than bonds due to ownership.

39. Dutch auction preferred stock: A. is issued first to the bidder willing to accept the lowest yield. B. matures every seventeen weeks and is re-auctioned at a subsequent bidding. C. allows foreign investors to take advantage of preferred stock tax benefits. D. occurs only in Europe.

40. When comparing common stock of the same company it is fair to say that: A. all shares, no matter how many classes, are all created with the same equal rights. B. companies sometimes have two different classes of shares with unequal rights to dividends and votes. C. the securities commissions allow only one class of common stock. D. investors are indifferent between class A and class B shares.

Foundations of Financial Management - 10th Canadian Edition by Block

41. American Depositary Receipts (ADRs) are: A. receipts sent to foreign shareholders who own American companies. B. proof of ownership for Eurodollar deposits held by Americans. C. certificates that have a legal claim on an ownership interest in a foreign company's common stock. D. certificates in U.S. companies that allow foreign investors to buy shares of American companies.

42. American Depositary Receipts: A. have annual reports and financial statements presented in English. B. pay dividends in Euro's. C. are more liquid and more expensive to buy than foreign stock. D. are an alternative method to list on the world's largest capital market, the TSX.

43. Which of the following are benefits of a rights offering? A. Rights offerings increase return on equity. B. Rights offerings substantiate higher debt to equity ratios. C. Rights offerings decrease earnings per share. D. Rights offerings raise capital for the firm.

44. Given that there are 6,000,000 shares outstanding in a corporation, how many additional shares will be required for a minority group of shareholders to elect 4 of the 14 members on the board of directors? (Assume cumulative voting required. Assume the group already owns 400,000 shares.) A. 1,600,001 B. 1,000,001 C. 1,714,286 D. 1,200,001

45. A stock sells for $50 rights-on, the subscription price is $40. Nine rights are required to purchase one share. The value of a right is: A. $1.00. B. $10.00. C. $1.11. D. $5.00.

46. Nine rights are necessary to purchase one share of stock $99. A right sells for a $7.70. The ex-rights value of the stock is: A. $99.00. B. $168.30. C. $106.70. D. $69.30.

Foundations of Financial Management - 10th Canadian Edition by Block

47. Which of the following statements is true with respect to cumulative voting? A. Cumulative voting permits one votes for a single director. B. Cumulative voting gives minority shareholders less chance of being represented on the board of directors. C. If 6 directors are to be elected and you own 100 shares, you may vote all 600 votes for one director and none for the others. D. Cumulative voting allows the voter to add one vote for every share owned.

48. Advantages that the American Depositary Receipts (ADRs) have over investing in actual shares of a foreign stock include all but the following; A. Unlike direct foreign stock, ADRs have financial statements presented in a US GAAP or IFRS format. B. Dividends are paid in dollars and easier to collect than actual shares of foreign stock. C. ADRs are more liquid and less expensive than buying foreign stock directly. D. Have annual reports and financial statements presented in French, Spanish and Mandarin.

49. Preferred stock is the most used of all long-term securities because? A. Investors can get higher returns after taxes than from other investments. B. Preferred dividends are considered regular (fixed) obligations. C. Flotation costs are extremely low compared to bonds. D. It is not the most used security due to no right to vote.

50. Preferred stock is often sold by companies: A. to expand the capital base without incurring contractual debt obligation. B. that have a large amount of assets and small amount of debt. C. looking for the taxable shelter of preferred dividends. D. that are trying to reduce their dividend obligations.

51. Davis Aquatic Corp. has 300,000 shares of preferred stock outstanding that is cumulative. The dividend is $8.00 per share and has not been paid for 2 years. If Davis Aquatic Corp. retained earnings and after tax income this year total $3 million, what could be the maximum payment to the preferred shareholders on a per share basis? A. $10.00 per share B. $16.00 per share C. $2.00 per share D. $8.00 per share

Foundations of Financial Management - 10th Canadian Edition by Block

52. A "poison pill": A. protects current shareholders against dilution. B. may lower the potential for maximizing shareholder value by discouraging potential high takeover bids. C. may attract potential investors who will take over the company. D. are voted in by all shareholders.

53. A firm has 200,000 outstanding shares and 11 directors. Doug owns 15,500 shares of this firm. How many directors can Doug elect with cumulative voting? A. 0 B. 1 C. 2 D. 3

54. Corporation A is issuing preferred stock yielding 9%, and Corporation B is considering buying the stock. Corp A's tax rate is 23% and Corp B's tax rate is 39%. What is the aftertax preferred yield for Corp A? A. 9% B. 6.9% C. 5.5% D. 8.9%

55. To the corporate investor, common stock offers which of the following advantages? A. Highest claim on assets B. Moderate risk, moderate return C. 100% of dividends are tax-exempt D. 50% of dividends are tax exempt

56. American Depositary Receipts: A. do not have annual reports. B. pay dividends in euros. C. are less liquid and less expensive to buy than foreign stock. D. are more liquid and less expensive to buy than foreign stock.

57. You are a shareholder in Trees N Things (TNT) and you would like to elect 6 of the 11 members of the Board of Directors. If there are 3.5 million shares outstanding what is the minimum number of shares required to elect your slate of directors under cumulative voting? A. 2,000,001 B. 3,000,001 C. 1,909,091 D. 1,750,001

Foundations of Financial Management - 10th Canadian Edition by Block

58. SED Corporation's shares are currently trading at $52.50. Shareholders have the right to buy 1 share of SED for every 5 rights they own at a price of $48.00. SED's rights trade at $_________? A. $0.75 B. $1.75 C. $3.75 D. $4.50

59. If SED's shares trade ex-rights at $51.75, carry a subscription price of $48 a share, and can be purchase by shareholders in a ratio of 5 rights per share, SED's rights trade at ______. A. $0.75 B. $1.75 C. $3.75 D. $4.50

60. XYZ's rights currently trade at $7.60. Each right can be used to buy one share of XYZ at $27.92 based on a subscription ratio of 5 rights for each share purchased. XYZ's current cum rights share price is _______. A. $73.52 B. $35.52 C. $65.92 D. $87.50

61. Shareholders always have preemptive rights when new issues of stock are offered. True False

62. Bondholders never have any control over the actions of a firm. True False

63. Preferred stock dividends are a deductible expense for a corporation. True False

64. The aftertax cost of debt is cheaper than preferred stock to the issuing corporation. True False

Foundations of Financial Management - 10th Canadian Edition by Block

65. If the market value of a stock when the shares are trading ex-rights is $57 and 9 rights are required to buy one share of stock at the subscription price of $45, then the rights are worth $1.33. True False

66. The difference between the rights-on and ex-rights price is equal to the subscription price divided by N. True False

67. The difference between the rights-on and ex-rights common stock price is equal to the value of a right. True False

68. The ex-rights date usually takes place after the end of the subscription period. True False

69. A rights offering may be of limited value to shareholders. True False

70. Shares purchased through a rights offering may carry lower margin requirements. True False

71. Preferred stock generally carries a higher interest rate than debt. True False

72. Participating preferred stock is advantageous to common shareholders. True False

73. To the security holder, preferred stock offers the highest risk and the lowest return. True False

74. To the individual recipient, preferred stock dividends offer no advantage over common stock dividends. True False

Foundations of Financial Management - 10th Canadian Edition by Block

75. If a company has preferred stock, it must pay the dividends on the preferred even if it shows no profit for the year. True False

76. Because of tax considerations, corporations are able to issue preferred stock at a slightly lower yield than debt. True False

77. Corporations are able to issue preferred stock at a slightly lower pre-tax yield than debt. True False

78. Common shareholders have a residual claim to income, in other words they are last in line. True False

79. A common shareholder cannot force a company into bankruptcy for eliminating the dividend. True False

80. After a rights offering, the common stock will sell at the subscription price. True False

81. When a stock sells ex-rights the sale of the shares no longer entitles the purchaser to receive a right. True False

82. Participating preferred stock may receive an extra dividend in a particularly good year when earnings are above a stated level. True False

83. The dividend rate paid on floating rate preferred stock will be equal to the market rate at the time dividends are paid. True False

Foundations of Financial Management - 10th Canadian Edition by Block

84. The market price of floating rate preferred stock is less volatile than that of regular preferred stock. True False

85. Floating rate preferred stock allows shareholders to receive more or less than the quoted dividend based on the firm's success. True False

86. The floating rate feature on preferred stock causes more volatility in its price. True False

87. Common shareholders have a legal claim to dividend income. True False

88. When a cumulative voting method is used, it is possible for those who hold less than a 50 percent interest to elect board members. True False

89. Share classes are similar to bond ratings in that they are used to rank the performance of different corporation's stock. True False

90. Share classes may differ in both voting rights and dividend rights. True False

91. Participating preferred stock gives its owners voting rights. True False

92. Generally the receipt of corporate bond interest is more valuable than preferred dividends to corporate investors. True False

Foundations of Financial Management - 10th Canadian Edition by Block

93. Occasionally, a company will have several classes of common stock, with each class carrying different rights to dividends and income. True False

94. Common shareholders may assign a proxy, or the power to cast their ballot, only when majority voting is in place. True False

95. The type of shareholder voting has become less important with the influence of takeover, leveraged buyouts, and other challenges to management control. True False

96. Shares purchased through a rights offering usually carry lower margin requirements. True False

97. A poison pill will raise the potential for maximizing shareholder value because it deters takeover bids. True False

98. Current shareholders are a built-in market for raising capital at a cost below that of underwriting a new issue. True False

99. Pre-emptive rights provision ensures that management cannot subvert the position of present shareholders by selling shares to outside interests without first offering them to current shareholders. True False

100. Convertible exchangeable preferreds give the holder the sole right to exchange their preferred shares for common shares. True False

101. Some preferred shares are participating preferreds and this may allow for an increase in the preferred share dividend when the common share dividend equals the preferred share dividend. True False

Foundations of Financial Management - 10th Canadian Edition by Block

102. Preferred and common stock dividends are a deductible expense for a corporation. True False

103. Both preferred and common shareholders are entitled to receive all or a portion of a corporation's residual income. True False

104. Preferred shareholders have a contractual claim against a corporation for dividends not declared by the Board of Directors. True False

105. Pre-emptive rights do not protect shareholders from dilution of their ownership position. True False

106. The period during a rights offering when the shares no longer include rights to purchase additional shares of common stock is called the ex-rights period. True False

107. If the shareholder is no better off in terms of total valuation, why undertake a rights offering? What are the advantages of a rights offering?

108. Define and describe the characteristics of American Depositary Receipts (ADRs).

Foundations of Financial Management - 10th Canadian Edition by Block

109. A preferred stock issue contains a number of stipulations and provisions that define the shareholder's claim to income and assets. List and briefly describe these stipulations and provisions.

110. Describe income trusts. What is the purpose of an income trust?

111. Krager Foods Corp. has 700,000 shares outstanding. General Grocery, one of its subsidiaries, is disgusted with current management practices and is trying to get some of its own people elected to the board of directors. There are 15 directors, and General Grocery controls proxies for 87,501 shares. A) Under cumulative voting, how many directors can General Grocery elect? B) How many shares will General Grocery have to acquire in order to elect 8 directors?

112. Fritz Corporation has 800,000 shares of preferred stock and 1,800,000 shares of common stock. The cumulative preferred stock has a stated dividend of $2.50 per share. Under normal conditions, Kreisler pays out 30% of earnings available to common shareholders, however, because of a severe recession, Fritz retained all earnings last year. This year, Fritz earned net income of $6.4 million.

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 17 Key

1. The effect of a rights offering on a shareholder is: A. to increase his/her wealth. B. to increase his/her wealth only if the new stock is purchased. C. to decrease his/her wealth unless the stock is purchased. D. to decrease his/her wealth if nothing is done.

Accessibility: Keyboard Navigation Block - Chapter 17 #1 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #2 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

3. The subscription price is generally _______ than the rights-on price and _______ than the ex-rights price. A. higher; higher B. higher; lower C. lower; higher D. lower; lower

Accessibility: Keyboard Navigation Block - Chapter 17 #3 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #4 Difficulty: Easy Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-03 Cumulative Voting Example Type: Concept

5. A stock sells for $45 rights-on, the subscription price is $41. Seven rights are required to purchase one share. The value of a right is: A. $5.50. B. $0.50. C. $5.00. D. $0.57.

Accessibility: Keyboard Navigation Block - Chapter 17 #5 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Concept

6. Ten rights are necessary to purchase one share of stock $84. A right sells for $6.30. The ex-rights value of the stock is: A. $147. B. $105. C. $63. D. $154.

Accessibility: Keyboard Navigation Block - Chapter 17 #6 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #7 Difficulty: Easy Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-04 The Right to Purchase New Shares Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #8 Difficulty: Easy Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-04 The Right to Purchase New Shares Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #9 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-01 Common Shareholders Claim to Income Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #10 Difficulty: Medium Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #11 Difficulty: Hard Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-09 American Depository Receipts (ADRs) Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 17 #12 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #13 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #14 Difficulty: Easy Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-04 The Right to Purchase New Shares Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #15 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-06 Effect of Rights on Shareholders Position Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #16 Difficulty: Medium Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-01 Common Shareholders Claim to Income Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #17 Difficulty: Medium Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #18 Difficulty: Medium Learning Objective: 17-05 Characterize preferred shares as a type of security somewhere between debt and common stock. Topic: 17-11 Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #19 Difficulty: Hard Learning Objective: 17-05 Characterize preferred shares as a type of security somewhere between debt and common stock. Topic: 17-11 Preferred Stock Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 17 #20 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #21 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

22. Under normal operating conditions the board of directors elected by: A. the common shareholders. B. the preferred shareholders. C. the bondholders. D. the board of directors.

Accessibility: Keyboard Navigation Block - Chapter 17 #22 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #23 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #24 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #25 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-08 Desirable Features of Rights Offerings Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #26 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Concept

27. Which of the following is not a very common feature of preferred stock? A. Cumulative dividends B. Voting rights C. Call feature D. Conversion feature

Accessibility: Keyboard Navigation Block - Chapter 17 #27 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #28 Difficulty: Medium Learning Objective: 17-07 Differentiate the features of various securities in a risk-return framework. Topic: 17-15 Comparing Features of Common and Preferred Stock and Debt Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #29 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #30 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

31. Firm X has 150,000 outstanding shares and 9 directors. Joe Stone owns 37,500 shares of firm X. How many directors can Joe elect with cumulative voting? A. 0 B. 1 C. 2 D. 3

Accessibility: Keyboard Navigation Block - Chapter 17 #31 Difficulty: Easy Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-03 Cumulative Voting Example Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 17 #32 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 17 #33 Difficulty: Easy Learning Objective: 17-04 Describe poison pills and other provisions that make it difficult for outsiders to gain control of the corporation against management wishes. Topic: 17-10 Poison Pills Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #34 Difficulty: Easy Learning Objective: 17-04 Describe poison pills and other provisions that make it difficult for outsiders to gain control of the corporation against management wishes. Topic: 17-10 Poison Pills Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #35 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

36. The following are primary purchasers of preferred stock except: A. corporate investors. B. insurance companies. C. pension funds. D. individual investors.

Accessibility: Keyboard Navigation Block - Chapter 17 #36 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #37 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #38 Difficulty: Medium Learning Objective: 17-07 Differentiate the features of various securities in a risk-return framework. Topic: 17-15 Comparing Features of Common and Preferred Stock and Debt Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #39 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #40 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #41 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-09 American Depository Receipts (ADRs) Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #42 Difficulty: Hard Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-09 American Depository Receipts (ADRs) Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #43 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #44 Difficulty: Medium Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-03 Cumulative Voting Example Type: Concept

45. A stock sells for $50 rights-on, the subscription price is $40. Nine rights are required to purchase one share. The value of a right is: A. $1.00. B. $10.00. C. $1.11. D. $5.00.

Accessibility: Keyboard Navigation Block - Chapter 17 #45 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

46. Nine rights are necessary to purchase one share of stock $99. A right sells for a $7.70. The ex-rights value of the stock is: A. $99.00. B. $168.30. C. $106.70. D. $69.30.

Accessibility: Keyboard Navigation Block - Chapter 17 #46 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 17 #47 Difficulty: Easy Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-03 Cumulative Voting Example Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #48 Difficulty: Hard Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-09 American Depository Receipts (ADRs) Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #49 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #50 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #51 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #52 Difficulty: Medium Learning Objective: 17-04 Describe poison pills and other provisions that make it difficult for outsiders to gain control of the corporation against management wishes. Topic: 17-10 Poison Pills Type: Memory

53. A firm has 200,000 outstanding shares and 11 directors. Doug owns 15,500 shares of this firm. How many directors can Doug elect with cumulative voting? A. 0 B. 1 C. 2 D. 3

Accessibility: Keyboard Navigation Block - Chapter 17 #53 Difficulty: Medium Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-03 Cumulative Voting Example Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 17 #54 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #55 Difficulty: Medium Learning Objective: 17-07 Differentiate the features of various securities in a risk-return framework. Topic: 17-15 Comparing Features of Common and Preferred Stock and Debt Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #56 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-09 American Depository Receipts (ADRs) Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #57 Difficulty: Easy Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-03 Cumulative Voting Example Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #58 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 17 #59 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 17 #60 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

61. Shareholders always have preemptive rights when new issues of stock are offered. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #61 Difficulty: Easy Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-04 The Right to Purchase New Shares Type: Memory

62. Bondholders never have any control over the actions of a firm. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #62 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-01 Common Shareholders Claim to Income Type: Memory

63. Preferred stock dividends are a deductible expense for a corporation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #63 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

64. The aftertax cost of debt is cheaper than preferred stock to the issuing corporation. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #64 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 17 #65 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

66. The difference between the rights-on and ex-rights price is equal to the subscription price divided by N. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #66 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

67. The difference between the rights-on and ex-rights common stock price is equal to the value of a right. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #67 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

68. The ex-rights date usually takes place after the end of the subscription period. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #68 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

69. A rights offering may be of limited value to shareholders. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #69 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-07 Rights Offering: No Wealth Increase Type: Memory

70. Shares purchased through a rights offering may carry lower margin requirements. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #70 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

71. Preferred stock generally carries a higher interest rate than debt. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #71 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

72. Participating preferred stock is advantageous to common shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #72 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

73. To the security holder, preferred stock offers the highest risk and the lowest return. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #73 Difficulty: Hard Learning Objective: 17-05 Characterize preferred shares as a type of security somewhere between debt and common stock. Topic: 17-11 Preferred Stock Type: Memory

74. To the individual recipient, preferred stock dividends offer no advantage over common stock dividends. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #74 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Concept

75. If a company has preferred stock, it must pay the dividends on the preferred even if it shows no profit for the year. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #75 Difficulty: Medium Learning Objective: 17-05 Characterize preferred shares as a type of security somewhere between debt and common stock. Topic: 17-11 Preferred Stock Type: Memory

76. Because of tax considerations, corporations are able to issue preferred stock at a slightly lower yield than debt. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #76 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

77. Corporations are able to issue preferred stock at a slightly lower pre-tax yield than debt. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #77 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

78. Common shareholders have a residual claim to income, in other words they are last in line. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #78 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-01 Common Shareholders Claim to Income Type: Memory

79. A common shareholder cannot force a company into bankruptcy for eliminating the dividend. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #79 Difficulty: Medium Learning Objective: 17-05 Characterize preferred shares as a type of security somewhere between debt and common stock. Topic: 17-11 Preferred Stock Type: Memory

80. After a rights offering, the common stock will sell at the subscription price. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #80 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

81. When a stock sells ex-rights the sale of the shares no longer entitles the purchaser to receive a right. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #81 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

82. Participating preferred stock may receive an extra dividend in a particularly good year when earnings are above a stated level. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #82 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Concept

83. The dividend rate paid on floating rate preferred stock will be equal to the market rate at the time dividends are paid. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #83 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Concept

84. The market price of floating rate preferred stock is less volatile than that of regular preferred stock. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #84 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

85. Floating rate preferred stock allows shareholders to receive more or less than the quoted dividend based on the firm's success. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #85 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Memory

86. The floating rate feature on preferred stock causes more volatility in its price. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #86 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Memory

87. Common shareholders have a legal claim to dividend income. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #87 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-01 Common Shareholders Claim to Income Type: Memory

88. When a cumulative voting method is used, it is possible for those who hold less than a 50 percent interest to elect board members. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #88 Difficulty: Medium Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

89. Share classes are similar to bond ratings in that they are used to rank the performance of different corporation's stock. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #89 Difficulty: Medium Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

90. Share classes may differ in both voting rights and dividend rights. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #90 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

91. Participating preferred stock gives its owners voting rights. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #91 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

92. Generally the receipt of corporate bond interest is more valuable than preferred dividends to corporate investors. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #92 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-12 Justification for Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

93. Occasionally, a company will have several classes of common stock, with each class carrying different rights to dividends and income. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #93 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-01 Common Shareholders Claim to Income Type: Memory

94. Common shareholders may assign a proxy, or the power to cast their ballot, only when majority voting is in place. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #94 Difficulty: Easy Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

95. The type of shareholder voting has become less important with the influence of takeover, leveraged buyouts, and other challenges to management control. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #95 Difficulty: Medium Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation. Topic: 17-02 The Voting Right Type: Memory

96. Shares purchased through a rights offering usually carry lower margin requirements. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #96 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

97. A poison pill will raise the potential for maximizing shareholder value because it deters takeover bids. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #97 Difficulty: Easy Learning Objective: 17-04 Describe poison pills and other provisions that make it difficult for outsiders to gain control of the corporation against management wishes. Topic: 17-10 Poison Pills Type: Memory

98. Current shareholders are a built-in market for raising capital at a cost below that of underwriting a new issue. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #98 Difficulty: Hard Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 17 #99 Difficulty: Medium Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-04 The Right to Purchase New Shares Type: Memory

100. Convertible exchangeable preferreds give the holder the sole right to exchange their preferred shares for common shares. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #100 Difficulty: Medium Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

101. Some preferred shares are participating preferreds and this may allow for an increase in the preferred share dividend when the common share dividend equals the preferred share dividend. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #101 Difficulty: Easy Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Memory

102. Preferred and common stock dividends are a deductible expense for a corporation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #102 Difficulty: Easy Learning Objective: 17-07 Differentiate the features of various securities in a risk-return framework. Topic: 17-15 Comparing Features of Common and Preferred Stock and Debt Type: Concept

103. Both preferred and common shareholders are entitled to receive all or a portion of a corporation's residual income. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #103 Difficulty: Easy Learning Objective: 17-07 Differentiate the features of various securities in a risk-return framework. Topic: 17-15 Comparing Features of Common and Preferred Stock and Debt Type: Concept

104. Preferred shareholders have a contractual claim against a corporation for dividends not declared by the Board of Directors. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #104 Difficulty: Easy Learning Objective: 17-05 Characterize preferred shares as a type of security somewhere between debt and common stock. Topic: 17-11 Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

105. Pre-emptive rights do not protect shareholders from dilution of their ownership position. FALSE

Accessibility: Keyboard Navigation Block - Chapter 17 #105 Difficulty: Easy Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-04 The Right to Purchase New Shares Type: Concept

106. The period during a rights offering when the shares no longer include rights to purchase additional shares of common stock is called the ex-rights period. TRUE

Accessibility: Keyboard Navigation Block - Chapter 17 #106 Difficulty: Easy Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-05 The Use of Rights in Financing Type: Memory

107. If the shareholder is no better off in terms of total valuation, why undertake a rights offering? What are the advantages of a rights offering? There are a number of possible advantages. 1 By giving current shareholders a first option to purchase new shares, we protect their current position in regard to voting rights and claims to earnings. 2 The use of a rights offering gives the firm a built-in market for new security issues. 3 Because of this built-in base, distribution costs are likely to be considerably lower than under a straight public issue in which investment dealers must underwrite the full risk of distribution. Investment dealers may assist in a rights offering but with a lower expected fee. 4 A rights offering may generate more interest in the market than would a straight public issue. There is a market not only for the stock, but also for the rights. Because the subscription price is normally set 15 to 25 percent below current value, there is the false appearance of a bargain, creating further interest in the offering.

Block - Chapter 17 #107 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-08 Desirable Features of Rights Offerings Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

108. Define and describe the characteristics of American Depositary Receipts (ADRs). Since foreign companies want to tap into the world's largest capital market, the United States, they need to offer securities for sale in the United States that can be traded by investors and have the same liquidity features of U.S. securities. American Depositary Receipts (ADRs) are certificates that have a legal claim on an ownership interest in a foreign company's common stock. The shares of the foreign company are purchased and put in trust in a foreign branch of a New York bank. The bank, in turn, receives and can issue depositary receipts to the American shareholders of the foreign firm. ADRs allow foreign shares to be traded in the United States much like a common stock. Dividends are paid in dollars and are more easily collected than if the actual shares of the foreign stock were owned. ADRs are considered to be more liquid, less expensive, and easier to trade than a foreign company's stock bought directly on that country's exchange. ADRs, sometimes referred to as American Depositary shares (ADSs), have been around since 1927.

Block - Chapter 17 #108 Difficulty: Medium Learning Objective: 17-03 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wealth during the rights-offering process. Topic: 17-09 American Depository Receipts (ADRs) Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

109. A preferred stock issue contains a number of stipulations and provisions that define the shareholder's claim to income and assets. List and briefly describe these stipulations and provisions. 1. Cumulative dividends. Most preferred stock issues have a cumulative claim to dividends. That is, if preferred stock dividends are not paid in any one year, they accumulate and must be paid in total before common shareholders can receive dividends. If preferred stock carries a $2 cash dividend and the company does not pay dividends for three years, preferred shareholders must receive the full $6 before common shareholders can receive anything. The cumulative dividend feature makes a corporation very cognizant of its obligation to preferred shareholders. When a financially troubled corporation has missed a number of dividend payments under a cumulative arrangement, there may be a financial recapitalization of the corporation in which preferred shareholders receive new securities in place of the dividend arrearage. 2. Conversion feature. Similarly to certain forms of debt, preferred stock may be convertible into common shares at the option of the holder. One new wrinkle on convertible preferred is the use of convertible exchangeable preferred that allow the company to force conversion from convertible preferred stock into convertible debt. This can be used to allow the company to change preferred dividends into tax-deductible interest payments when it is to the company's advantage to do so. 3. Call feature. Preferred stock, like debt, may be callable or "redeemable." That is, the corporation may retire the security before maturity at some small premium over par. 4. Retractable feature. A preferred share containing a provision that allows redemption of the shares at the option of the shareholder has a retractable feature. This provision creates advantages and disadvantages for the company and shareholder in just the opposite direction as does the call provision. 5. Participation provision. A small percentage of preferred stock issues are participating; that is, they may participate over and above the quoted yield when the corporation is enjoying a particularly good year. 6. Floating rate. Some preferred stocks have dividends with floating rates that are plus or minus a percentage from the selected money market rate such as the prime or an average bankers' acceptance rate. Often, preferred shares paying a fixed return are set to convert to a floating-rate return in the near future. Thus, the issuing firms have protected themselves from being locked into a fixed-rate security in perpetuity—as have the investors. 7. Par value. As with common shares, federally incorporated companies issue no-par value preferred. However, many balance sheets still show par value preferred shares issued before the Canada Business Corporations Act was amended to disallow their issue. Despite preferred no longer having a par value, corporations still may use a similar term. They may refer to the "stated value" per share in establishing the redeemable and dividend features. 8. Dutch auction preferred stock. Dutch auction preferred stock is similar to floating-rate preferred stock, but it is a short-term instrument. The security matures every seven weeks and is sold (re-auctioned) at a subsequent bidding. The concept of Dutch auction means the stock is issued to the bidder willing to accept the lowest yield and then to the next lowest bidder, and so on until all the preferred stock is sold. This is much like the Treasury bill auctions held by the Bank of Canada. This auction process at short term intervals allows investors to keep up with the changing interest rates in the short-term market.

Block - Chapter 17 #109 Difficulty: Hard Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-13 Provisions Associated with Preferred Stock Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

110. Describe income trusts. What is the purpose of an income trust? Income trusts allow a firm to raise additional capital for its ongoing operations by selling off its mature assets into a new operating company. Generally it is these mature assets that generate stable and strong cash flows. The new operating company is financed by a combination of subordinated debt and share equity held in an income trust, managed by a trustee. In turn the income trust is financed by an equity investment of investors or unitholders, as opposed to shareholders in a company. Unlike preferred or common stock, income trusts are not identified as a liability or equity on the firm's balance sheet because the mature assets are sold into the new operating company. However the additional financing can improve the firm's capital structure and the original firm by managing the new operating company can generate a good income. Income trusts were developed as an investment to provide high returns (yields) for the investor because of their tax efficiency and the strong cash flows generated by the mature assets. The new operating company holding the mature assets was financed with the right mix of debt and equity in its capital structure to minimize its corporate taxes. Interest paid on the debt, dividends from the equity, and some return of capital "flow-through" to the income trust. The income trust, which paid no taxes, thus provided a higher cash distribution to unitholders on a monthly or quarterly basis, who pay the required taxes at the individual's marginal tax rate. Today's income trusts in Canada lost that advantage and are taxed similarly to corporations. The market for income trusts is a recent development.

Block - Chapter 17 #110 Difficulty: Hard Learning Objective: 17-06 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest. Topic: 17-14 Income Trusts Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

B) 8 directors desired:

Block - Chapter 17 #111 Difficulty: Medium Learning Objective: 17-02 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Calculate the number of shares required to elect a director. Topic: 17-03 Cumulative Voting Example Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 17 #112 Difficulty: Medium Learning Objective: 17-05 Characterize preferred shares as a type of security somewhere between debt and common stock. Topic: 17-11 Preferred Stock Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 17 Summary Category

# of Que stions

Accessibility: Keyboard Navigation

106

Block - Chapter 17

112

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 17-01 Outline the rights of shareholders as owners of the corporation.

Learning Objective: 1702 Briefly describe cumulative voting as a method to potentially give minority shareholders representation on the board of directors. Ca lculate the number of shares required to elect a director.

Learning Objective: 1703 Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights; shares; and shareholder wea lth during the rights-offering process.

Learning Objective: 1704 Describe poison pills and other provisions that make it difficult for outsiders to gain control of the corporation against management wishes.

Learning Objective: 17-05 Characterize preferred shares as a type of security somewhere between debt and common stock.

Learning Objective: 1706 Calculate the different tax treatment and resulting aftertax income from preferred dividends as compared to bond interest.

Learning Objective: 17-07 Differentiate the features of various securities in a risk-return framework.

Topic: 17-01 Common Shareholders Claim to Income

Topic: 17-02 The Voting Right

Topic: 17-03 Cumulative Voting Example

Topic: 17-04 The Right to Purchase New Shares

Topic: 17-05 The Use of Rights in Financing

Topic: 17-06 Effect of Rights on Shareholders Position

Topic: 17-07 Rights Offering: No Wealth Increase

Topic: 17-08 Desirable Features of Rights Offerings

Topic: 17-09 American Depository Receipts (ADRs)

Topic: 17-10 Poison Pills

Topic: 17-11 Preferred Stock

Topic: 17-12 Justification for Preferred Stock

Topic: 17-13 Provisions Associated with Preferred Stock

Topic: 17-14 Income Trusts

Topic: 17-15 Comparing Features of Common and Preferred Stock and Debt

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 18 1. According to the "marginal principle of retained earnings," dividends are: A. the active variable. B. the passive variable. C. not usually paid. D. a certain fixed percentage of earnings.

2. The major, overall argument against the "marginal principle of retained earnings" is: A. the uncertainty surrounding capital investment projects. B. the lack of ability to adequately measure corporate investment returns. C. the diversity of shareholders and their potential investment returns. D. its failure to consider shareholder preferences.

3. A major desire of shareholders regarding dividend policy is: A. frequent stock dividends. B. dividend stability. C. high payouts when earnings are up and lower payouts when earnings are down. D. payment of dividends at frequent intervals.

4. The ex-dividend date is the date on which: A. recipients of the dividend are determined. B. the dividend is paid. C. the dividend is declared. D. the stock bought no longer includes the right to receive dividend payments.

5. A stock dividend will: A. increase the total value of shareholders' equity. B. decrease the total value of shareholders' equity. C. not affect the total value of shareholders' equity. D. change the total value of shareholders' equity but the direction cannot be determined unless the market price and par value is known.

Foundations of Financial Management - 10th Canadian Edition by Block

6. A corporation may wish to repurchase some of its shares in the market for all the following reasons except: A. this action might maximize after-tax benefit to shareholders. B. the corporation's executives will financially benefit if the shares are resold later at a substantial profit. C. it can stabilize or increase the market price of the stock. D. the stock may be needed for an employee compensation plan.

7. Shareholders may prefer dividends to reinvestment by the firm: A. because dividends payments are certainty every year. B. because dividend payments have an information content. C. because investors may prefer future cash to current cash. D. because the firm can earn higher returns than the shareholder.

8. Inflation can affect dividend payouts in that: A. higher interest rates resulting from inflation have left more earnings available for dividends. B. inflation leads investors to demand higher payouts. C. corporations are hesitant to pay dividends from inflation-caused "inventory profits." D. dividend payouts decrease due to slower earnings growth in an inflationary economy.

9. The primary purpose of a stock split is to: A. indicate the firm's desire to retain funds. B. increase the investor's overall wealth. C. reduce the threat of a takeover by creating more shares. D. bring the share price to a lower trading range.

10. A firm with excess cash and few investment alternatives might logically: A. declare a stock dividend. B. split its stock two-for-one. C. repurchase some of its own shares. D. choose to issue preferred stock.

11. Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split? A. Retained earnings B. Cash C. Common stock D. Dividends-in-arrears

Foundations of Financial Management - 10th Canadian Edition by Block

12. The residual theory of dividend policy asserts that: A. sufficient dividends are paid to maintain a stable total dividend payment with any residual invested internally by the firm. B. sufficient dividends are paid to maintain a stable dividend payout ratio with any residual invested internally by the firm. C. dividends are paid out of the residual remaining after internal investments by the firm. D. dividend payments are adjusted to maintain dividends at a constant percentage of total cash flows.

13. Which of the following generally does not influence the dividend policy of the firm? A. Cash position of the firm B. Desire for control C. Payables vs. receivables D. Investor's expectations of the future based on dividend policy

14. A 2-for-1 stock split is declared. In this case which of following statements is true? A. The cash account declines. B. The common stock account rises. C. The retained earnings fall. D. The number of common shares increases.

15. The shareholders' equity section of the balance sheet of the XYZ Corp. is as follows:

If the company now splits its stock 5-for-1, which of the following is correct? A. The common stock section will increase to $100,000,000. B. The market price per share will probably remain unchanged. C. The book value per share will decline to $17.60. D. The number of shares outstanding will increase.

16. The clientele effect is concerned with: A. investor behaviour and attitudes towards dividends. B. the relationship between the stockbroker and his/her client. C. the stability of dividends. D. the effect of earnings on the client.

Foundations of Financial Management - 10th Canadian Edition by Block

17. A firm may repurchase stock in the market because: A. it will decrease the shareholder's wealth. B. the firm has inadequate capital budgeting alternatives. C. it provides negative informational content. D. the shareholders want to divest.

18. In Stage II (growth stage), sales and returns on assets will be growing at increasing rates. Which of the following is true? A. Earnings are now available for moderate dividends. B. Stock dividends (additional shares) are quite common. C. Acquisition of new assets will be stable. D. The payout ratio will be close to 50% by now.

19. The marginal principle of retained earnings means that each potential project to be financed by retained earnings must: A. provide a higher rate of return than the shareholders can achieve after paying taxes on the distributed dividends. B. yield a return equal to or greater than the marginal cost of capital. C. provide enough return to pay the corporation's marginal tax rate. D. have an internal rate of return greater than the corporate growth rate of dividends.

20. In the initial stage (Stage I), the corporation: A. has a product yet to be accepted in the marketplace. B. anticipates slow growth in sales and earnings. C. needs a stable growth rate similar to the economy as a whole. D. the firm has numerous projects that add value.

21. Management may repurchase shares of stock in the market: A. if they believe the shares are considerably underpriced. B. for shareholder stock options. C. to use in a stock split. D. to reduce the market price of the shares.

22. In the maturity stage, a firm: A. is growing about the same rate as the economy as a whole. B. has returns on assets lower than those of the industry norm. C. loses market share and suffers a decline in profitability. D. pays out all earnings in dividends.

Foundations of Financial Management - 10th Canadian Edition by Block

23. Which of the following does not affect a company's dividend policy? A. Legal rules concerning capital impairment B. The efficient market hypothesis C. Access to capital markets D. Tax position of shareholders

24. A stock dividend will: A. increase the value of a share of stock. B. decrease the common stock account. C. decrease the retained earnings account. D. decrease the number of shares outstanding.

25. A stock split: A. is treated by accountants just like a stock dividend. B. reduces the retained earnings account. C. does not change the amount in the common stock account. D. increases shareholder wealth.

26. Some dividend reinvestment plans allow the shareholder to purchase shares of stock: A. from the company's future share issues. B. in the market through the company. C. at a premium from the market price. D. in the market through the shareholders broker.

27. The "clientele effect" assumes that: A. taxes affect shareholder dividend preferences. B. capital gains taxes are equal to taxes on dividends. C. investors prefer dividends over capital gains regardless of their marginal tax bracket. D. investors are indifferent between stable dividends and irregular dividends.

28. Which of the following is not true about the life cycle growth and dividend policy? A. In the maturity stage, a firm usually pays moderate to high dividends. B. In the development stage, a firm usually pays stock dividends and some low cash dividends. C. In the expansion stage, a firm pays low to medium cash dividends and occasionally may have stock splits. D. In the growth stage, a firm pays stock dividends.

Foundations of Financial Management - 10th Canadian Edition by Block

29. Firm X has declared a stock dividend that pays one share of stock for every 7 shares owned. After the stock dividend, earnings per share will: A. remain the same. B. decline 14.30%. C. decline 7.00%. D. increase 7.00%.

30. CBA Inc. has 250,000 shares outstanding. The shares were issued for $14. The stock is currently selling for $34. CBA has $5,000,000 in retained earnings and has declared a stock dividend that will increase the number of outstanding shares by 6%. What will be the common stock account after the stock dividend? A. $510,000 B. $3,500,000 C. $4,010,000 D. $8,500,000

31. In which phase of the life cycle would one most likely encounter stock dividends? A. Always in Phase I B. Only in Phase III C. Only in Phase IV D. In both Phase II and III

32. What strategy would a shareholder in a high tax bracket prefer? A. Payment of cash dividends B. Reduction of debt C. Repurchase of common shares D. A stock dividend

33. Low dividend yields are seen: A. when interest rates are high. B. when firms have good investment opportunities. C. after a stock market downturn. D. when corporations have low growth opportunities.

34. A reverse stock split: A. occurs when a company wants to increase the price of its common shares because the market hasn't recognized the improvements the company has made in achieving profitability. B. exchanges fewer new shares of common stock for old shares of common stock. C. will not change earnings per share. D. is more popular in bull markets than in bear markets.

Foundations of Financial Management - 10th Canadian Edition by Block

35. A stock split is different from a stock dividend due to: A. delisting by stock exchanges. B. the resulting change in market price of the common shares. C. the shares outstanding after the split or dividend will have an increased market value. D. no transfer of funds from retained earnings to the capital accounts.

36. According to the law, dividends may be funded from: A. past earnings. B. current forecasted earnings. C. future earnings. D. future forecasted earnings.

37. Generally at what payout percentage is a stock dividend considered a stock split? A. 10% of the outstanding shares B. 15% of the outstanding shares C. 25% of the outstanding shares. D. 33% of the outstanding shares.

38. The major, overall argument against the "marginal principle of retained earnings" is: A. the uncertainty surrounding capital investment projects. B. the lack of ability to adequately measure corporate investment returns. C. the diversity of shareholders and their potential investment returns. D. the funds must provide a higher rate of return than the shareholder could achieve alone.

39. Dividend policy is relevant because: A. shareholders apply a lower discount rate to yield a lower valuation to funds retained in the business as opposed to paid out. B. shareholders apply a lower discount rate to yield a higher valuation to funds retained in the business as opposed to paid out. C. shareholders apply a higher discount rate to yield a higher valuation to funds retained in the business as opposed to paid out. D. shareholders apply a higher discount rate to yield a lower valuation to funds retained in the business as opposed to paid out.

Foundations of Financial Management - 10th Canadian Edition by Block

40. A corporation may wish to repurchase some of its shares in the market for all the following reasons except: A. this action might maximize after-tax benefit to shareholders. B. it can stabilize or increase the market price of the stock. C. the stock may be needed for an employee compensation plan. D. corporations may have strategic goals for the organization that may be adversely E. impacted by the number of shares outstanding.

41. Shareholders may prefer dividends to reinvestment by the firm: A. because dividends provide the highest return to investors. B. because dividend payments are tax free. C. because investors may prefer current cash to future cash. D. because shareholders may prefer faster growth in the firm.

42. A firm may repurchase stock in the market because: A. the firm believes that they are repurchasing at a premium price. B. reacquired shares may be useful for shareholder options. C. it provides negative informational content. D. reacquired shares may be useful for employee stock options.

43. In the initial stage (Stage I), the corporation: A. has a product yet to be developed. B. anticipates slow growth in sales and earnings. C. needs all its earnings for reinvestment in new assets. D. is more capable of paying cash dividends.

44. Management may repurchase shares of stock in the market: A. to buy stock they feel is considerably overpriced. B. because future earnings are expected to decrease. C. to use in a merger. D. to send a signal to the market that the company is in trouble.

45. A firm has declared a stock dividend that pays 1 share of stock for every 11 shares owned. After the stock dividend, earnings per share will: A. remain the same. B. decline 9.1%. C. decline 8.3%. D. increase 8.3%

Foundations of Financial Management - 10th Canadian Edition by Block

46. Francis Forensic Inc. has 500,000 shares outstanding. The shares were issued for $10. The stock is currently selling for $40. Francis Forensic has $6,000,000 in retained earnings and has declared a stock dividend that will increase the number of outstanding shares by 10%. What will be the common stock account after the stock dividend? A. $2,000,000 B. $7,000,000 C. $1,000,000 D. $5,500,000

47. Low dividend yields are seen: A. when interest rates are high. B. when firms have good investment opportunities. C. after a stock market downturn. D. as a signal of bankruptcy.

48. According to the law, dividends may be funded from: A. predicted earnings. B. current earnings. C. future earnings. D. from accounts receivable.

49. A major influence on dividends is sales growth and ____________. A. ROE B. gross margins C. ROA D. brand management

50. The corporate life cycle has 4 stages. In stage 2 a corporation is more likely to issue _______. A. very high cash dividends B. very low cash dividends C. stock dividends D. buy back stock

51. The corporate life cycle has 4 stages. In stage 1 a corporation is more likely to issue _______ A. cash dividends. B. stock dividends. C. no cash dividends. D. rights.

Foundations of Financial Management - 10th Canadian Edition by Block

Phil's Corp. (PC) reported AT Earnings of $15,000,000. PC has 2,150,000 shares outstanding and has excess cash on hand of $5,500,000. PC stock is currently trading at $62 a share.

52. PC's EPS prior to any share repurchase would be _________. A. $7.25 B. $5.56 C. $6.98 D. $6.56

53. PC's EPS after any share repurchase would be ________. A. $5.56 B. $6.97 C. $7.28 D. $6.25

54. The "marginal principle of retained earnings" holds that corporate investment should provide a return equal to or higher than that a shareholder could earn elsewhere. True False

55. Dividends are the active variable in the "marginal principle of retained earnings." True False

56. The major drawback for viewing dividends as a passive variable is that shareholders likely have some preference related to dividend payments. True False

57. One reason that investors may prefer dividends to reinvestment by the firm is that dividend payments provide information to the investor. True False

58. Generally, dividends should be changed when a corporation reaches a new level of permanent income. True False

Foundations of Financial Management - 10th Canadian Edition by Block

59. A firm will pay dividends as long as it has cash available. True False

60. Regardless of the situation, no well-managed firm would borrow money to pay dividends to shareholders. True False

61. Corporations are usually exempt from taxes on dividends received from other corporations. True False

62. Interest income is taxed at a lower rate than dividends. True False

63. Most dividends, like interest, are paid semiannually. True False

64. Stock dividends usually enhance the overall wealth of an investor. True False

65. A stock split involves a reduction in the firm's retained earnings account. True False

66. Distributions of 20-25% or greater of outstanding shares are generally to be treated as stock splits. True False

67. Stock dividends may be utilized to provide information to investors about growing companies. True False

68. Stock splits are usually utilized to place stock in a lower-price trading range. True False

Foundations of Financial Management - 10th Canadian Edition by Block

69. The repurchase of a corporation's own stock will generally have a negative impact on its price. True False

70. Investors in high marginal tax brackets prefer dividends while investors in low marginal tax brackets prefer to have corporate earnings reinvested. True False

71. One of the major influences on dividends is the corporate growth rate in sales and the subsequent return on assets. True False

72. At maturity (Stage IV) the firm will usually pay out about 15-25% of earnings in dividends. True False

73. Life cycle growth analysis can be helpful in determining a firm's ability to pay dividends. True False

74. In Stage III growth, stock dividends and stock splits are eliminated. True False

75. Shareholders in general prefer large dividends to small dividends. True False

76. Some researchers feel that shareholders prefer dividends to retained earnings because dividends have an information content. True False

77. A general rule of thumb would be that firms with a faster growth rate have smaller payout ratios. True False

Foundations of Financial Management - 10th Canadian Edition by Block

78. Stability of dividends is not important to shareholders. True False

79. Dividends can only be distributed if the firm has positive income in the year the dividend is paid. True False

80. Dividend reinvestment plans provide the shareholder an opportunity to buy additional shares of stock with the cash dividend paid by the company. True False

81. With a dividend reinvestment plan an investor may be able to add cash payments to buy additional shares. True False

82. Investors in high marginal tax brackets usually prefer companies that reinvest most of their earnings, thus creating more growth in earnings and stock prices and deferring taxes into the future. True False

83. A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders' total claim on earnings will increase. True False

84. A rapid growth firm can often expect a shift in the type of its typical shareholder as the firm moves into maturity. True False

85. Firms with extra money should always repurchase their own stock, thus increasing the value of the firm. True False

86. When a firm raises its dividend, the information content is usually positive for investors. True False

Foundations of Financial Management - 10th Canadian Edition by Block

87. Dividends may be relevant because they help to resolve uncertainty about the firm and its future. True False

88. Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm. True False

89. Retained earnings accurately portray the liquidity position of the firm. True False

90. Following the payment of a dividend, the firm's stock price tends to fall by the amount of the dividend. True False

91. If the cash dividend per share remains constant following a stock dividend, the shareholder will receive greater total cash dividends. True False

92. Because the investor is taxed whether dividends are received or not, there are no real advantages to a dividend reinvestment plan. True False

93. The major stock repurchase plans often revolve around companies wanting to create demand for their shares. True False

94. Large dividend payouts may suggest that the firm does not have sufficient investment opportunities with adequate returns. True False

95. Stock repurchases can be tax advantageous and signal messages to the market that the company expects future prosperity. True False

Foundations of Financial Management - 10th Canadian Edition by Block

96. Stock dividends and stock splits have the same impact on retained earnings. True False

97. The main concern over the investor preference for dividends or reinvestment is centred on tax implications. True False

98. To receive a dividend on a common share, an investor must purchase the share at least a week before the holder-of-record date. True False

99. No tax is payable on stock dividends. True False

100. By employing a dividend reinvestment plan, a company is assured of increasing cash flow into the company. True False

101. The marginal principle of retained earnings states that the corporation must be able to earn a higher return on retained earnings than shareholders could receive for themselves after paying taxes on the distributed dividends. True False

102. The clientele effect is the effect of investor preferences for dividends or capital gains. True False

103. Why might a company repurchase its own shares?

Foundations of Financial Management - 10th Canadian Edition by Block

104. Explain in detail the corporate life cycle and the corresponding dividend policy that is most likely to be found at each stage.

105. Pharma Duece Corporation, which manufactures biotech drugs, has been experiencing a tremendous growth in the price of its common stock. The stock price increased from $4.50 on January 1, 2011 to $18.00 per share on December 31, 2015. Its current net worth statement is as follows:

A) What changes would occur in the above statement of net worth after a 2 for 1 stock split? B) Earnings for 2015 were $1,575,000, what would EPS be before and after the stock split?

106. The shareholders' equity portion of Mishastone Tire Company follows:

Foundations of Financial Management - 10th Canadian Edition by Block

107. Maxwell Electronics had net income of $15 million last year, and had 3 million common shares outstanding. They declared a 12% stock dividend. Calculate EPS before and after the stock dividend.

108. Acme Corporation consists of 250 grocery stores throughout the West. At the beginning of 2015 its statement of net worth showed the following information: Common Stock $1,800,000 and retained earnings $500,000. During the year net income equalled $160,000. Management was undecided on what to do with the income. Acme paid a dividend of $0.35 last year and the stock price is currently $14.50. Acme has a 6% growth rate in earnings and dividends, and is in the 40% tax bracket. A) What return on investment would Acme have to earn in order to justify retaining 2015's earnings? B) What changes would occur in the statement of net worth if a $.25 cash dividend was paid? If a 5% stock dividend was given and no cash dividend was paid? C) What would EPS be before and after the stock dividend?

109. J E Davis Pharmaceuticals Corporation which manufactures biotech drugs has been experiencing a tremendous growth in the price of its common stock. The stock price increased from $5.00 on January 1, 2011 to $21.00 per share on December 31, 2015. Its current net worth statement is as follows:

A) What changes would occur in the above statement of net worth after a 4 for 1 stock split? B) Earnings for 2015 were $3,10,000, what would EPS be before and after the stock split?

Foundations of Financial Management - 10th Canadian Edition by Block

110. The shareholders' equity portion of Dexter Company follows:

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 18 Key

1. According to the "marginal principle of retained earnings," dividends are: A. the active variable. B. the passive variable. C. not usually paid. D. a certain fixed percentage of earnings.

Accessibility: Keyboard Navigation Block - Chapter 18 #1 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-03 Residual Theory Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #2 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-06 Arguments for the Relevance of Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #3 Difficulty: Easy Learning Objective: 18-02 Describe a dividend payment as a passive or active decision based on investor preference and the informational content of dividends. Calculate dividend payout ratios and dividend yields. Topic: 18-10 Dividend Stability Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #4 Difficulty: Easy Learning Objective: 18-05 Outline dividend payment procedures. Topic: 18-18 Dividend Payment Procedures Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #5 Difficulty: Easy Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-20 Accounting Considerations for a Stock Dividend Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #6 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-25 Repurchase of Stock as an Alternative to Dividends Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #7 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-06 Arguments for the Relevance of Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #8 Difficulty: Hard Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-13 Cash Position of the Firm Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 18 #9 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #10 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-25 Repurchase of Stock as an Alternative to Dividends Type: Concept

11. Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split? A. Retained earnings B. Cash C. Common stock D. Dividends-in-arrears

Accessibility: Keyboard Navigation Block - Chapter 18 #11 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 18 #12 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-03 Residual Theory Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #13 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-11 Other Factors Influencing Dividend Policy Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #14 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Memory

15. The shareholders' equity section of the balance sheet of the XYZ Corp. is as follows:

Block - Chapter 18 #15 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #16 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-16 Tax Position of Shareholders Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #17 Difficulty: Medium Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-25 Repurchase of Stock as an Alternative to Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #18 Difficulty: Easy Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #19 Difficulty: Medium Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-01 Dividend Theories Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #20 Difficulty: Easy Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #21 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-26 Other Reasons for Repurchase Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #22 Difficulty: Medium Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #23 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-11 Other Factors Influencing Dividend Policy Type: Memory

24. A stock dividend will: A. increase the value of a share of stock. B. decrease the common stock account. C. decrease the retained earnings account. D. decrease the number of shares outstanding.

Accessibility: Keyboard Navigation Block - Chapter 18 #24 Difficulty: Easy Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-20 Accounting Considerations for a Stock Dividend Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #25 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #26 Difficulty: Easy Learning Objective: 18-08 Explain a dividend reinvestment plan. Topic: 18-27 Dividend Reinvestment Plans Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #27 Difficulty: Medium Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-16 Tax Position of Shareholders Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #28 Difficulty: Medium Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #29 Difficulty: Easy Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-21 Value to the Investor Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 18 #30 Difficulty: Medium Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

31. In which phase of the life cycle would one most likely encounter stock dividends? A. Always in Phase I B. Only in Phase III C. Only in Phase IV D. In both Phase II and III

Accessibility: Keyboard Navigation Block - Chapter 18 #31 Difficulty: Medium Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Concept

32. What strategy would a shareholder in a high tax bracket prefer? A. Payment of cash dividends B. Reduction of debt C. Repurchase of common shares D. A stock dividend

Accessibility: Keyboard Navigation Block - Chapter 18 #32 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-16 Tax Position of Shareholders Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #33 Difficulty: Easy Learning Objective: 18-02 Describe a dividend payment as a passive or active decision based on investor preference and the informational content of dividends. Calculate dividend payout ratios and dividend yields. Topic: 18-09 Dividend Yields Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #34 Difficulty: Hard Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 18 #35 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Memory

36. According to the law, dividends may be funded from: A. past earnings. B. current forecasted earnings. C. future earnings. D. future forecasted earnings.

Accessibility: Keyboard Navigation Block - Chapter 18 #36 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-12 Legal Rules Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #37 Difficulty: Medium Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #38 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-01 Dividend Theories Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #39 Difficulty: Hard Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-06 Arguments for the Relevance of Dividends Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #40 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-25 Repurchase of Stock as an Alternative to Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #41 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-06 Arguments for the Relevance of Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #42 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-26 Other Reasons for Repurchase Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #43 Difficulty: Easy Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #44 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-26 Other Reasons for Repurchase Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #45 Difficulty: Easy Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-21 Value to the Investor Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 18 #46 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-20 Accounting Considerations for a Stock Dividend Type: Concept

47. Low dividend yields are seen: A. when interest rates are high. B. when firms have good investment opportunities. C. after a stock market downturn. D. as a signal of bankruptcy.

Accessibility: Keyboard Navigation Block - Chapter 18 #47 Difficulty: Easy Learning Objective: 18-02 Describe a dividend payment as a passive or active decision based on investor preference and the informational content of dividends. Calculate dividend payout ratios and dividend yields. Topic: 18-09 Dividend Yields Type: Memory

48. According to the law, dividends may be funded from: A. predicted earnings. B. current earnings. C. future earnings. D. from accounts receivable.

Accessibility: Keyboard Navigation Block - Chapter 18 #48 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-12 Legal Rules Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

49. A major influence on dividends is sales growth and ____________. A. ROE B. gross margins C. ROA D. brand management

Accessibility: Keyboard Navigation Block - Chapter 18 #49 Difficulty: Easy Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Concept

50. The corporate life cycle has 4 stages. In stage 2 a corporation is more likely to issue _______. A. very high cash dividends B. very low cash dividends C. stock dividends D. buy back stock

Accessibility: Keyboard Navigation Block - Chapter 18 #50 Difficulty: Easy Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Concept

51. The corporate life cycle has 4 stages. In stage 1 a corporation is more likely to issue _______ A. cash dividends. B. stock dividends. C. no cash dividends. D. rights.

Accessibility: Keyboard Navigation Block - Chapter 18 #51 Difficulty: Easy Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Concept

Phil's Corp. (PC) reported AT Earnings of $15,000,000. PC has 2,150,000 shares outstanding and has excess cash on hand of $5,500,000. PC stock is currently trading at $62 a share.

Block - Chapter 18

Foundations of Financial Management - 10th Canadian Edition by Block

52. PC's EPS prior to any share repurchase would be _________. A. $7.25 B. $5.56 C. $6.98 D. $6.56

Accessibility: Keyboard Navigation Block - Chapter 18 #52 Difficulty: Easy Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-21 Value to the Investor Type: Concept

53. PC's EPS after any share repurchase would be ________. A. $5.56 B. $6.97 C. $7.28 D. $6.25

Accessibility: Keyboard Navigation Block - Chapter 18 #53 Difficulty: Easy Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-21 Value to the Investor Type: Concept

54. The "marginal principle of retained earnings" holds that corporate investment should provide a return equal to or higher than that a shareholder could earn elsewhere. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #54 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-02 The Marginal Principle of Retained Earnings Type: Memory

55. Dividends are the active variable in the "marginal principle of retained earnings." FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #55 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-03 Residual Theory Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

56. The major drawback for viewing dividends as a passive variable is that shareholders likely have some preference related to dividend payments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #56 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-04 An Incomplete Theory Type: Memory

57. One reason that investors may prefer dividends to reinvestment by the firm is that dividend payments provide information to the investor. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #57 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-06 Arguments for the Relevance of Dividends Type: Memory

58. Generally, dividends should be changed when a corporation reaches a new level of permanent income. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #58 Difficulty: Easy Learning Objective: 18-05 Outline dividend payment procedures. Topic: 18-18 Dividend Payment Procedures Type: Memory

59. A firm will pay dividends as long as it has cash available. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #59 Difficulty: Easy Learning Objective: 18-05 Outline dividend payment procedures. Topic: 18-18 Dividend Payment Procedures Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

60. Regardless of the situation, no well-managed firm would borrow money to pay dividends to shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #60 Difficulty: Easy Learning Objective: 18-02 Describe a dividend payment as a passive or active decision based on investor preference and the informational content of dividends. Calculate dividend payout ratios and dividend yields. Topic: 18-08 Dividend Payouts Type: Concept

61. Corporations are usually exempt from taxes on dividends received from other corporations. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #61 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-16 Tax Position of Shareholders Type: Memory

62. Interest income is taxed at a lower rate than dividends. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #62 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-16 Tax Position of Shareholders Type: Memory

63. Most dividends, like interest, are paid semiannually. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #63 Difficulty: Easy Learning Objective: 18-05 Outline dividend payment procedures. Topic: 18-18 Dividend Payment Procedures Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

64. Stock dividends usually enhance the overall wealth of an investor. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #64 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-19 Stock Dividend Type: Memory

65. A stock split involves a reduction in the firm's retained earnings account. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #65 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Memory

66. Distributions of 20-25% or greater of outstanding shares are generally to be treated as stock splits. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #66 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Memory

67. Stock dividends may be utilized to provide information to investors about growing companies. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #67 Difficulty: Medium Learning Objective: 18-02 Describe a dividend payment as a passive or active decision based on investor preference and the informational content of dividends. Calculate dividend payout ratios and dividend yields. Topic: 18-08 Dividend Payouts Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

68. Stock splits are usually utilized to place stock in a lower-price trading range. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #68 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Memory

69. The repurchase of a corporation's own stock will generally have a negative impact on its price. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #69 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-25 Repurchase of Stock as an Alternative to Dividends Type: Memory

70. Investors in high marginal tax brackets prefer dividends while investors in low marginal tax brackets prefer to have corporate earnings reinvested. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #70 Difficulty: Medium Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-16 Tax Position of Shareholders Type: Memory

71. One of the major influences on dividends is the corporate growth rate in sales and the subsequent return on assets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #71 Difficulty: Medium Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

72. At maturity (Stage IV) the firm will usually pay out about 15-25% of earnings in dividends. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #72 Difficulty: Medium Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Memory

73. Life cycle growth analysis can be helpful in determining a firm's ability to pay dividends. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #73 Difficulty: Easy Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Memory

74. In Stage III growth, stock dividends and stock splits are eliminated. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #74 Difficulty: Easy Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Memory

75. Shareholders in general prefer large dividends to small dividends. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #75 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-16 Tax Position of Shareholders Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

76. Some researchers feel that shareholders prefer dividends to retained earnings because dividends have an information content. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #76 Difficulty: Medium Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-06 Arguments for the Relevance of Dividends Type: Memory

77. A general rule of thumb would be that firms with a faster growth rate have smaller payout ratios. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #77 Difficulty: Medium Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-06 Arguments for the Relevance of Dividends Type: Memory

78. Stability of dividends is not important to shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #78 Difficulty: Easy Learning Objective: 18-02 Describe a dividend payment as a passive or active decision based on investor preference and the informational content of dividends. Calculate dividend payout ratios and dividend yields. Topic: 18-10 Dividend Stability Type: Memory

79. Dividends can only be distributed if the firm has positive income in the year the dividend is paid. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #79 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-12 Legal Rules Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

80. Dividend reinvestment plans provide the shareholder an opportunity to buy additional shares of stock with the cash dividend paid by the company. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #80 Difficulty: Medium Learning Objective: 18-08 Explain a dividend reinvestment plan. Topic: 18-27 Dividend Reinvestment Plans Type: Memory

81. With a dividend reinvestment plan an investor may be able to add cash payments to buy additional shares. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #81 Difficulty: Easy Learning Objective: 18-08 Explain a dividend reinvestment plan. Topic: 18-27 Dividend Reinvestment Plans Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #82 Difficulty: Medium Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-16 Tax Position of Shareholders Type: Concept

83. A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders' total claim on earnings will increase. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #83 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-21 Value to the Investor Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

84. A rapid growth firm can often expect a shift in the type of its typical shareholder as the firm moves into maturity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #84 Difficulty: Medium Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-13 Cash Position of the Firm Type: Concept

85. Firms with extra money should always repurchase their own stock, thus increasing the value of the firm. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #85 Difficulty: Medium Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-25 Repurchase of Stock as an Alternative to Dividends Type: Memory

86. When a firm raises its dividend, the information content is usually positive for investors. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #86 Difficulty: Medium Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-06 Arguments for the Relevance of Dividends Type: Memory

87. Dividends may be relevant because they help to resolve uncertainty about the firm and its future. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #87 Difficulty: Medium Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-06 Arguments for the Relevance of Dividends Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

88. Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #88 Difficulty: Hard Learning Objective: 18-02 Describe a dividend payment as a passive or active decision based on investor preference and the informational content of dividends. Calculate dividend payout ratios and dividend yields. Topic: 18-10 Dividend Stability Type: Memory

89. Retained earnings accurately portray the liquidity position of the firm. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #89 Difficulty: Hard Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-13 Cash Position of the Firm Type: Memory

90. Following the payment of a dividend, the firm's stock price tends to fall by the amount of the dividend. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #90 Difficulty: Medium Learning Objective: 18-05 Outline dividend payment procedures. Topic: 18-18 Dividend Payment Procedures Type: Memory

91. If the cash dividend per share remains constant following a stock dividend, the shareholder will receive greater total cash dividends. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #91 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-19 Stock Dividend Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

92. Because the investor is taxed whether dividends are received or not, there are no real advantages to a dividend reinvestment plan. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #92 Difficulty: Hard Learning Objective: 18-08 Explain a dividend reinvestment plan. Topic: 18-27 Dividend Reinvestment Plans Type: Concept

93. The major stock repurchase plans often revolve around companies wanting to create demand for their shares. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #93 Difficulty: Medium Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-25 Repurchase of Stock as an Alternative to Dividends Type: Concept

94. Large dividend payouts may suggest that the firm does not have sufficient investment opportunities with adequate returns. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #94 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-02 The Marginal Principle of Retained Earnings Type: Memory

95. Stock repurchases can be tax advantageous and signal messages to the market that the company expects future prosperity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #95 Difficulty: Medium Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-25 Repurchase of Stock as an Alternative to Dividends Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

96. Stock dividends and stock splits have the same impact on retained earnings. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #96 Difficulty: Easy Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-24 Stock Splits Type: Concept

97. The main concern over the investor preference for dividends or reinvestment is centred on tax implications. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #97 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-16 Tax Position of Shareholders Type: Concept

98. To receive a dividend on a common share, an investor must purchase the share at least a week before the holder-of-record date. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #98 Difficulty: Easy Learning Objective: 18-05 Outline dividend payment procedures. Topic: 18-18 Dividend Payment Procedures Type: Memory

99. No tax is payable on stock dividends. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #99 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-21 Value to the Investor Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

100. By employing a dividend reinvestment plan, a company is assured of increasing cash flow into the company. FALSE

Accessibility: Keyboard Navigation Block - Chapter 18 #100 Difficulty: Easy Learning Objective: 18-08 Explain a dividend reinvestment plan. Topic: 18-27 Dividend Reinvestment Plans Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 18 #101 Difficulty: Easy Learning Objective: 18-01 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends. Topic: 18-02 The Marginal Principle of Retained Earnings Type: Concept

102. The clientele effect is the effect of investor preferences for dividends or capital gains. TRUE

Accessibility: Keyboard Navigation Block - Chapter 18 #102 Difficulty: Easy Learning Objective: 18-03 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices based on earnings multiples. Topic: 18-16 Tax Position of Shareholders Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

103. Why might a company repurchase its own shares? 1. A firm with excess cash and inadequate investment opportunities may choose to repurchase its own shares in the market rather than pay a cash dividend. For this reason, the stock repurchase decision may be thought of as an alternative to the payment of cash dividends. 2. Corporation believes the shares are selling at bargain basement prices. By repurchasing shares the corporation is able to maintain a constant demand for its own securities and to perhaps stave off further price erosion, at least temporarily. 3. Corporate management believes that the announcement of a repurchase reassures investors of the value of their investment. 4. Reacquired shares may also be useful for employee stock options or as part of a tender offer in a merger or acquisition. 5. Firms also often reacquire part of their shares as a protective device against being taken over by others. As the equity value of a firm decreases relative to the value of its physical assets, outsiders may attempt to gain control of the firm by using the value of the physical assets to finance the purchase of the equity. To reduce the availability of their companies to these highly leveraged buyouts, the managements of potential takeover targets often take on debt to buy back some of their stock. 6. Some evidence exists for superior returns on shares after repurchase. It is suggested that management is conveying new information about future expected earnings when a repurchase announcement is made. With improved results in the following months, the share price shows increasing value.

Block - Chapter 18 #103 Difficulty: Medium Learning Objective: 18-07 Discuss the reasons for a share repurchase. Topic: 18-25 Repurchase of Stock as an Alternative to Dividends Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

104. Explain in detail the corporate life cycle and the corresponding dividend policy that is most likely to be found at each stage. Stage I: A small firm pays no dividends because it needs all of its profits (if there are any) for reinvestment in new productive assets. If the firm is successful in the marketplace, the demand for its products will create growth in sales, earnings, and assets, and the firm will move into Stage II. Stage II: The firm has numerous projects that add value. The projects have positive NPVs and the returns on the projects exceed shareholder expected rates of return (opportunity costs). Sales and returns on assets will be growing at an increasing rate, and earnings will still be reinvested. • Early on, stock dividends (distribution of additional shares) may be instituted. • Later, low cash dividends may be started to inform investors that the firm is profitable but cash is needed for internal acquisition. At this stage careful financial forecasting is required. The large demand for funds will likely send the firm to the capital markets as internal funds are not usually sufficient to meet the growth demands. Stage III: The expansion of sales continues, but at a decreasing rate, and returns on investment may decline as more competition enters the market and tries to take away the firm's market share. During this period the firm is more and more capable of paying cash dividends, as the asset expansion rate slows and external funds become more readily available. Stock dividends and stock splits are still common in the expansion phase, and the dividend payout ratio usually increases from a low level of 5 to 15 percent of earnings to a moderate level of 25 to 40 percent of earnings. Stage IV: At maturity, the firm maintains a stable growth rate in sales similar to that of the economy as a whole, and when risk premiums are considered, its return on assets level out to those of the industry and the economy. In unfortunate cases firms suffer declines in sales if product innovation and diversification have not occurred over the years. In Stage IV, assuming maturity rather than decline, dividends might range from 40 to 60 percent of earnings. These percentages differ from industry to industry depending on the individual characteristics of the company, such as operating and financial leverage and the volatility of sales and earnings over the business cycle. In a general sense, the life cycle of the firm relates to the theory and practice of dividend policy. When opportunities are good the marginal principle of retained earnings applies, but as growth slows and dividends begin, investors expect the dividends to continue for various reasons. Management at this point tries to stabilize the dividend payout.

Block - Chapter 18 #104 Difficulty: Hard Learning Objective: 18-04 Outline the life cycle and growth of dividends. Topic: 18-17 Life Cycle Growth and Dividends Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

A) What changes would occur in the above statement of net worth after a 2 for 1 stock split? B) Earnings for 2015 were $1,575,000, what would EPS be before and after the stock split? A)

Block - Chapter 18 #105 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-24 Stock Splits Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

106. The shareholders' equity portion of Mishastone Tire Company follows:

The current market value of Mishastone's stock is $20. Show what the balance sheet will look like if Brimstone declares a 15% stock dividend. 2.0 million × 15% = 300,000 new shares

Block - Chapter 18 #106 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-20 Accounting Considerations for a Stock Dividend Type: Concept

107. Maxwell Electronics had net income of $15 million last year, and had 3 million common shares outstanding. They declared a 12% stock dividend. Calculate EPS before and after the stock dividend. Before:

After:

Block - Chapter 18 #107 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-21 Value to the Investor Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

December 31, 2015, after $.25 cash dividend

December 31, 2015, after 5% stock dividend

C) Earnings $160,000

Foundations of Financial Management - 10th Canadian Edition by Block Block - Chapter 18 #108 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-19 Stock Dividend Type: Concept

A) What changes would occur in the above statement of net worth after a 4 for 1 stock split? B) Earnings for 2015 were $3,10,000, what would EPS be before and after the stock split? A)

Block - Chapter 18 #109 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-21 Value to the Investor Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

110. The shareholders' equity portion of Dexter Company follows:

The current market value of Dexter's stock is $30. Show what the balance sheet will look like if Brimstone declares a 10% stock dividend. 1.0 million × 10% = 100,000 new shares

Block - Chapter 18 #110 Difficulty: Medium Learning Objective: 18-06 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sheet that result. Topic: 18-20 Accounting Considerations for a Stock Dividend Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 18 Summary Category

# of Que stions

Accessibility: Keyboard Navigation

101

Block - Chapter 18

111

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 1801 Justify Managements Decision Criteria as to Whether Internally Generated Funds Should Be Reinvested or Paid Out as Dividends.

Learning Objective: 1802 Describe a dividend payment as a passive or active decision based on investor preference and the informational content of dividends . Calculate dividend payout ratios and dividend yields.

Learning Objective: 1803 Outline the many factors to be considered in dividend policy. Calculate aftertax income from dividends and calculate share prices ba sed on earnings multiples.

Learning Objective: 18-04 Outline the life cycle and growth of dividends.

Learning Objective: 18-05 Outline dividend payment procedures.

Learning Objective: 1806 Distinguish the effect of stock splits and stock dividends on the position of the shareholders. Calculate the changes in the balance sh eet that result.

Learning Objective: 18-07 Discuss the reasons for a share repurchase.

Learning Objective: 18-08 Explain a dividend reinvestment plan.

Topic: 18-01 Dividend Theories

Topic: 18-02 The Marginal Principle of Retained Earnings

Topic: 18-03 Residual Theory

Topic: 18-04 An Incomplete Theory

Topic: 18-06 Arguments for the Relevance of Dividends

Topic: 18-08 Dividend Payouts

Topic: 18-09 Dividend Yields

Topic: 18-10 Dividend Stability

Topic: 18-11 Other Factors Influencing Dividend Policy

Topic: 18-12 Legal Rules

Topic: 18-13 Cash Position of the Firm

Topic: 18-16 Tax Position of Shareholders

Topic: 18-17 Life Cycle Growth and Dividends

Topic: 18-18 Dividend Payment Procedures

Topic: 18-19 Stock Dividend

Topic: 18-20 Accounting Considerations for a Stock Dividend

Topic: 18-21 Value to the Investor

Topic: 18-24 Stock Splits

Topic: 18-25 Repurchase of Stock as an Alternative to Dividends

Topic: 18-26 Other Reasons for Repurchase

Topic: 18-27 Dividend Reinvestment Plans

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 19 1. A convertible security is almost always: A. a security that can be converted into any other type of security. B. a debt security that can be converted into preferred shares. C. a security that can be converted into common shares at the holder's option. D. a security that can be converted into common shares at the option of the issuing corporation.

2. The computation of (basic) earnings per share will include consideration of: A. all convertible securities. B. only shares outstanding. C. shares outstanding and common stock equivalents. D. only common stock equivalents.

3. A $1,000 par value bond with a conversion price of $50 has a conversion ratio of: A. $50. B. $20. C. 50 shares. D. 20 shares.

4. A convertible bond is currently selling for $855. It is convertible into 15 common shares which presently sell for $50 per share. The conversion premium is: A. $105. B. $57. C. 57 shares. D. 17 shares.

5. The theoretical floor value for a convertible bond is its: A. conversion price. B. conversion value. C. par value. D. pure bond value.

Foundations of Financial Management - 10th Canadian Edition by Block

6. If the price of common share associated with a convertible bond is less than the conversion price: A. the bond will sell at its pure bond value. B. the bond will sell at its par value. C. the bond will sell at its conversion value. D. there is not enough information to tell what the bond price will be.

7. The interest rate on convertibles is generally ____________ the interest rate on similar nonconvertible instruments. A. greater than B. less than C. the same as D. at least twice

8. The principle device used by the corporation to force conversion: A. is setting the conversion price above the current market price. B. is reducing the amount of interest payments. C. is buying bonds back at below par value. D. is a call provision.

9. The conversion ratio is the: A. price at which a convertible security is exchanged into common shares. B. ratio of conversion value to market value of a convertible security. C. number of shares of common stock into which the convertible may be converted. D. ratio of the conversion premium to market value of a convertible security.

10. The minimum theoretical value of a warrant to buy 5 shares of ACD stock at $45 per share is $10. What is the current market price of ACD stock? A. $45.50 B. $50.00 C. $47.00 D. $37.50

11. When preparing financial statements the accounting consideration of convertible bonds include: A. adding shares from conversion to shares outstanding in the numerator of the diluted earnings per shares calculation. B. the effect of convertibles on basic earnings per share. C. adjusting after tax earnings in the denominator of the diluted earnings per shares calculation. D. redefining earnings to add the costs related to the convertible securities to the numerator of the EPS ratio.

Foundations of Financial Management - 10th Canadian Edition by Block

12. A convertible bond is often utilized: A. as a sweetener when buying debt. B. to sell common bonds at prices lower than those prevailing when funds are needed. C. when the company wants to increase equity. D. when there is demand for straight debt.

13. Jacobs and Company has warrants outstanding, which are selling at a $3 premium above intrinsic (or minimum) value. Each warrant allows its owner to purchase one share of common stock at $25. If the common stock currently sells for $28, what is the warrant price? A. $6 B. $10 C. $12 D. $14

14. Conversion price is usually set _______ the prevailing market price of the common stock at the time the bond issue is sold. A. at B. below C. above D. at one half of

15. The conversion premium will be large: A. if investors have great expectations for the price of the common shares. B. if interest rates decline. C. when the conversion value is much greater than the pure bond value. D. when the share price is very stable.

16. Warrants as compared to convertible bonds: A. provide a regular return. B. do not trade at a speculative premium. C. are sold without the company's consent. D. provide the company with cash flow when exercised (converted).

17. If the share price rises substantially above the conversion price, an advantage to the corporation would be: A. the premium would decrease. B. the floor price would offer the investor downside protection. C. the bond would most likely be converted into common shares and the debt would not have to be repaid. D. the firm could raise the capital needed by issuing fewer shares than those sold from the conversion of the securities.

Foundations of Financial Management - 10th Canadian Edition by Block

18. A step-up in the conversion price refers to: A. the ability of the company to step up the maturity of the bond to an earlier date. B. the provision that decreases the conversion ratio the longer a convertible bond is held. C. a refunding of a convertible bond when the conversion value equals the pure bond value. D. the ability of the holder to step up the conversion maturity to an earlier date.

19. The conversion premium is the greatest and the downside the smallest when: A. the conversion value equals the pure bond value. B. the conversion value is greater than the pure bond value. C. the conversion value is less than the pure bond value. D. the share price is expected to go up drastically.

20. A disadvantage to the investor of a convertible bond is that: A. the share price may rise above conversion price. B. if interest rates rise, the pure bond value (floor price) will decline. C. the interest rate on convertibles is generally one-half below the coupon rate on straight bonds of similar risk. D. interest paid on convertible bonds is higher than that paid on non-convertible bonds.

21. An advantage to the corporation in selling a convertible bond is: A. the interest rate on a convertible is lower than a straight debt issue of equal risk. B. the bond may never get converted into common stock and create dilution. C. if interest rates fall the bond is likely to be refunded. D. a dilution effect on earnings per share when convertible securities are issued.

22. The floor price of a convertible bond cannot fall below: A. the conversion ratio. B. the conversion price. C. the conversion premium. D. the pure bond value.

23. The price of a convertible bond: A. has downside as well upside limitations. B. has only upside limitations. C. has only downside limitations. D. has no upside or downside limitations.

Foundations of Financial Management - 10th Canadian Edition by Block

24. Which of the following is true? A. As the price of common stock increases, the market price of a convertible bond and the conversion premium increase. B. As the price of common stock increases, the market price of a convertible bond and the conversion value increase. C. As the price of common stock increases, the conversion value and the floor price increase. D. As the book value of common stock increases, the market price of a convertible bond and the conversion premium increase.

25. Which of the following is true about warrants? A. As the market value of a warrant increases, so does the premium. B. A rising share price is usually followed by an increase in the price of the warrant. C. Warrants guarantee a return for the holder. D. Warrant premiums are independent of the market price of shares.

26. Trusty Corp. has 20,000, 7% bonds, convertible into 30 shares per bond. Each bond has a par value of $1,000. Trusty has 800,000 outstanding shares paying a $0.50 annual dividend. Earnings were $750,000 after paying $250,000 in taxes. Compute the diluted EPS. A. $0.54 B. $0.94 C. $1.29 D. $1.71

27. Quirm Corp. has 10,000 7.25% bonds convertible into 30 shares per $1000 bond. Quirm has 700,000 outstanding shares. Quirm has a tax rate of 35%. Compute (basic) earnings per share if aftertax earnings are $742,000. A. $0.71 B. $0.99 C. $1.06 D. $1.51

28. The Burma Hat Company's warrant is trading for $10.20. The warrant carries the option to purchase two shares of common stock for $48. What is the speculative premium if the stock price is $51.30? A. $3.30 B. $3.60 C. $6.60 D. $10.90

Foundations of Financial Management - 10th Canadian Edition by Block

29. Which of the following is not a characteristic of convertible bond issues? A. The average size of the offering is small. B. A 15-20% conversion premium at time of issue is common. C. Large companies with billions of dollars in sales and assets are the primary issuers. D. Primary issuers tend to have less than AA credit ratings.

30. The "floor," or pure bond, value of a convertible bond is found by: A. multiplying the price of the firm's common stock by the conversion ratio. B. multiplying the bond's conversion premium by the price of the firm's common shares. C. multiplying the price of the firm's common stock by the conversion ratio and adding the present value of the bond's face value. D. finding the present value of the bond's interest payments and adding the present value of the bond's face value.

31. Expectations of a significant increase in the price of a firm's common shares will result in: A. large conversion premiums for the firm's convertible bonds. B. small conversion premiums for the firm's convertible bonds. C. negative conversion premiums for the firm's convertible bonds. D. no effect at all on conversion premiums.

32. Which of the following characteristics are drawbacks of convertible bonds? A. Downside protection is effectual if the bond is bought at a large premium over par value. B. Interest rates on a convertible bond are always above market interest rates. C. Conversion may be forced on the bondholder by put provisions on the convertible bond. D. Interest rates on the debt-instrument part of a convertible bond are frequently below market interest rates.

33. When a company has a convertible bond in its capital structure,; A. it can reduce its debt-to-equity ratio by calling the bond. B. there is no effect on the firm's basic earnings per share. C. there is no advantage to the firm in forcing conversion of the bonds. D. it should ignore the conversion feature.

34. Warrants are: A. long-term options to sell shares of the issuing firm's shares. B. fairly stable, low-risk investments. C. investments whose value is directly related to the price of the underlying shares. D. structured to sell for precisely their intrinsic value.

Foundations of Financial Management - 10th Canadian Edition by Block

35. Duckwalk Corporation warrants carry the right to buy 10 shares of Duckwalk common stock at $3.50 per share. The common stock has a current market price of $4.25 per share. The intrinsic or minimum value of one Duckwalk warrant is: A. $0.43. B. $7.50. C. $0.75. D. $0.53.

36. A warrant which does not expire until several years in the future and which provides its owner the opportunity to buy a stock which is rising in price will probably sell for: A. less than its intrinsic value. B. exactly its intrinsic value. C. more than its intrinsic value. D. less than or equal to its intrinsic value.

37. A forward contract: A. fixes today the right to buy/sell an asset at a future date at a price to be determined at that future date. B. fixes today the right to buy/sell an asset at a future date at a price set today. C. fixes today the right to buy/sell an asset today at a price to be determined at a future date. D. fixes today the right to buy/sell an asset at a future date at a price to be determined at that future date, if the price has decreased.

38. Futures contracts differ from forward contracts because: A. they trade on an organized exchange. B. they require marking to market on a daily basis. C. delivery can occur any day of the delivery month. D. futures only deal with currency and forwards deal with commodities.

39. Warrants and call options are similar because: A. each requires the firm to issue new shares when exercised. B. each will affect the share value when exercised. C. both are issued by the corporation. D. give the holder leverage on the company's share price.

40. A call option gives the holder the right: A. but not the obligation to sell an asset at a predetermined price. B. but not the obligation to buy an asset at a predetermined price. C. and the obligation to sell an asset at a predetermined price. D. and the obligation to buy an asset at a predetermined price.

Foundations of Financial Management - 10th Canadian Edition by Block

41. A put option gives the holder the right: A. but not the obligation to sell an asset at a predetermined price. B. but not the obligation to buy an asset at a predetermined price. C. and the obligation to sell an asset at a predetermined price. D. and the obligation to buy an asset at a predetermined price.

42. The writer of a call option has the obligation: A. but not the right to sell an asset at a predetermined price. B. but not the right to buy an asset at a predetermined price. C. and the right to sell an asset at a predetermined price. D. and the right to buy an asset at a predetermined price.

43. Which of the following statements is correct? A. Call and put options increase in price if the exercise price is increased. B. Call and put options increase in price if the volatility of the underlying asset is decreased. C. Call and put options increase in price if the time to expiry is increased. D. Call and put options increase in price if the opportunity cost of funds is increased.

44. If the time to expire of an option increases: A. the value of a call option will increase, but a put option will decrease. B. the value of a call option will decrease, but a put option will increase. C. the value of a call option will decrease, and a put option will decrease. D. the value of a call option will increase, and a put option will increase.

45. If the volatility of an option increases: A. the value of a call option will increase, but a put option will decrease. B. the value of a call option will decrease, but a put option will increase. C. the value of a call option will decrease, and a put option will decrease. D. the value of a call option will increase, and a put option will increase.

46. If the market opportunity cost of funds increases: A. the value of a call option will increase, but a put option will decrease. B. the value of a call option will decrease, but a put option will increase. C. the value of a call option will decrease, and a put option will decrease. D. the value of a call option will increase, but a put option will increase.

Foundations of Financial Management - 10th Canadian Edition by Block

47. A future contract is more flexible than a forward contract because: A. the future price is preset today. B. it is available in a wider variety of amounts. C. it trades on an organized exchange. D. prices are published in the newspaper.

48. Brenda Baruda has a futures contract to sell corn at $2.22 per bushel. The contract is about to expire and the spot (cash) price of corn is currently $2.00 per bushel. We would expect Brenda to: A. close out the contract at a gain. B. close out the contract at a loss. C. deliver under the contract at a gain. D. deliver under the contract at a loss.

49. A company will force conversion of a convertible bond when: A. the conversion value is higher than the call price. B. the conversion value is higher than the par value (face value). C. when the total interest payment on the bond equals the total dividend payment on the converted shares of common stock. D. when the share price is very low.

50. A $1,000 par value bond with a conversion price of $20 has a conversion ratio of: A. $50. B. $20. C. 50 shares. D. 20 shares.

51. A convertible bond is currently selling for $900. It is convertible into 15 common shares which presently sell for $55 per share. The conversion premium is: A. $825. B. $75. C. 16 shares. D. 17 shares.

52. The interest rate on nonconvertible bonds is generally ____________ the interest rate on similar convertible instruments. A. greater than B. less than C. the same as D. at least twice

Foundations of Financial Management - 10th Canadian Edition by Block

53. The minimum theoretical value of a warrant to buy 6 shares of a firm's stock at $50 per share is $10. What is the current market price of the firm's stock? A. $51.67 B. $50.00 C. $60.00 D. $5.00

54. Simba Inc. has warrants outstanding, which are selling at a $2 premium above intrinsic (or minimum) value. Each warrant allows its owner to purchase one share of common stock at $24. If the common stock currently sells for $29, what is the warrant price? A. $5.00 B. $7.00 C. $12.00 D. $14.50

55. A step-up in the conversion price refers to: A. the ability of the company to step up the maturity of the bond to an earlier date. B. the provision that increases the conversion ratio the longer a convertible bond is held. C. a refunding of a convertible bond when the conversion value equals the pure bond value. D. the holder may pay a progressively higher option price if he or she does not exercise by a given date.

56. A disadvantage to the investor of a convertible bond is that: A. the share price may never rise above conversion price. B. if interest rates rise, the pure bond value (floor price) will rise. C. the interest rate on convertibles is generally half the coupon rate on straight bonds of similar risk. D. if stock price rises above the conversion price, the firm could raise the capital needed by issuing fewer shares than those sold from the conversion of the securities.

57. The floor value of a convertible bond cannot fall below: A. the conversion ratio. B. the conversion price. C. the conversion premium. D. its value as either equity or debt.

58. Which of the following is true about warrants? A. As the market value of a warrant increases, so does the premium. B. A rising share price is usually followed by a decrease in the price of the warrant. C. Exercise price is greater than market price ant time of issue. D. Warrants are favoured by small businesses and are issued more frequently on the Venture Exchange.

Foundations of Financial Management - 10th Canadian Edition by Block

59. Shady Corp. has 30,000, 6% bonds, convertible into 50 shares per bond. Each bond has a par value of $1,000. Trusty has 1,000,000 outstanding shares paying a $0.75 annual dividend. Earnings were $900,000 after paying $600,000 in taxes. Compute the diluted EPS. A. $0.79 B. $1.08 C. $0.90 D. $0.36

60. Horne Engineering Corp. has 30,000 6.0% bonds convertible into 30 shares per $1,000 bond. Horne Engineering has 500,000 outstanding shares and a tax rate of 35%. Compute (basic) earnings per share if aftertax earnings are $750,000 and diluted EPS when bonds are converted. A. $1.82 basic, $1.50 diluted B. $1.50 basic, $1.37 diluted C. $3.30 basic, $1.18 diluted D. $1.26 basic, $0.98 diluted

61. Vansteelandt Distillery Inc's warrant is trading for $12.50. The warrant carries the option to purchase two shares of common stock for $50. What is the speculative premium if the stock price is $53.50? A. $3.50 B. $5.50 C. $7.00 D. No speculative value.

Beck Corp. (BC) has a convertible bond issue outstanding. Each $1,000 in bond outstanding can be converted into 20 common shares. BC's non-convertible bonds have a coupon of 4% paid annually and mature in 15 years. BC's common stock is currently trading at $38 a share and its convertible bonds are trading at $1,100.

62. If bonds of similar risk are yielding 5% what is the pure bond value of BC's convertible bonds? A. $896 B. $1,000 C. $1,150 D. $982

63. BC's convertible bond has a conversion value of _______. A. $1,100 B. $1,000 C. $760 D. $340

Foundations of Financial Management - 10th Canadian Edition by Block

64. BC's convertible bond has a conversion premium of ______. A. $340 B. $760 C. $1,000 D. $1,100

65. If BC's stock price rises to $55 a share, the price of the convertible bond will rise to ______. A. $1,100 B. $1,000 C. $1,260 D. $1,500

66. FC reported earnings of $12,000,000. During the year FC issued a convertible bond that could be, if fully converted, increase FC's shares outstanding by 575,000. If FC currently has 4,800,000 shares outstanding and the after-tax cost of the convertible bonds is $850,000, what is FC's diluted EPS? A. $2.50 B. $2.39 C. $2.89 D. $3.48

67. Silver and Gold Ltd. (SG) common stock is currently trading at $32 a share. SG's warrants have a strike price of $25 if converted on or before July 1 and can be converted into 1 share of SG. Calculate the intrinsic value of SG's warrants. A. $8.90 B. $12.90 C. $15.90 D. $7.00

68. Silver and Gold Ltd. (SG) common stock is currently trading at $32 a share. SG's warrants have a strike price of $25 if converted on or before July 1 and can be converted into 1 share of SG. If SG's warrants are currently trading at $12.00, and the intrinsic value of these warrants is $7.00, calculate their speculative premium. A. $5.00 B. $7.00 C. $8.90 D. $12.00

Foundations of Financial Management - 10th Canadian Edition by Block

69. A convertible security is almost always: A. a security that can be converted into any other type of security. B. a debt security that can only be converted into preferred stock. C. a security that can be converted into common stock at the holder's option. D. a security that can be converted into common stock only at the option of the issuing corporation.

71. If the price of common stock associated with a convertible bond is less than the conversion price: A. the bond will sell at its pure bond value. B. the bond will sell at its par value. C. the bond will sell at its conversion value. D. there is not enough information to tell what the bond price will be.

72. The conversion ratio is the: A. price at which a convertible security is exchanged into common stock. B. ratio of conversion value to market value of a convertible security. C. number of shares of common stock into which the convertible may be converted. D. ratio of the conversion premium to market value of a convertible security.

73. The conversion premium will be small: A. if investors have low expectations for the price of the common stock. B. if interest rates decline. C. when the conversion value is much greater than the pure bond value. D. when the stock price is very stable.

74. Which of the following is true? A. As the price of common stock increases, the market price of a convertible bond and the conversion premium increase. B. As the price of common stock increases, the market price of a convertible bond and the conversion value increase. C. As the price of common stock increases, the conversion value and the floor price increase. D. As the price of common stock increases, the market price of a convertible bond and the conversion premium decrease.

Foundations of Financial Management - 10th Canadian Edition by Block

75. Expectations of a significant increase in the price of a firm's common stock will result in: A. large conversion premiums for the firm's convertible bonds. B. small conversion premiums for the firm's convertible bonds. C. negative conversion premiums for the firm's convertible bonds. D. No effect at all on conversion premiums.

77. A $1,000 par value bond with a conversion price of $100 has a conversion ratio of: A. $20. B. 20 shares. C. $10. D. 10 shares.

78. The theoretical floor value for a convertible bond is its: A. conversion price. B. conversion value. C. par value. D. pure bond value.

79. The floor price of a convertible bond is determined by: A. the conversion ratio. B. the conversion price. C. the conversion premium. D. its value as either equity or debt.

80. The price of a convertible bond: A. is calculated by adding the pure bond value to the market price. B. is determined by subtracting the market price of the common share from the market price of the bond. C. has some downside protection. D. has no upside potential.

Foundations of Financial Management - 10th Canadian Edition by Block

81. The conversion premium is the greatest and the downside risk the smallest when: A. the conversion value equals the pure bond value. B. the conversion value is greater than the pure bond value. C. the conversion value is less than the pure bond value. D. the stock price is expected to go up drastically.

82. Convertible securities are attractive because of their downside protection characteristics as well as upside potential. True False

83. A convertible security is one that can be converted into common stock at the option of the issuer. True False

84. A $1,000 par value convertible bond has a conversion ratio of 50. The bond conversion price is $20. True False

85. The conversion premium represents the dollar difference between the conversion value and the pure bond value. True False

86. The interest rate on convertible bonds is typically one-third higher than similar non-convertible issues. True False

87. For the most downside protection, an investor should search for convertibles trading below par value near their floor value. True False

88. A call provision is a commonly used device by a corporation to force conversion into common stock. True False

89. Warrants are considered only in the computation of diluted earnings per share. True False

Foundations of Financial Management - 10th Canadian Edition by Block

90. A common stock equivalent is considered to be any security convertible into common stock. True False

91. Warrants are often attached to debt securities to increase the debt issues attractiveness to investors. True False

92. Most corporations include call provisions in agreements relating to the issue of warrants. True False

93. If you purchased a convertible bond when first issued, you would pay more for the shares of stock you are entitled to than if you purchased the shares directly on the market at that point in time. True False

94. A convertible bond has two separate bases of value, the bond investment value and the bond conversion value. True False

95. The face value of a convertible bond divided by the conversion price equals the number of shares a bondholder will receive upon conversion. True False

96. The conversion price divided into the market value of a convertible bond provides the conversion ratio. True False

97. The conversion premium is equal to the market price minus the conversion value. True False

98. Earnings per share (basic) includes all convertible bonds outstanding. True False

Foundations of Financial Management - 10th Canadian Edition by Block

99. Diluted earnings per share must include all convertible securities. True False

100. In order to calculate (basic) earnings per share, the earnings after taxes have to be adjusted for the elimination of the convertible bond interest expense. True False

101. Forced conversion refers to the corporation calling a convertible bond when the market price of the stock is above the conversion price. True False

102. A convertible bond has both a downside limit (the pure bond value) and an upside limit (the conversion price). True False

103. The floor value of a bond can change if market interest rates for competitive bonds change. True False

104. The premium for a warrant would increase if its underlying common stock has a negative market outlook. True False

105. The primary issuers of convertible bonds are smaller, less than top grade companies. True False

106. On average, convertible bonds have conversion premiums of less than 10% at time of issue. True False

107. In general the average size of a convertible issue is small compared to normal bond issues. True False

Foundations of Financial Management - 10th Canadian Edition by Block

108. A warrant's speculative premium equals the market price of the underlying common stock minus the option price. True False

109. The term forced conversion is derived from the fact that in such a situation, the bond issuer has no choice but to convert. True False

110. Conversion premiums are found by subtracting the current share price from the bond's semi-annual interest payment. True False

111. The downside protection of a convertible bond's floor value will protect the investor against loss. True False

112. Earnings per share (basic) may not include the dilutive effects of all of a firm's convertible bonds. True False

113. Warrants never sell for more than their intrinsic value. True False

114. A warrant may carry a speculative premium above intrinsic value if it will not expire until far into the future. True False

115. Conversion premiums are influenced heavily by expectations of future share price performance. True False

116. Generally, once a convertible bond trades at a certain premium to its intrinsic value, or at a certain multiple of its conversion price, the bond must be converted into common stock. True False

Foundations of Financial Management - 10th Canadian Edition by Block

117. To entice investors who are looking for a financial sweetener, convertible bonds are often sold at a discount. True False

118. At issuance, convertible bonds usually have a conversion premium of about 12%. True False

119. A forced conversion will alter the corporate balance sheet. True False

120. Warrants may be used by a corporation in financial distress as a means to satisfy shareholders in the event of a reverse share split. True False

121. Because a warrant is dependent on the market movement of an underlying share, it is highly speculative in nature. True False

122. A warrant loses some of its financial leverage when the share rises far above the exercise price. True False

123. As a financing device for creating common shares, warrants are usually more desirable than convertible bonds. True False

124. Derivatives receive their value based on particular assets such as commodities or foreign exchange. True False

125. Derivatives generally have an unlimited life, as do common shares. True False

Foundations of Financial Management - 10th Canadian Edition by Block

126. The derivatives market has developed in response to the increased volatility of the world's financial market. True False

127. Convertibles, rights, and warrants like other derivatives are the obligation of the financial markets. True False

128. The most common derivatives on organized exchanges are interest rate contracts. True False

129. Forwards unlike futures contracts are standardized as to amount and delivery dates. True False

130. Derivatives can be employed to take on more risk or to reduce risk. True False

131. Canada's derivative market is concentrated in Montreal (acquired by the TSX). True False

132. The use of a derivative contract can be set up to remove all the risk from a commercial transaction. True False

133. Forwards, futures, and options are contracts that all must be executed before the expiry date. True False

134. Futures and options require a small good faith deposit to hold the contract. True False

135. Options trade at their intrinsic value. True False

Foundations of Financial Management - 10th Canadian Edition by Block

136. The size of an option's speculative premium will be influenced to a large extent by the volatility of the underlying asset. True False

137. Forced conversion occurs when a company calls a convertible security that has a conversion value greater than the call price. True False

138. A warrant is a long-term option to buy securities at a set price for a given period of time. True False

139. List and explain 3 factors that determine the size of a speculative premium of a call or put option in the markets.

140. Describe the similarities and differences between options and futures.

141. Define and give examples of convertible securities.

Foundations of Financial Management - 10th Canadian Edition by Block

143. What are the advantage and disadvantages of convertible bonds for a corporation?

144. Lucky Dog Pet Food has a $1,000 convertible bond outstanding with a conversion price of $18.00 per share. The bond pays an interest payment of $50 semiannually and matures in 20 years unless converted into common shares earlier or called by the company. The common shares currently sell for $14.70 per share. If the bond sold at its theoretical bond value it would be priced competitively to yield 12% with bonds of the same risk class. A) How many shares of common stock are received on conversion? B) What is the conversion value? C) What is the pure bond value? D) How much downside protection has the pure bond value provided to investors? (answer in dollars)

Foundations of Financial Management - 10th Canadian Edition by Block

145. The Whipple Corporation currently has common stock selling for $25 per share on the Dominion Stock Exchange. Warrants are also available entitling the warrant holder the option of purchasing 1 share of common stock for every 3 warrants held. The exercise price is $19 per share. The warrants are currently selling for $4 per warrant. A) How much would you have to spend to buy one share of stock using the warrants? Does this make sense? B) What is the intrinsic value of the warrant? C) What is the speculative premium on this warrant?

146. The XLarge Corporation has a convertible bond outstanding with a conversion price of $28 per share. The $1,000 par value bonds have a 5% coupon rate and 20 years to maturity. The firm's common stock is currently selling for $36 per share and the bonds are selling for $1,300.00. A) Calculate the conversion ratio B) Calculate the conversion value. C) If equivalent bonds are currently yielding 12% to maturity, what is the pure bond value of this bond? D) How much downside protection does the pure bond value provide to an investor? Would this be an appropriate investment for a risk-averse investor?

Foundations of Financial Management - 10th Canadian Edition by Block

147. Fred Jury is a portfolio manager who has $1,200,000 of a client's money to invest in highly speculative instruments. Jury is contemplating the purchase of 40,000 shares of Shakee Corp. common stock, which is currently selling on the TransCanada Stock Exchange at $30.00 per share. Alternatively, he could buy warrants on Shakee Corp. common for $6.60. Each warrant gives the holder the right to buy one share of Shakee Corp. common stock at $27.00 per share. A) How many warrants could Mr. Jury buy with the $1,200,000? B) If he had purchased the common stock directly, and its price had increased to $37.20 per share, calculate his dollar and percentage return on the investment. C) Assume that when the price of the stock goes to $37.20 per share, the warrant sells for its intrinsic value. If Jury sells his warrants at this point, calculate his dollar and percentage return on the investment.

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 19 Key

1. A convertible security is almost always: A. a security that can be converted into any other type of security. B. a debt security that can be converted into preferred shares. C. a security that can be converted into common shares at the holder's option. D. a security that can be converted into common shares at the option of the issuing corporation.

Accessibility: Keyboard Navigation Block - Chapter 19 #1 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #2 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-12 Accounting Considerations with Convertibles Type: Memory

3. A $1,000 par value bond with a conversion price of $50 has a conversion ratio of: A. $50. B. $20. C. 50 shares. D. 20 shares.

Accessibility: Keyboard Navigation Block - Chapter 19 #3 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #4 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Learning Objective: 19-05 Calculate the conversion value of a convertible security. Topic: 19-08 Value of the Convertible Bond Type: Concept

5. The theoretical floor value for a convertible bond is its: A. conversion price. B. conversion value. C. par value. D. pure bond value.

Accessibility: Keyboard Navigation Block - Chapter 19 #5 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #6 Difficulty: Easy Learning Objective: 19-05 Calculate the conversion value of a convertible security. Topic: 19-07 Convertible Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

7. The interest rate on convertibles is generally ____________ the interest rate on similar nonconvertible instruments. A. greater than B. less than C. the same as D. at least twice

Accessibility: Keyboard Navigation Block - Chapter 19 #7 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-09 Is This Fools Gold? Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #8 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-09 Is This Fools Gold? Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #9 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

10. The minimum theoretical value of a warrant to buy 5 shares of ACD stock at $45 per share is $10. What is the current market price of ACD stock? A. $45.50 B. $50.00 C. $47.00 D. $37.50

Accessibility: Keyboard Navigation Block - Chapter 19 #10 Difficulty: Easy Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #11 Difficulty: Hard Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-12 Accounting Considerations with Convertibles Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #12 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #13 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

14. Conversion price is usually set _______ the prevailing market price of the common stock at the time the bond issue is sold. A. at B. below C. above D. at one half of

Accessibility: Keyboard Navigation Block - Chapter 19 #14 Difficulty: Easy Learning Objective: 19-08 Show how convertible securities and warrants affect earnings per share as reported on the income statement. Topic: 19-18 Comparisons of Rights, Warrants, and Convertibles Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #15 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #16 Difficulty: Easy Learning Objective: 19-06 Describe warrants and compare them to convertible securities. Topic: 19-14 Warrants Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #17 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-10 Advantages and Disadvantages to the Corporation Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #18 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-11 Forcing Conversion Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #19 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #20 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #21 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-10 Advantages and Disadvantages to the Corporation Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

22. The floor price of a convertible bond cannot fall below: A. the conversion ratio. B. the conversion price. C. the conversion premium. D. the pure bond value.

Accessibility: Keyboard Navigation Block - Chapter 19 #22 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

23. The price of a convertible bond: A. has downside as well upside limitations. B. has only upside limitations. C. has only downside limitations. D. has no upside or downside limitations.

Accessibility: Keyboard Navigation Block - Chapter 19 #23 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #24 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #25 Difficulty: Easy Learning Objective: 19-06 Describe warrants and compare them to convertible securities. Topic: 19-14 Warrants Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #26 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-12 Accounting Considerations with Convertibles Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #27 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-12 Accounting Considerations with Convertibles Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #28 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #29 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #30 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #31 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #32 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-10 Advantages and Disadvantages to the Corporation Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #33 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-10 Advantages and Disadvantages to the Corporation Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #34 Difficulty: Easy Learning Objective: 19-06 Describe warrants and compare them to convertible securities. Topic: 19-14 Warrants Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #35 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #36 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #37 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-01 Forwards Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #38 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-02 Futures Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #39 Difficulty: Medium Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-04 Call Option Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #40 Difficulty: Medium Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-03 Options Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #41 Difficulty: Medium Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-03 Options Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #42 Difficulty: Medium Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-03 Options Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #43 Difficulty: Hard Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-03 Options Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #44 Difficulty: Hard Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-04 Call Option Topic: 19-05 Put Option Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #45 Difficulty: Hard Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-03 Options Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #46 Difficulty: Hard Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-03 Options Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #47 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-02 Futures Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #48 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-02 Futures Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #49 Difficulty: Hard Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-11 Forcing Conversion Type: Concept

50. A $1,000 par value bond with a conversion price of $20 has a conversion ratio of: A. $50. B. $20. C. 50 shares. D. 20 shares.

Accessibility: Keyboard Navigation Block - Chapter 19 #50 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #51 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Learning Objective: 19-05 Calculate the conversion value of a convertible security. Topic: 19-08 Value of the Convertible Bond Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

52. The interest rate on nonconvertible bonds is generally ____________ the interest rate on similar convertible instruments. A. greater than B. less than C. the same as D. at least twice

Accessibility: Keyboard Navigation Block - Chapter 19 #52 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

53. The minimum theoretical value of a warrant to buy 6 shares of a firm's stock at $50 per share is $10. What is the current market price of the firm's stock? A. $51.67 B. $50.00 C. $60.00 D. $5.00

Accessibility: Keyboard Navigation Block - Chapter 19 #53 Difficulty: Easy Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #54 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #55 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-11 Forcing Conversion Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #56 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

57. The floor value of a convertible bond cannot fall below: A. the conversion ratio. B. the conversion price. C. the conversion premium. D. its value as either equity or debt.

Accessibility: Keyboard Navigation Block - Chapter 19 #57 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #58 Difficulty: Medium Learning Objective: 19-06 Describe warrants and compare them to convertible securities. Topic: 19-14 Warrants Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #59 Difficulty: Medium Learning Objective: 19-08 Show how convertible securities and warrants affect earnings per share as reported on the income statement. Topic: 19-17 Accounting Considerations with Warrants Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #60 Difficulty: Hard Learning Objective: 19-08 Show how convertible securities and warrants affect earnings per share as reported on the income statement. Topic: 19-17 Accounting Considerations with Warrants Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #61 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Block - Chapter 19

62. If bonds of similar risk are yielding 5% what is the pure bond value of BC's convertible bonds? A. $896 B. $1,000 C. $1,150 D. $982

Accessibility: Keyboard Navigation Block - Chapter 19 #62 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

63. BC's convertible bond has a conversion value of _______. A. $1,100 B. $1,000 C. $760 D. $340

Accessibility: Keyboard Navigation Block - Chapter 19 #63 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

64. BC's convertible bond has a conversion premium of ______. A. $340 B. $760 C. $1,000 D. $1,100

Accessibility: Keyboard Navigation Block - Chapter 19 #64 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

65. If BC's stock price rises to $55 a share, the price of the convertible bond will rise to ______. A. $1,100 B. $1,000 C. $1,260 D. $1,500

Accessibility: Keyboard Navigation Block - Chapter 19 #65 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #66 Difficulty: Easy Learning Objective: 19-08 Show how convertible securities and warrants affect earnings per share as reported on the income statement. Topic: 19-17 Accounting Considerations with Warrants Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #67 Difficulty: Easy Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #68 Difficulty: Easy Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #69 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

70. A convertible bond is currently selling for $970. It is convertible into 15 shares of common which presently sell for $50 per share. The conversion premium is: A. $90. B. $220. C. 57 shares. D. 13 shares. $50 stock price × 15 shares = $750 conversion value Conversion premium = Bond price of $970 - Conversion value of $750 = $220

Accessibility: Keyboard Navigation Block - Chapter 19 #70 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #71 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #72 Difficulty: Medium Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 19 #73 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #74 Difficulty: Hard Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #75 Difficulty: Hard Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

76. A convertible bond is currently selling for $1,125. It is convertible into 20 shares of common which presently sell for $40 per share. The conversion premium is: A. $325. B. $215. C. 66.74 shares. D. 23.80 shares. $40 stock price × 20 shares = $800 conversion value Conversion premium = Bond price of $1,125 - Conversion value of $800 = $325

Accessibility: Keyboard Navigation Block - Chapter 19 #76 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

77. A $1,000 par value bond with a conversion price of $100 has a conversion ratio of: A. $20. B. 20 shares. C. $10. D. 10 shares. Conversion ratio = Par value of $1,000/Conversion price of $50 = 20 shares

Accessibility: Keyboard Navigation Block - Chapter 19 #77 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Concept

78. The theoretical floor value for a convertible bond is its: A. conversion price. B. conversion value. C. par value. D. pure bond value.

Accessibility: Keyboard Navigation Block - Chapter 19 #78 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

79. The floor price of a convertible bond is determined by: A. the conversion ratio. B. the conversion price. C. the conversion premium. D. its value as either equity or debt.

Accessibility: Keyboard Navigation Block - Chapter 19 #79 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #80 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 19 #81 Difficulty: Hard Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Concept

82. Convertible securities are attractive because of their downside protection characteristics as well as upside potential. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #82 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

83. A convertible security is one that can be converted into common stock at the option of the issuer. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #83 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

84. A $1,000 par value convertible bond has a conversion ratio of 50. The bond conversion price is $20. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #84 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Concept

85. The conversion premium represents the dollar difference between the conversion value and the pure bond value. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #85 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

86. The interest rate on convertible bonds is typically one-third higher than similar non-convertible issues. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #86 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-09 Is This Fools Gold? Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

87. For the most downside protection, an investor should search for convertibles trading below par value near their floor value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #87 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-09 Is This Fools Gold? Type: Concept

88. A call provision is a commonly used device by a corporation to force conversion into common stock. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #88 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-09 Is This Fools Gold? Type: Memory

89. Warrants are considered only in the computation of diluted earnings per share. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #89 Difficulty: Medium Learning Objective: 19-08 Show how convertible securities and warrants affect earnings per share as reported on the income statement. Topic: 19-17 Accounting Considerations with Warrants Type: Memory

90. A common stock equivalent is considered to be any security convertible into common stock. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #90 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

91. Warrants are often attached to debt securities to increase the debt issues attractiveness to investors. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #91 Difficulty: Easy Learning Objective: 19-06 Describe warrants and compare them to convertible securities. Topic: 19-14 Warrants Type: Memory

92. Most corporations include call provisions in agreements relating to the issue of warrants. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #92 Difficulty: Easy Learning Objective: 19-06 Describe warrants and compare them to convertible securities. Topic: 19-14 Warrants Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 19 #93 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Concept

94. A convertible bond has two separate bases of value, the bond investment value and the bond conversion value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #94 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

95. The face value of a convertible bond divided by the conversion price equals the number of shares a bondholder will receive upon conversion. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #95 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

96. The conversion price divided into the market value of a convertible bond provides the conversion ratio. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #96 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

97. The conversion premium is equal to the market price minus the conversion value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #97 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

98. Earnings per share (basic) includes all convertible bonds outstanding. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #98 Difficulty: Easy Learning Objective: 19-08 Show how convertible securities and warrants affect earnings per share as reported on the income statement. Topic: 19-17 Accounting Considerations with Warrants Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

99. Diluted earnings per share must include all convertible securities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #99 Difficulty: Medium Learning Objective: 19-08 Show how convertible securities and warrants affect earnings per share as reported on the income statement. Topic: 19-17 Accounting Considerations with Warrants Type: Memory

100. In order to calculate (basic) earnings per share, the earnings after taxes have to be adjusted for the elimination of the convertible bond interest expense. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #100 Difficulty: Medium Learning Objective: 19-08 Show how convertible securities and warrants affect earnings per share as reported on the income statement. Topic: 19-17 Accounting Considerations with Warrants Type: Memory

101. Forced conversion refers to the corporation calling a convertible bond when the market price of the stock is above the conversion price. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #101 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-11 Forcing Conversion Type: Memory

102. A convertible bond has both a downside limit (the pure bond value) and an upside limit (the conversion price). FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #102 Difficulty: Medium Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

103. The floor value of a bond can change if market interest rates for competitive bonds change. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #103 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

104. The premium for a warrant would increase if its underlying common stock has a negative market outlook. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #104 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Memory

105. The primary issuers of convertible bonds are smaller, less than top grade companies. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #105 Difficulty: Medium Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

106. On average, convertible bonds have conversion premiums of less than 10% at time of issue. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #106 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

107. In general the average size of a convertible issue is small compared to normal bond issues. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #107 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-13 Some Final Comments on Convertible Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

108. A warrant's speculative premium equals the market price of the underlying common stock minus the option price. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #108 Difficulty: Easy Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Memory

109. The term forced conversion is derived from the fact that in such a situation, the bond issuer has no choice but to convert. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #109 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-11 Forcing Conversion Type: Memory

110. Conversion premiums are found by subtracting the current share price from the bond's semi-annual interest payment. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #110 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

111. The downside protection of a convertible bond's floor value will protect the investor against loss. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #111 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

112. Earnings per share (basic) may not include the dilutive effects of all of a firm's convertible bonds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #112 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-12 Accounting Considerations with Convertibles Type: Memory

113. Warrants never sell for more than their intrinsic value. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #113 Difficulty: Easy Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Memory

114. A warrant may carry a speculative premium above intrinsic value if it will not expire until far into the future. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #114 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Memory

115. Conversion premiums are influenced heavily by expectations of future share price performance. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #115 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

116. Generally, once a convertible bond trades at a certain premium to its intrinsic value, or at a certain multiple of its conversion price, the bond must be converted into common stock. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #116 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

117. To entice investors who are looking for a financial sweetener, convertible bonds are often sold at a discount. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #117 Difficulty: Medium Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

118. At issuance, convertible bonds usually have a conversion premium of about 12%. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #118 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-08 Value of the Convertible Bond Type: Memory

119. A forced conversion will alter the corporate balance sheet. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #119 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-11 Forcing Conversion Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

120. Warrants may be used by a corporation in financial distress as a means to satisfy shareholders in the event of a reverse share split. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #120 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-16 Use of Warrants in Corporate Finance Type: Concept

121. Because a warrant is dependent on the market movement of an underlying share, it is highly speculative in nature. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #121 Difficulty: Medium Learning Objective: 19-06 Describe warrants and compare them to convertible securities. Topic: 19-14 Warrants Type: Memory

122. A warrant loses some of its financial leverage when the share rises far above the exercise price. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #122 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Memory

123. As a financing device for creating common shares, warrants are usually more desirable than convertible bonds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #123 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-16 Use of Warrants in Corporate Finance Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

124. Derivatives receive their value based on particular assets such as commodities or foreign exchange. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #124 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-01 Forwards Type: Memory

125. Derivatives generally have an unlimited life, as do common shares. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #125 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-01 Forwards Type: Memory

126. The derivatives market has developed in response to the increased volatility of the world's financial market. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #126 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-01 Forwards Type: Memory

127. Convertibles, rights, and warrants like other derivatives are the obligation of the financial markets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #127 Difficulty: Medium Learning Objective: 19-08 Show how convertible securities and warrants affect earnings per share as reported on the income statement. Topic: 19-18 Comparisons of Rights, Warrants, and Convertibles Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

128. The most common derivatives on organized exchanges are interest rate contracts. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #128 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-01 Forwards Type: Memory

129. Forwards unlike futures contracts are standardized as to amount and delivery dates. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #129 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-01 Forwards Type: Concept

130. Derivatives can be employed to take on more risk or to reduce risk. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #130 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-01 Forwards Type: Concept

131. Canada's derivative market is concentrated in Montreal (acquired by the TSX). TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #131 Difficulty: Easy Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-02 Futures Type: Memory

132. The use of a derivative contract can be set up to remove all the risk from a commercial transaction. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #132 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-02 Futures Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

133. Forwards, futures, and options are contracts that all must be executed before the expiry date. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #133 Difficulty: Hard Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-02 Futures Type: Concept

134. Futures and options require a small good faith deposit to hold the contract. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #134 Difficulty: Medium Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options. Topic: 19-02 Futures Type: Memory

135. Options trade at their intrinsic value. FALSE

Accessibility: Keyboard Navigation Block - Chapter 19 #135 Difficulty: Medium Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-03 Options Type: Concept

136. The size of an option's speculative premium will be influenced to a large extent by the volatility of the underlying asset. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #136 Difficulty: Hard Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-03 Options Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

137. Forced conversion occurs when a company calls a convertible security that has a conversion value greater than the call price. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #137 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-11 Forcing Conversion Type: Memory

138. A warrant is a long-term option to buy securities at a set price for a given period of time. TRUE

Accessibility: Keyboard Navigation Block - Chapter 19 #138 Difficulty: Easy Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-12 Accounting Considerations with Convertibles Type: Memory

139. List and explain 3 factors that determine the size of a speculative premium of a call or put option in the markets. The size of a speculative premium in the markets will be determined by 1. The time to expiry of the option. A longer time to expiry gives a greater time for the underlying asset to rise in price. 2. The volatility of the underlying share (asset). An asset that has larger price changes stands a greater chance of having a significant price increase. This has value to the option investor. 3. The opportunity cost of funds. At a higher opportunity cost of funds it is more advantageous for an investor to be holding the option, at a lower cash outlay, than the actual share. This has value to the option investor. When an investor sees value in a characteristic of an option, the speculative premium will increase. The actual market price of an option is always greater than the intrinsic value. The intrinsic value is zero until the market price of the underlying shares rises above the exercise price.

Block - Chapter 19 #139 Difficulty: Medium Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-04 Call Option Topic: 19-05 Put Option Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

140. Describe the similarities and differences between options and futures. Similarities: Both options and futures have a limited life, are standardized, and are guaranteed by the market acting as a clearinghouse. Differences relate to the pattern of cash flows experienced: Options • Require a larger up-front payment with speculative premium. • Involve limited risk. The maximum potential loss is the purchase price. • Can have delivery anytime. • Are most useful when used in conjunction with a potential business contract. If the contract falls through, the option does not have to be exercised. Futures • Require a small margin deposit, credited or debited (marked to market) daily as the current futures price moves up or down from the original contracted future price. • Can have delivery only in the delivery month

Block - Chapter 19 #140 Difficulty: Medium Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options. Topic: 19-06 Options versus Futures Type: Memory

141. Define and give examples of convertible securities. A convertible security is a bond or share of preferred stock that can be converted, at the option of the holder, into common stock. Thus, the owner has a fixed-income security that can be transferred to a common stock interest if and when the affairs of the firm indicate that such a conversion is desirable. Convertible bonds (debentures) and convertible preferred stock are 2 examples. These securities are sold by corporations to raise capital.

Block - Chapter 19 #141 Difficulty: Easy Learning Objective: 19-03 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds. Topic: 19-07 Convertible Securities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

142. When discussing convertible bonds, have we repealed the old risk-return tradeoff principle—the idea that to get superior returns we must take larger than normal risks? With convertible bonds, we appear to limit our risk while maximizing our return potential. Although there is some truth to this statement, what are the many qualifications that indicate there is still risk associated with this type of bond? Qualifications to convertible bonds: • Limited downside protection. When convertible debentures begin going up in value, the floor's protection can become meaningless. If interest rates in the market rise, the floor price, or pure bond value, could fall, creating more downside risk. • Below market-rate interest. The interest rate on convertibles is significantly below that for instruments in a similar risk class at time of issue. • Premium payment. The premium payment is a cost forgone in purchasing additional shares to garner a profit in case share price goes up. • Possible call provision attachment. A call provision can give the corporation the option of redeeming the bonds at a specified price above par ($1,000) in the future.

Block - Chapter 19 #142 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-09 Is This Fools Gold? Type: Memory

143. What are the advantage and disadvantages of convertible bonds for a corporation? Advantages • Interest paid on convertible issues is lower than that paid on a straight debt instrument. • Convertible feature acts as a sweetener that allows smaller corporations access to the bond market. • Convertible debentures are attractive to a corporation that believes its stock is currently undervalued. Disadvantages • If stock price rises above the conversion price, the firm could raise the capital needed by issuing fewer shares than those sold from the conversion of the securities. • Corporations must consider the accounting treatment accorded to convertibles. • Proper procedure ensures that there is a dilution effect on earnings per share when convertible securities are issued. • Management should consider the potential reduction in voting power after conversion occurs. • A call provision must be established at issue in order for the company to force security holders to convert the securities to common stock.

Block - Chapter 19 #143 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Topic: 19-10 Advantages and Disadvantages to the Corporation Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

B) $12.25 market price × 76.92 shares = $942.30 Conversion value C) Since this is a semiannual bond, we must use interest factors for i% = 6% and n = 40

D) An investor purchasing the bond for its conversion value of $942.30 would suffer a maximum loss of $93.00. However the market price of the bond will generally sell at a conversion premium so that the actual downside risk would be $93.00 plus the dollar amount of the conversion premium.

Block - Chapter 19 #144 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Learning Objective: 19-05 Calculate the conversion value of a convertible security. Topic: 19-08 Value of the Convertible Bond Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Since you can buy the stock in the market for $25, you would not use 3 warrants to end up with one share of stock. However, if you do not intend to buy the stock right away you may be willing to pay a $2 premium for each warrant and see if the stock goes up enough to make your purchase more attractive in the future. One main consideration in the establishment of the premium is the length of time left before the warrant must be exercised. The longer the time period, the higher the premium. B)

Block - Chapter 19 #145 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

C) Pure bond value (with semi-annual interest payments %i = 5%, n = 40 periods)

A risk adverse investor would not buy this bond unless the underlying company and its common stock had a stable price history accompanied by fairly certain growth. The downside loss potential is very large if the share price should decline dramatically.

Block - Chapter 19 #146 Difficulty: Medium Learning Objective: 19-04 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation. Learning Objective: 19-05 Calculate the conversion value of a convertible security. Topic: 19-08 Value of the Convertible Bond Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

C) At stock price of $37.20 per share,

Block - Chapter 19 #147 Difficulty: Medium Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant. Topic: 19-15 Valuation of Warrants Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 19 Summary Category

# of Questi ons

Accessibility: Keyboard Navigation

138

Block - Chapter 19

148

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 19-01 Distinguish between and outline the uses of forwards; futures; and options.

Learning Objective: 19-02 Calculate the hedge on futures and the value of call and put options.

Learning Objective: 1903 Characterize the securities offered by a corporation that are convertible into common shares at the option of the investor and are a means of raising funds.

Learning Objective: 1904 Examine the benefits of a convertible security; including a fixed rate of return and the potential for capital appreciation.

Learning Objective: 19-05 Calculate the conversion value of a convertible security.

Learning Objective: 19-06 Describe warrants and compare them to convertible securities.

Learning Objective: 19-07 Calculate the intrinsic value and the speculative premium on a warrant.

Learning Objective: 1908 Show how convertible securities and warrants affect earnings per share as reported on the income statement.

Topic: 19-01 Forwards

Topic: 19-02 Futures

Topic: 19-03 Options

Topic: 19-04 Call Option

Topic: 19-05 Put Option

Topic: 19-06 Options versus Futures

Topic: 19-07 Convertible Securities

Topic: 19-08 Value of the Convertible Bond

Topic: 19-09 Is This Fools Gold?

Topic: 19-10 Advantages and Disadvantages to the Corporation

Topic: 19-11 Forcing Conversion

Topic: 19-12 Accounting Considerations with Convertibles

Topic: 19-13 Some Final Comments on Convertible Securities

Topic: 19-14 Warrants

Topic: 19-15 Valuation of Warrants

Topic: 19-16 Use of Warrants in Corporate Finance

Topic: 19-17 Accounting Considerations with Warrants

Topic: 19-18 Comparisons of Rights, Warrants, and Convertibles

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 20 1. Which of the following is not a potential benefit of a merger? A. Improved financing posture. B. Portfolio effect. C. Dilution of earnings per share. D. Tax loss carry-forward.

2. White knights: A. advise companies on ways to avoid being taken over. B. offer a higher purchase price and a friendlier offer in the event of an unsolicited and unfriendly takeover attempt. C. attempt to make money in the stock market on shares that are likely merger candidates. D. buy depressed stock of quality companies when merger talks are discontinued.

3. A business combination of two or more companies in which the resulting firm maintains the identity of the acquiring company is defined as a: A. consolidation. B. holding company. C. conglomerate. D. statutory amalgamation.

4. Synergy is said to occur when the whole is: A. equal to the sum of the parts. B. less than the sum of the parts. C. greater than the sum of the parts. D. greater than or equal to the sum of the parts.

5. The price that a company has to pay to purchase another firm is typically: A. the book value. B. the market value. C. some premium over current market value. D. some discount of current market value.

Foundations of Financial Management - 10th Canadian Edition by Block

6. Which of the following is not a form of compensation that selling shareholders could receive? A. Stock B. Cash C. Stock options D. Fixed income securities

7. The impact on EPS is influenced by all but the: A. relative debt/equity ratios of the firms. B. exchange ratio. C. relative earnings growth rates of the firms. D. premium paid above market value for the acquired firm.

8. Dilution in earnings per share occurs when a company with: A. a high P/E ratio buys a company with a low P/E ratio. B. a low P/E ratio buys a company with a high P/E ratio. C. a high growth rate in earnings per share buys a company with a low growth rate in earnings per share. D. a low growth rate in earnings per share buys a company with a high growth rate in earnings per share.

9. Which of the following firms would be a takeover candidate? A. A firm with strong market position, high earnings and low current assets. B. A firm with strong market position, low earnings and low cash balances. C. A firm with strong market position, low earnings and high cash balances. D. A firm with high non-current assets, high earnings and low current assets.

10. The Investment Canada Act is intended to: A. lower interest rates in foreign investments. B. change regulation of Canadian companies investing abroad. C. increasing foreign competition in Canada. D. ensure that the takeover of a Canadian company by a foreign entity will result in a net gain for Canada.

11. Historically, the Foreign Investment Review Agency: A. ensured no large takeovers of Canadian firms by foreigners occurred. B. established Canada as a place for large foreign investment. C. allowed an increasing number of unfriendly mergers and buyouts. D. was a created through the passing of the Investment Canada Act.

Foundations of Financial Management - 10th Canadian Edition by Block

12. Assume Alpha pays a 20% premium for Beta in a pooling of interests' transaction. Calculate the post-merger EPS for Alpha. A. $2.50 B. $3.00 C. $3.50 D. $4.00

13. Alpha has a growth rate in EPS of 12%. Beta's growth rate in EPS is 9%. What is the post-merger growth rate assuming the facts as previously stated? (Assume no Synergy.) A. 10.50% B. 10.88% C. 11.37% D. 11.87%

14. Which of the following would be true concerning the EPS of Alpha Corp. in 5 years? Alpha's EPS would be: A. higher due to the merger. B. the same with or without the merger. C. lower without the merger. D. lower with the merger.

15. In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a higher P/E ratio, we could be assured one of the following would occur. A. Active Corp. will have an immediate increase in EPS. B. Active Corp. will have an immediate decrease in EPS. C. Active Corp. will have an immediate increase in the growth rate of EPS. D. Active Corp. will have an immediate decrease in P/E.

Foundations of Financial Management - 10th Canadian Edition by Block

16. Which of the following is a tender offer that utilizes borrowed funds and the acquired firm's assets as collateral? A. Unfriendly take-over B. Divestiture C. Repurchase D. Leveraged buyout

Company A buys Company B for $3,500,000. Company A had a pre-merger net worth of $8,000,000; Company B's net worth was $2,000,000. The transaction was accounted for as a pooling of interests. Company A wants to write off any available goodwill as slowly as allowable.

17. How much would Company A write off each year? A. $112,500 B. $37,500 C. $150,000 D. $0

18. Over how many years can goodwill be written off for accounting purposes? A. 0 years B. 20 years C. 40 years D. 50 years

19. Which of the following statements is true of mergers and amalgamations in Canada? A. The terms "merger" and "amalgamation" have no legal definition. B. The term "merger" is legally defined and the term "amalgamation" is not. C. The term "amalgamation" is legally defined and the term "merger" is not. D. Amalgamation means one company purchases the shares of another and merger means a statutory combination under one of the Provincial Corporations Act, the Canada Corporations Act, or the Canada Business Corporations Act.

20. Hostile takeovers are less common in Canada because: A. Canadian use of IFRS makes companies appear less profitable. B. share ownership is not widely held. C. companies have greater regulatory requirements. D. the government does not allow hostile takeovers.

Foundations of Financial Management - 10th Canadian Edition by Block

21. Non-financial motives for mergers include: A. marketing expansion. B. portfolio effect. C. access to capital. D. tax loss carry-forward.

22. The portfolio effect after a merger should provide the firm with risk reduction benefits that result in: A. the expected value of earnings per share may increase as a result of the merger, the standard deviation of possible outcomes may increase as a result of risk reduction through diversification. B. the expected value of earnings per share may remain relatively constant as a result of the merger, the standard deviation of possible outcomes may increase as a result of risk reduction through diversification. C. the expected value of earnings per share may decline as a result of the merger, the standard deviation of possible outcomes may decline as a result of risk reduction through diversification. D. the expected value of earnings per share may remain relatively constant as a result of the merger, the standard deviation of possible outcomes may decline as a result of risk reduction through diversification.

23. Which of the following is not a financial motive but rather an operating motive for merger and consolidation? A. The portfolio diversification effect. B. Tax-loss carry-forward. C. Greater financing capability. D. Desire for greater size.

24. When a tobacco firm merges with a steel company, it would be called: A. a horizontal merger. B. a vertical merger. C. a conglomerate merger. D. a consolidation.

25. An example of a horizontal merger would be: A. Husky Oil and Sears. B. McDonalds and Pillsbury. C. Pepsi and Frito Lay. D. Coca Cola and Canada Dry.

Foundations of Financial Management - 10th Canadian Edition by Block

26. All of the following are potential benefits to a corporation in offering share purchases rather than non-equity compensation except: A. a share purchase more readily qualifies a merger for a tax-free exchange. B. a corporation may diminish the perceived dilutive effect of a merger. C. the shareholders of the acquired firm may defer any capital gains taxes. D. when the stock is sold, the tax is recognized.

27. The financial motives for merger activity include all of the following except: A. the portfolio effect. B. improved financial posture and greater debt. C. the utilization of tax loss carry-forwards. D. vertical integration.

28. The Celluloid Collar Corporation has $360,000 in tax loss carry-forwards. The Bowstring Shirt Company, a firm in the 30% tax bracket, would be willing to pay (on a non-discounted basis) the sum of ______________ for the carry-forward alone. A. $108,000 B. $252,000 C. $350,000 D. $200,000

29. The Prad Corporation is considering a merger with the Stone Company which has 400,000 outstanding shares selling for $25. An investment dealer has advised that to succeed in its merger Prad Corp. would have to offer $45 per share for Stones' stock. Prad Corp. stock is selling for $30. How many shares of Prad Corp. stock would have to be exchanged to acquire all of Stones' stock? A. 266,667 shares B. 600,000 shares C. 720,000 shares D. 800,000 shares

30. The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as: A. horizontal integration. B. vertical integration. C. synergy. D. the portfolio effect.

Foundations of Financial Management - 10th Canadian Edition by Block

31. Selling shareholders who are offered cash in a merger may be willing to part with the shares they hold because: A. the offered shares may be less marketable. B. a merger can create improved financing posture as a result of expansion in size. C. they can attain a lower degree of market concentration as a result. D. the price they are offered for their shares may be above book value or market value.

32. Aardvark Software, Inc. can purchase all the stock of Zebra Computer Services for $1,000,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 10 years. Aardvark should: A. not purchase Zebra Computer Services. B. purchase Zebra Computer Services. C. purchase Zebra only if Aardvark's cost of capital is between 5% and 10%. D. purchase Zebra only if Aardvark's cost of capital is above 10%.

33. In planning mergers, there is a tendency to _____ synergistic benefits. A. overestimate B. underestimate C. correctly estimate D. need more information

34. Which of the following is not a motive for selling by the shareholders of the acquired company? A. Opportunity to diversify B. Tax advantage C. Attractive price D. Avoid bias against smaller businesses

35. Which of the following type of merger creates goodwill? A. Horizontal merger B. Vertical merger C. Pooling of interests D. Purchase of assets

36. Which of the following type of merger is most likely to lead to diversification benefits? A. Horizontal merger B. Vertical merger C. Tax free exchange D. Conglomerate

Foundations of Financial Management - 10th Canadian Edition by Block

37. The portfolio effect in a merger has to do with: A. increasing EPS. B. reducing risk. C. creating tax advantages. D. writing off goodwill.

38. Synergy is: A. the 2 + 2 = 3 effect. B. the 2 + 2 = 4 effect. C. the 2 + 2 = 5 effect. D. always present in a merger.

39. A white knight benefits the: A. acquiring firm. B. acquiring firm's shareholders. C. officers of the acquired company. D. potential acquired firm.

40. Which of the following is not a potential benefit of a merger? A. Greater access to financial markets, and thus, be in a better position to raise debt and equity capital. B. Achieving risk reduction while perhaps maintaining the firm's rate of return. C. Tax loss carry-forward might be available in a merger if one of the firms has previously sustained a tax loss. D. Increased standard deviation of earnings per share.

41. Which of the following is a form of compensation that selling shareholders could receive? A. Non-taxable interest income B. Retirement savings top up C. Fixed income securities D. Management stock options

42. When analyzing a going concern acquisition the financial manager should consider: A. the net present value of the firm post-acquisition. B. the net book value of the firm post-acquisition. C. the net present value of the firm pre-acquisition. D. the net book value of the firm pre-acquisition.

Foundations of Financial Management - 10th Canadian Edition by Block

43. Mergers after the financial crisis of 2008 were driven by which of the following factors? A. High interest rates B. Large cash positions C. Less global competition D. High price earnings ratios

44. The advantage of a holding company: A. is that it seems to afford opportunities for leverage. B. is that it always prevents foreign acquisition. C. is the avoidance of competition laws. D. is that it magnifies poor returns.

45. Assume Company A pays a 20% premium for Company B in a pooling of interests' transaction. Calculate the post-merger EPS for Company A. A. $10.00 B. $5.00 C. $7.50 D. $6.00

46. Company A has a growth rate in EPS of 14%. Company B's growth rate in EPS is 10%. What is the postmerger growth rate assuming the facts as previously stated? (Assume no Synergy.) A. 13.20% B. 10.88% C. 12.00% D. 12.67%

47. Which of the following would be true concerning the EPS of Company A. in 5 years? Company A's EPS would be: A. higher due to the merger. B. the same with or without the merger. C. lower without the merger. D. lower with the merger.

Foundations of Financial Management - 10th Canadian Edition by Block

48. Hostile takeovers may be avoided in Canada due to: A. Canadians are more risk oriented. B. A white knight investor. C. companies have cyclical cash flows. D. closely held companies.

49. Laura's Design Corporation has $400,000 in tax loss carry-forwards. Vandenbosch Investment Consulting, a firm in the 40% tax bracket, would be willing to pay (on a non-discounted basis) the sum of ______________ for the carry-forward alone. A. $240,000 B. $160,000 C. $400,000 D. $100,000

50. The Sheridan Corporation is considering a merger with the Kent Company which has 600,000 outstanding shares selling for $20. An investment dealer has advised that to succeed in its merger Sheridan Corp. would have to offer $40 per share for Kent's stock. Sheridan Corp. stock is selling for $25. How many shares of Sheridan Corp. stock would have to be exchanged to acquire all of Kent's stock? A. 960,000 shares B. 600,000 shares C. 750,000 shares D. 480,000 shares

51. One of the primary motives of merger activity is that acquiring companies find it less expensive to buy assets than to build. True False

52. A purchase of assets merger recording is desirable due to the possibility of the creation of goodwill on the books of the surviving firm. True False

53. A tender offer describes the attempted purchase of a firm with the consent of that firm's management. True False

54. Leveraged buyout occur to firms that have an unusually large cash/total assets position. True False

Foundations of Financial Management - 10th Canadian Edition by Block

55. The term "Reverse Leveraged Buyout" refers to a company that had previously gone from a public company to a private company and sells stock to the public years later. True False

56. Shareholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged. True False

57. One potential advantage of a merger to the acquiring firm is the portfolio effect which attempts to achieve risk reduction while perhaps maintaining the rate of return for the firm. True False

58. The potential of a tax loss carry-forward has no effect when considering the acquisition of a company. True False

59. Synergy is said to take place when the whole is less than the sum of the parts. True False

60. If the acquiring firm's P/E ratio is greater than the P/E of the acquired firm, the surviving firm will automatically get an increase in EPS. True False

61. Statutory amalgamation under the Canada Business Corporations Act requires all merger combinations of two or more firms to form an entirely new entity. True False

62. The write off of goodwill is a tax deductible expense. True False

63. One advantage of receiving stock instead of cash in a buy-out is the deferment of the tax payment until the stock received is actually sold. True False

Foundations of Financial Management - 10th Canadian Edition by Block

64. Most mergers are horizontal in nature in order to avoid the potential complications involved with the elimination of competition. True False

65. The earnings per share impact of a merger are influenced by relative price-earnings ratios and the terms of exchange. True False

66. In a merger, the short-term and long-term effect on EPS varies according to the relative P/E ratios and the differential future growth rates of the two firms. True False

67. Existing management of a firm is almost always ready to accept an offer for the purchase of the firm at a price above the market. True False

68. When negotiating a merger offer, management and shareholders may disagree on whether a bid should be accepted. True False

69. United States style mergers rarely happen in Canada. True False

70. An unfriendly takeover can always be stopped by invoking a poison pill under the Companies Act. True False

71. In a merger, two or more companies are combined to form an entirely new entity. True False

72. The desire to expand management and marketing capabilities is a financial motive for merging. True False

Foundations of Financial Management - 10th Canadian Edition by Block

73. Poison pills are usually put in place when one shareholder acquires a certain number of outstanding shares. True False

74. Shareholders do not like a white knight since it always results in their receiving a lower share price. True False

75. The primary advantage of a holding company is that it affords opportunities for leverage. True False

76. The subsidiaries of a holding company are separate legal entities, and one cannot force the bankruptcy of another. True False

77. Goodwill may be created when a pooling of interests' merger is utilized. True False

78. "Poison pills" are strategies that reduce the value of a firm if it is taken over by a corporate raider. True False

79. Too much diversification has led some companies to sell off companies previously acquired during the merger boom. True False

80. Leveraged buyouts are restricted to "outside" tender offers. True False

81. Mergers often improve the financing flexibility that a larger company has available. True False

Foundations of Financial Management - 10th Canadian Edition by Block

82. In a horizontal merger, the integration that occurs comes from acquiring companies that supply resources to the company's production process. True False

83. Vertical integration is usually prohibited or severely restricted by government competition regulations. True False

84. A tax loss carry-forward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in present value to a firm that might acquire company ZZZ. True False

85. Synergy is the greatest and most easily measured nonfinancial benefit in a merger. True False

86. If an acquiring firm's merger proposal was initially rejected by a target firm's management and board of directors, the acquiring firm could utilize a tender offer to gain control of the target firm. True False

87. While a horizontal merger may improve profitability, it will not necessarily reduce the portfolio risk of the acquiring company. True False

88. The stock market reaction to divestitures may actually be positive if the divestiture is perceived to rid the company of an unprofitable business, or if it seems to sharpen the company's focus. True False

89. Following a merger, the change in the risk profile of the merged companies may influence the P/E ratio as much as the change in the overall growth rate. True False

90. In light of accounting considerations, the acquiring company has some inducement to offer cash, and the acquired company would rather receive cash than face possible dilution. True False

Foundations of Financial Management - 10th Canadian Edition by Block

91. By using cash instead of stock, a company may diminish the perceived dilutive effects of a merger. True False

92. When one company offers a large premium for another company, most of the upward movement in share price occurs after the public announcement of the merger offer and thus offers the best opportunity for profit to small investors. True False

93. A tax loss carry-forward is a benefit to the acquired firm's shareholders. True False

94. Risk averse investors may discount the future expected performance of the merged firm at a lower rate. True False

95. Vertical integration represents acquisition of a competitor. True False

96. Officers of a selling firm are almost always released. True False

97. Selling shareholders may receive a price well above current market value. True False

98. Goodwill is created when a purchase of assets is used in an acquisition if the purchase price per share is well above the book value per share and 75 percent of goodwill can be considered an eligible capital expenditure, which has a 7 percent CCA rate. True False

Foundations of Financial Management - 10th Canadian Edition by Block

100. To avoid an unfriendly takeover, management may institute one or more of several takeover defences. List and explain in detail these defences.

101. List and describe financial motives for mergers.

102. List and describe nonfinancial motives for mergers.

103. Discuss briefly the diversification benefits and pitfalls of a merger.

Foundations of Financial Management - 10th Canadian Edition by Block

104. The King Solomon Mining Company is contemplating a cash tender offer for the outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide $175,000 in after-tax cash flow (after-tax income plus depreciation) each year for the next 20 years. In addition, Roanoke has a $400,000 tax loss carryforward which King Solomon Mining can use over the next two years ($200,000 per year). If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%, what is the cash price it should be willing to pay to acquire Roanoke based solely on its cash-flow benefit over the next 20 years?

105. Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a two-step buyout. Garfunkel has 1,500,000 shares of common stock currently outstanding, and the market price is currently at $25 per share. The first step of the buyout would offer to purchase 51% of Garfunkel Engineering common stock for $28 per share. The second step would be to exchange each remaining share of Garfunkel common for $5 in cash and a newly issued share of Simon Manufacturing convertible preferred stock, valued at $31.00 per share. Simon Manufacturing's investment banker has suggested, as an alternative, a single-stage buyout at $32.50 per share for all of Garfunkel's common stock. a) What is the total cost of the two-step buyout? b) What is the total cost of the single step proposal? c) If it wants to minimize the total cost of the acquisition, what should Simon Manufacturing do?

Foundations of Financial Management - 10th Canadian Edition by Block

107. Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a cash plus stock buyout. Garfunkel has 2,000,000 shares of common stock currently outstanding, and the market price is currently at $25 per share. The buyout would offer to purchase Garfunkel Engineering common stock for $19.50 per share, plus a newly issued share of Simon Manufacturing convertible preferred stock, valued at $13.75 per share. Simon Manufacturing's investment dealer has suggested, as an alternative, a single-stage buyout at $32.50 per share for all of Garfunkel's common stock. A) What is the total cost of the cash plus stock buyout? B) What is the total cost of the cash only proposal? C) If it wants to minimize the total cost of the acquisition, what should Simon Manufacturing do?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 20 Key

1. Which of the following is not a potential benefit of a merger? A. Improved financing posture. B. Portfolio effect. C. Dilution of earnings per share. D. Tax loss carry-forward.

Accessibility: Keyboard Navigation Block - Chapter 20 #1 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #2 Difficulty: Easy Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-02 Negotiated versus Tendered Offers Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #3 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-06 Motives for Business Combinations Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #4 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #5 Difficulty: Easy Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

6. Which of the following is not a form of compensation that selling shareholders could receive? A. Stock B. Cash C. Stock options D. Fixed income securities

Accessibility: Keyboard Navigation Block - Chapter 20 #6 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-09 Motives of Selling Shareholders Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #7 Difficulty: Easy Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #8 Difficulty: Medium Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #9 Difficulty: Medium Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-03 The Domino Effect of Merger Activity Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #10 Difficulty: Easy Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-05 Government Regulation of Takeovers Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 20 #11 Difficulty: Easy Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-05 Government Regulation of Takeovers Type: Memory

Block - Chapter 20

12. Assume Alpha pays a 20% premium for Beta in a pooling of interests' transaction. Calculate the post-merger EPS for Alpha. A. $2.50 B. $3.00 C. $3.50 D. $4.00

Block - Chapter 20 #12 Difficulty: Easy Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 20 #13 Difficulty: Easy Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

Block - Chapter 20 #14 Difficulty: Medium Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 20 #15 Difficulty: Medium Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

16. Which of the following is a tender offer that utilizes borrowed funds and the acquired firm's assets as collateral? A. Unfriendly take-over B. Divestiture C. Repurchase D. Leveraged buyout

Accessibility: Keyboard Navigation Block - Chapter 20 #16 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Block - Chapter 20

17. How much would Company A write off each year? A. $112,500 B. $37,500 C. $150,000 D. $0

Accessibility: Keyboard Navigation Block - Chapter 20 #17 Difficulty: Medium Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-15 Accounting Considerations in Mergers and Acquisitions Type: Concept

18. Over how many years can goodwill be written off for accounting purposes? A. 0 years B. 20 years C. 40 years D. 50 years

Accessibility: Keyboard Navigation Block - Chapter 20 #18 Difficulty: Medium Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-15 Accounting Considerations in Mergers and Acquisitions Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #19 Difficulty: Hard Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-06 Motives for Business Combinations Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #20 Difficulty: Easy Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-03 The Domino Effect of Merger Activity Type: Memory

21. Non-financial motives for mergers include: A. marketing expansion. B. portfolio effect. C. access to capital. D. tax loss carry-forward.

Accessibility: Keyboard Navigation Block - Chapter 20 #21 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #22 Difficulty: Medium Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-14 Portfolio Effect Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #23 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Memory

24. When a tobacco firm merges with a steel company, it would be called: A. a horizontal merger. B. a vertical merger. C. a conglomerate merger. D. a consolidation.

Accessibility: Keyboard Navigation Block - Chapter 20 #24 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

25. An example of a horizontal merger would be: A. Husky Oil and Sears. B. McDonalds and Pillsbury. C. Pepsi and Frito Lay. D. Coca Cola and Canada Dry.

Accessibility: Keyboard Navigation Block - Chapter 20 #25 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 20 #26 Difficulty: Hard Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-15 Accounting Considerations in Mergers and Acquisitions Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 20 #27 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #28 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #29 Difficulty: Medium Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 20 #30 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #31 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-09 Motives of Selling Shareholders Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #32 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Concept

33. In planning mergers, there is a tendency to _____ synergistic benefits. A. overestimate B. underestimate C. correctly estimate D. need more information

Accessibility: Keyboard Navigation Block - Chapter 20 #33 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #34 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-09 Motives of Selling Shareholders Type: Concept

35. Which of the following type of merger creates goodwill? A. Horizontal merger B. Vertical merger C. Pooling of interests D. Purchase of assets

Accessibility: Keyboard Navigation Block - Chapter 20 #35 Difficulty: Medium Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-15 Accounting Considerations in Mergers and Acquisitions Type: Concept

36. Which of the following type of merger is most likely to lead to diversification benefits? A. Horizontal merger B. Vertical merger C. Tax free exchange D. Conglomerate

Accessibility: Keyboard Navigation Block - Chapter 20 #36 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

37. The portfolio effect in a merger has to do with: A. increasing EPS. B. reducing risk. C. creating tax advantages. D. writing off goodwill.

Accessibility: Keyboard Navigation Block - Chapter 20 #37 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Concept

38. Synergy is: A. the 2 + 2 = 3 effect. B. the 2 + 2 = 4 effect. C. the 2 + 2 = 5 effect. D. always present in a merger.

Accessibility: Keyboard Navigation Block - Chapter 20 #38 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

39. A white knight benefits the: A. acquiring firm. B. acquiring firm's shareholders. C. officers of the acquired company. D. potential acquired firm.

Accessibility: Keyboard Navigation Block - Chapter 20 #39 Difficulty: Medium Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-02 Negotiated versus Tendered Offers Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #40 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #41 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-09 Motives of Selling Shareholders Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #42 Difficulty: Easy Learning Objective: 20-03 Explain acquisition through cash purchases or by one company exchanging its shares for another companys shares. Topic: 20-10 Terms of Exchange Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

43. Mergers after the financial crisis of 2008 were driven by which of the following factors? A. High interest rates B. Large cash positions C. Less global competition D. High price earnings ratios

Accessibility: Keyboard Navigation Block - Chapter 20 #43 Difficulty: Easy Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-01 The International and Canadian Merger Environment Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 20 #44 Difficulty: Medium Learning Objective: 20-06 Outline the reasons for using a holding company. Topic: 20-18 Holding Companies Type: Memory

Block - Chapter 20

45. Assume Company A pays a 20% premium for Company B in a pooling of interests' transaction. Calculate the post-merger EPS for Company A. A. $10.00 B. $5.00 C. $7.50 D. $6.00

Block - Chapter 20 #45 Difficulty: Easy Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 20 #46 Difficulty: Easy Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

Block - Chapter 20 #47 Difficulty: Medium Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

48. Hostile takeovers may be avoided in Canada due to: A. Canadians are more risk oriented. B. A white knight investor. C. companies have cyclical cash flows. D. closely held companies.

Accessibility: Keyboard Navigation Block - Chapter 20 #48 Difficulty: Medium Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-03 The Domino Effect of Merger Activity Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #49 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #50 Difficulty: Medium Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

51. One of the primary motives of merger activity is that acquiring companies find it less expensive to buy assets than to build. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #51 Difficulty: Easy Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

52. A purchase of assets merger recording is desirable due to the possibility of the creation of goodwill on the books of the surviving firm. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #52 Difficulty: Easy Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-15 Accounting Considerations in Mergers and Acquisitions Type: Memory

53. A tender offer describes the attempted purchase of a firm with the consent of that firm's management. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #53 Difficulty: Easy Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-02 Negotiated versus Tendered Offers Type: Memory

54. Leveraged buyout occur to firms that have an unusually large cash/total assets position. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #54 Difficulty: Easy Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-03 The Domino Effect of Merger Activity Type: Memory

55. The term "Reverse Leveraged Buyout" refers to a company that had previously gone from a public company to a private company and sells stock to the public years later. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #55 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

56. Shareholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #56 Difficulty: Easy Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Memory

57. One potential advantage of a merger to the acquiring firm is the portfolio effect which attempts to achieve risk reduction while perhaps maintaining the rate of return for the firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #57 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

58. The potential of a tax loss carry-forward has no effect when considering the acquisition of a company. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #58 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-06 Motives for Business Combinations Type: Memory

59. Synergy is said to take place when the whole is less than the sum of the parts. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #59 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

60. If the acquiring firm's P/E ratio is greater than the P/E of the acquired firm, the surviving firm will automatically get an increase in EPS. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #60 Difficulty: Medium Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Concept

61. Statutory amalgamation under the Canada Business Corporations Act requires all merger combinations of two or more firms to form an entirely new entity. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #61 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-06 Motives for Business Combinations Type: Memory

62. The write off of goodwill is a tax deductible expense. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #62 Difficulty: Medium Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-15 Accounting Considerations in Mergers and Acquisitions Type: Memory

63. One advantage of receiving stock instead of cash in a buy-out is the deferment of the tax payment until the stock received is actually sold. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #63 Difficulty: Easy Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-14 Portfolio Effect Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

64. Most mergers are horizontal in nature in order to avoid the potential complications involved with the elimination of competition. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #64 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Memory

65. The earnings per share impact of a merger are influenced by relative price-earnings ratios and the terms of exchange. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #65 Difficulty: Medium Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Memory

66. In a merger, the short-term and long-term effect on EPS varies according to the relative P/E ratios and the differential future growth rates of the two firms. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #66 Difficulty: Medium Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-12 Stock-for-Stock Exchange Type: Memory

67. Existing management of a firm is almost always ready to accept an offer for the purchase of the firm at a price above the market. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #67 Difficulty: Medium Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-01 The International and Canadian Merger Environment Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

68. When negotiating a merger offer, management and shareholders may disagree on whether a bid should be accepted. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #68 Difficulty: Medium Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-01 The International and Canadian Merger Environment Type: Concept

69. United States style mergers rarely happen in Canada. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #69 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-06 Motives for Business Combinations Type: Memory

70. An unfriendly takeover can always be stopped by invoking a poison pill under the Companies Act. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #70 Difficulty: Medium Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-03 The Domino Effect of Merger Activity Type: Memory

71. In a merger, two or more companies are combined to form an entirely new entity. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #71 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-06 Motives for Business Combinations Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

72. The desire to expand management and marketing capabilities is a financial motive for merging. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #72 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Memory

73. Poison pills are usually put in place when one shareholder acquires a certain number of outstanding shares. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #73 Difficulty: Medium Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-02 Negotiated versus Tendered Offers Type: Memory

74. Shareholders do not like a white knight since it always results in their receiving a lower share price. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #74 Difficulty: Medium Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-02 Negotiated versus Tendered Offers Type: Memory

75. The primary advantage of a holding company is that it affords opportunities for leverage. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #75 Difficulty: Medium Learning Objective: 20-06 Outline the reasons for using a holding company. Topic: 20-18 Holding Companies Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

76. The subsidiaries of a holding company are separate legal entities, and one cannot force the bankruptcy of another. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #76 Difficulty: Medium Learning Objective: 20-06 Outline the reasons for using a holding company. Topic: 20-18 Holding Companies Type: Memory

77. Goodwill may be created when a pooling of interests' merger is utilized. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #77 Difficulty: Easy Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-15 Accounting Considerations in Mergers and Acquisitions Type: Memory

78. "Poison pills" are strategies that reduce the value of a firm if it is taken over by a corporate raider. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #78 Difficulty: Easy Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-02 Negotiated versus Tendered Offers Type: Memory

79. Too much diversification has led some companies to sell off companies previously acquired during the merger boom. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #79 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

80. Leveraged buyouts are restricted to "outside" tender offers. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #80 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

81. Mergers often improve the financing flexibility that a larger company has available. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #81 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Concept

82. In a horizontal merger, the integration that occurs comes from acquiring companies that supply resources to the company's production process. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #82 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Memory

83. Vertical integration is usually prohibited or severely restricted by government competition regulations. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #83 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

84. A tax loss carry-forward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in present value to a firm that might acquire company ZZZ. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #84 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

85. Synergy is the greatest and most easily measured nonfinancial benefit in a merger. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #85 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #86 Difficulty: Medium Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-02 Negotiated versus Tendered Offers Type: Memory

87. While a horizontal merger may improve profitability, it will not necessarily reduce the portfolio risk of the acquiring company. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #87 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #88 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Concept

89. Following a merger, the change in the risk profile of the merged companies may influence the P/E ratio as much as the change in the overall growth rate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #89 Difficulty: Medium Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-14 Portfolio Effect Type: Memory

90. In light of accounting considerations, the acquiring company has some inducement to offer cash, and the acquired company would rather receive cash than face possible dilution. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #90 Difficulty: Medium Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-15 Accounting Considerations in Mergers and Acquisitions Type: Memory

91. By using cash instead of stock, a company may diminish the perceived dilutive effects of a merger. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #91 Difficulty: Easy Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-15 Accounting Considerations in Mergers and Acquisitions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 20 #92 Difficulty: Hard Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-16 Premium Offers and Stock Price Movements Type: Concept

93. A tax loss carry-forward is a benefit to the acquired firm's shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #93 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

94. Risk averse investors may discount the future expected performance of the merged firm at a lower rate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #94 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Memory

95. Vertical integration represents acquisition of a competitor. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #95 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

96. Officers of a selling firm are almost always released. FALSE

Accessibility: Keyboard Navigation Block - Chapter 20 #96 Difficulty: Medium Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-09 Motives of Selling Shareholders Type: Memory

97. Selling shareholders may receive a price well above current market value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 20 #97 Difficulty: Easy Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-09 Motives of Selling Shareholders Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 20 #98 Difficulty: Easy Learning Objective: 20-05 Characterize the diversification benefits of a merger. Topic: 20-15 Accounting Considerations in Mergers and Acquisitions Type: Memory

99. If the potential buyer cannot come to agreement on merger terms with the potential seller's management and board of directors describe which two alternatives are still open to the potential buyer. 1 The buyer can ask the seller's shareholders for the right to vote their shares at the company's next annual meeting. This gives rise to what is known as a proxy fight, as management and the potential buyers vie for the right to vote a majority of the shareholders' shares. 2 Rather than engage in a lengthy and expensive proxy fight, the potential buyer can elect to make a tender offer through a stock exchange directly to the target company's shareholders. If the tender offer is lucrative enough to attract over 50 percent of the voting stock, the buyer gains control and can conclude the merger.

Block - Chapter 20 #99 Difficulty: Medium Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-02 Negotiated versus Tendered Offers Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

100. To avoid an unfriendly takeover, management may institute one or more of several takeover defences. List and explain in detail these defences. These defensive tactics are sometimes referred to as "applying shark repellent." In many cases the tactics only serve to increase the cost of the takeover without preventing it. These tactics include: 1 Turn to a white knight. A white knight is the term for a friendly company that agrees to bid a higher price for the targeted company and cooperates with the existing management in achieving a takeover that management feels is in the firm's (and management's) best interests. 2 Selling crown jewels. The targeted company may sell a prized division or asset of the company, making the takeover less attractive to the buyer. 3 A targeted repurchase of shares. The targeted company agrees to pay a premium to the acquiring company for the shares already purchased to have them discontinue the acquisition. This is sometimes referred to as greenmail. 4 Voting in golden parachutes. These are contracts that pay existing management rather large sums of money if the company is taken over and they lose their jobs. Although golden parachutes may make the takeover more expensive, they probably best serve management. 5 Taking on more debt. By going to the capital markets and raising additional debt and perhaps buying back shares, paying large dividends, or purchasing new assets, the targeted firm becomes more expensive to acquire and thus less attractive. 6 Adopting poison pills. These are also known as shareholders' rights plans. Inco adopted the first Canadian company protection plan. If a potential acquirer buys 20 percent or more of Inco's equity and cannot reach an agreement with the board of directors, the plan would allow other Inco shareholders, but not the potential acquirer, to buy newly issued shares at half-price. This makes the takeover very expensive. Proponents of this practice claim such protection against creeping takeovers is justified because management should be spending its time running the company rather than watching over its shoulder for whoever might be planning to try to take over the company. These plans have drawn criticism from some large investment managers.

Block - Chapter 20 #100 Difficulty: Hard Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover. Topic: 20-02 Negotiated versus Tendered Offers Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

101. List and describe financial motives for mergers. 1 Portfolio Effect: A merger allows the acquiring firm to enjoy a potentially desirable portfolio effect by achieving risk reduction while perhaps maintaining the firm's rate of return. If two firms that benefit from opposite phases of the business cycle combine, their variability in performance may be reduced. Risk-averse investors may then discount the future expected performance of the merged firm at a lower rate and thus assign it a higher valuation than was assigned to the separate firms. The same point can be made in regard to multinational mergers. Through merger, a firm that has holdings in diverse economic and political climates can enjoy some reduction in the risks that derive from foreign exchange translation, government politics, military takeovers, and localized recessions. However, too much diversification can strain the managerial capabilities of a firm, even one with excellent management talent. 2 Access to Capital: A merger can create improved financing posture as a result of expansion in size. Larger firms may enjoy greater access to financial markets and thus be in a better position to raise debt and equity capital. Such firms may also be able to attract larger and more prestigious investment bankers to handle future financing. Greater financing capability may also be inherent in the merger itself. This is likely to be the case if the acquired firm has a strong cash position or a low debt-equity ratio that can be used to expand borrowing by the acquiring company. 3 Tax Loss Carry-forward: A tax loss carry-forward might be available in a merger if one of the firms has previously sustained a tax loss. An operating loss may be carried forward up to 10 years, but not back by the acquiring company. In any event, a tax loss carry-forward must be used up as quickly as possible when there are offsetting profits. 4 Synergistic Effect: Perhaps the greatest management motive for a merger is the possible synergistic effect. Synergy is said to occur when the whole is greater than the sum of the parts. This "2 + 2 = 5" effect may be the result of eliminating overlapping functions in production and marketing as well as meshing various engineering and administrative capabilities. The increased cash flows from greater efficiencies suggested will add value. In planning mergers, however, there is often a tendency to overestimate the possible synergistic benefits that might accrue.

Block - Chapter 20 #101 Difficulty: Hard Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

102. List and describe nonfinancial motives for mergers. 1 Management Desires: Companies that are in traditional lines of business may attempt to expand into more dynamic industries to upgrade their image. This also suggests that the desire of management for size and influence may influence decision making when mergers are considered. This may conflict with what is best for the shareholder, which is the topic of agency theory. 2 Marketing Expansion: Although mergers may be directed toward either horizontal integration (the acquisition of competitors) or vertical integration (the acquisition of buyers or sellers of goods and services to the company), the new competition laws should preclude the substantial elimination of competition. For this reason, mergers may become more directed toward companies in allied but not directly related fields. The pure conglomerate merger of firms with totally unrelated firms is still undertaken, but after more careful deliberation than in the past. The trend in the new millennium seems to be toward convergence or the focusing of the corporation on related businesses on a global scale. Mergers seem to be creating corporations with substantial international operations.

Block - Chapter 20 #102 Difficulty: Hard Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-08 Nonfinancial Motives Type: Concept

103. Discuss briefly the diversification benefits and pitfalls of a merger. Diversification by combining entities with different patterns of cash flows reduces the variability of the overall cash flows. This should reduce risk and the attractiveness of the combined entity. Unfortunately for corporations, diversification has not always added the expected benefits, and in some cases, it has added unexpected management problems brought on by unfamiliarity with the new business. The benefits of diversification may be best achieved at the investor level. Although the portfolio diversification effect of a merger is intellectually appealing, with each firm becoming a mini-internal capital market unto itself, the practicalities of the situation can become quite complicated. One of the major forces of merger activity is the desire for diversification and globalization. A historical lesson learned is that too much diversification can strain the managerial capabilities of a firm, even one with excellent management talent.

Block - Chapter 20 #103 Difficulty: Hard Learning Objective: 20-02 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal. Topic: 20-07 Financial Motives Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 20 #104 Difficulty: Medium Learning Objective: 20-03 Explain acquisition through cash purchases or by one company exchanging its shares for another companys shares. Topic: 20-11 Cash Purchases Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 20 #105 Difficulty: Medium Learning Objective: 20-03 Explain acquisition through cash purchases or by one company exchanging its shares for another companys shares. Topic: 20-11 Cash Purchases Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

106. The King Solomon Mining Company is contemplating a cash tender offer for the outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide $162,500 in after-tax cash flow (after tax income plus CCA) each year for the next 20 years. In addition, Roanoke has a $630,000 tax loss carry-forward that King Solomon Mining can use over the next two years ($315,000 per year). If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%, what is the maximum cash price it should be willing to pay to acquire Roanoke? Present value of after-tax cash flows:

Present value of tax loss carry-forward: Cash flows from tax loss carry-forward: Years 1 & 2: $315,000 × .34 = $107,100/year

Total Present Value of Roanoke:

Block - Chapter 20 #106 Difficulty: Medium Learning Objective: 20-03 Explain acquisition through cash purchases or by one company exchanging its shares for another companys shares. Topic: 20-11 Cash Purchases Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

B) Total cost of cash only buyout 2,000,000 total shares × $32.50 = $65,000,000 C) The best alternative seems to be to try to complete the cash only buyout. In this particular case the cash only buyout is estimated to cost $1,500,000 less than the cash plus stock buyout.

Block - Chapter 20 #107 Difficulty: Medium Learning Objective: 20-03 Explain acquisition through cash purchases or by one company exchanging its shares for another companys shares. Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value. Topic: 20-11 Cash Purchases Topic: 20-12 Stock-for-Stock Exchange Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 20 Summary Category

# of Que stions

Accessibility: Keyboard Navigation

Block - Chapter 20

110

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 20-01 Explain some defensive measures taken to avoid an unfriendly takeover.

Learning Objective: 2002 Analyze the motives for mergers and divestitures; including financial considerations and the desire to increase operating efficiency. Also; perform an NPV analysis for a merger proposal.

Learning Objective: 2003 Explain acquisition through cash purchases or by one company exchanging its shares for another companys shares.

Learning Objective: 20-04 Evaluate the impact of the merger on earnings per share and share value.

Learning Objective: 20-05 Characterize the diversification benefits of a merger.

Learning Objective: 20-06 Outline the reasons for using a holding company.

Topic: 20-01 The International and Canadian Merger Environment

Topic: 20-02 Negotiated versus Tendered Offers

Topic: 20-03 The Domino Effect of Merger Activity

Topic: 20-05 Government Regulation of Takeovers

Topic: 20-06 Motives for Business Combinations

Topic: 20-07 Financial Motives

Topic: 20-08 Nonfinancial Motives

Topic: 20-09 Motives of Selling Shareholders

Topic: 20-10 Terms of Exchange

Topic: 20-11 Cash Purchases

Topic: 20-12 Stock-for-Stock Exchange

Topic: 20-14 Portfolio Effect

Topic: 20-15 Accounting Considerations in Mergers and Acquisitions

Topic: 20-16 Premium Offers and Stock Price Movements

Topic: 20-18 Holding Companies

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 21 1. A multinational corporation may be defined as: A. a company which owns property in a foreign country. B. a company which hires foreign labourers. C. a company which carries on some business activity outside of its own national borders. D. a company which conducts business with employees and corporations from around the world.

2. Multinational corporations may take several forms. An exporter could be described as: A. an MNC which produces a product within its own borders, but sells in a foreign market. B. the least risky political arrangement. C. an MNC willing to commit itself to a long-term foreign investment. D. accepting goods from other countries to sell locally.

3. In a licensing agreement, the multinational corporation will very likely: A. be able to compete with the local domestic manufacturers. B. experience import restrictions imposed by the foreign government. C. allow a foreign firm to use its technology in exchange for a fee or a royalty. D. charge a fee for each item sold.

4. A form of MNC which exposes the firm to the least amount political risk, and is therefore the preferred arrangement by both business and foreign governments is called a(an): A. exporter. B. licensing agreement. C. joint venture. D. fully-owned foreign subsidiary.

5. A fully owned foreign subsidiary is a form of MNC in which: A. a local entrepreneur buys the firm in that foreign country. B. the MNC owns and operates the firm by itself. C. the foreign government gives its full cooperation. D. the venture is jointly controlled with a local domestic partner.

Foundations of Financial Management - 10th Canadian Edition by Block

6. A particular country's pattern of importing more than is being exported is likely to: A. depress that country's currency. B. depress other countries' currencies. C. increase the value of that country's currency. D. increase the currency relative to the US dollar.

7. MNCs are concerned about which of the following exchange rate exposures? A. Foreign exchange risk and labour rates B. Economic exposure and translation exposure C. Political risk and tax rates D. Foreign exchange risk and strategic risk

8. You are on your way to the beautiful Mexican resort of Zijuatenejo. The current exchange rate is 500 pesos to the dollar. When you arrive, you convert $1,000 for how many pesos? A. 500,000 peso B. 5,000 peso C. 0.05 peso D. 0.005 peso

9. While shopping in the Mexican market, you find that limes cost 12 pesos each. You remember that back home they cost 60 cents each. If the Purchasing Power Parity Theory holds, the rate of exchange is: A. 20 pesos/dollar or 5 cents/peso. B. 80 pesos/dollar or 1.25 cents/peso. C. 5 pesos/dollar or 20 cents/peso. D. 1 peso/dollar or 15 cents/peso.

10. You are leaving Mexico and have 3,500 pesos to change into dollars. The exchange rate is now 1,500 pesos to the dollar. How many dollars will you receive? A. $0.43 B. $2.33 C. $23.33 D. $30.00

11. The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and the money market reach equilibrium is called the: A. Purchasing Power Parity Theory. B. Balance of Payments. C. Interest Rate Parity Theory. D. Money Differential Parity.

Foundations of Financial Management - 10th Canadian Edition by Block

12. Which of the following hedging strategies is not used to minimize transaction exposure? A. Eurobond market B. Forward exchange market C. Money market D. Currency futures market

13. The current spot exchange rate between the Japanese yen and the Canadian dollar is ×105/$. The yen is expected to appreciate by 5% against the dollar over the next six months. What do you expect the spot exchange rate between the yen and the dollar to be six months from now? A. ×94.50/$ B. ×99.75/$ C. ×110.25/$ D. ×115.50/$

14. The value of a country's currency may increase by: A. continuous excessive government spending. B. a stock market rally in that country. C. an increase in that country's money supply. D. an increase in another countries interest rate.

15. Which of the following statements about forward exchange rates is false? A. They reduce uncertainty about future value of currencies. B. They reflect expectations about the future value of currencies. C. They are usually slightly lower than the spot rate. D. Interest rate parity theory explains forward exchange rates.

16. The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called: A. foreign exchange risk. B. political risk. C. credit risk. D. strategic risk.

Foundations of Financial Management - 10th Canadian Edition by Block

17. The following are the prices in the foreign exchange market between the Canadian dollar and another local currency (LC).

What was the discount or premium on 3-month forward for LC? A. 1.2980% premium B. 0.0325% premium C. 0.0325% discount D. 1.2980% discount

18. Which of the following hedging strategies involves a loan without a futures contract? A. Eurobond market B. Forward exchange market C. Money market D. IMM contract

19. Which of the following statements about foreign affiliates funding is most accurate? A. In general, foreign affiliates are more profitable than domestic businesses. B. Foreign affiliates usually lower the portfolio risk of the parent company. C. Foreign affiliates may have a significant positive impact on the host company's economic growth, employment, trade, and balance of payments. D. Bank lending to foreign affiliates is based on some sort of a guarantee by the parent firm.

20. What has motivated Canadian firms to move their operations to foreign countries? A. Trade barriers, lower production costs, access to skilled workers, Canadian tax deferral. B. Political stability, large market size, access to advanced technology. C. Import tariffs, foreign unions, foreign technology, expropriation. D. Lower production costs, tax deferral, access to natural resources and manufacturing, expropriation.

21. To minimize exposure to political risk, a multinational firm may establish a joint venture with a local entrepreneur, establish a joint venture with a group of multinationals, or: A. purchase an insurance policy from the Export Development Corporation. B. hedge in the Eurodollar market. C. purchase an insurance policy from the Canada Revenue Agency. D. hedge the Canadian dollar.

Foundations of Financial Management - 10th Canadian Edition by Block

22. A loan arrangement between a parent company and its foreign affiliate which avoids the exchange markets entirely is called a: A. parallel loan. B. EDC direct loan. C. fronting loan. D. could be any one depending on the circumstances.

23. A loan arrangement in which a parent company reduces its political risk over a direct transfer of funds is called a(an): A. parallel loan. B. EDC direct loan. C. fronting loan. D. it depends on the host country

24. Which of the following is not an advantage of borrowing on the Eurocurrency market? A. Greater availability of credit B. Lower overhead costs for lending banks C. Absence of compensating balance requirements D. Constant lending rate over time

25. A long-term debt issue sold simultaneously in several different national capital markets, but denominated in a currency different than the nation of that issue is called a(an): A. world bond. B. international capital bond. C. floating bond. D. eurobond.

26. Some MNCs may have difficulty raising equity capital in world market for all of the following reasons EXCEPT: A. language barrier. B. foreign investors prefer capital gains over dividends. C. common stock ownership among individuals may be uncommon. D. the role of commercial banks throughout Europe in the issuing of new securities.

Foundations of Financial Management - 10th Canadian Edition by Block

27. Which of the following statements about the International Finance Corporation is not true? A. The decision to assist a venture depends on both profitability of the project and potential benefit to the host country's economy B. IFC assumes no managerial responsibility and exercises no voting rights C. IFC may either buy equity shares or provide long-term loans D. The IFC is owned by the member countries of the United Nations

28. Which of the following is not a reason for Canadian firms operating in foreign markets? A. Less expensive labour B. Better economic and political environment C. Tax incentives D. Achieve international diversification

29. Foreign business operations are more complex than domestic operations because of all of the following except: A. the rate of inflation may be higher than that of Canada. B. the rules of taxation are different. C. the financial markets vary from country to country. D. of interprovincial trade barriers.

30. If the Brazilian real is equal to $0.46, a Canadian dollar is equal to how many Brazilian reals? A. 1.36 B. 1.96 C. 2.17 D. 0.38

31. If prices double in Vancouver while the prices in San Paulo remain the same, the purchasing power of the dollar relative to the real: A. should increase by 50%. B. should increase by 100%. C. should decrease by 50%. D. should decrease by 100%.

32. Which of the following factors will not increase the value of a currency in foreign markets? A. High interest rates B. High inflation C. Positive balance of payments D. Strong stock market rally

Foundations of Financial Management - 10th Canadian Edition by Block

33. Which of the following statements is not true? A. The currency of Japan is described in yens. B. The currency of Mexico is described in pesos. C. The currency of Italy is described in euros. D. The currency of Denmark is described in rands.

34. The spot rate of the British pound to the dollar is 1.68 ($/≤,). The 180 day forward rate is $1.71, the annualized forward premium is: A. 1.018%. B. 3.636%. C. 7.273%. D. 2.036%.

35. The Chinese renminbi is selling for $0.1652 and the British pound is selling for $1.6581. The cross rate between the renminbi and the pound is: A. 10.0400. B. 0.1004. C. 9.9600. D. 0.0996.

36. Which of the following is not commonly used to minimize transaction exposure in foreign exchange dealings? A. Hedging in the foreign exchange market B. Hedging in the money market C. Hedging in the stock market D. Hedging in the currency futures market

37. A portfolio of international stocks in comparison to purely Canadian stocks generally shows: A. lower percentage risk for a given number of stocks. B. higher percentage risk for a given number of stocks. C. the same percentage risk for a given number of stocks. D. lower percentage return for a given number of stocks.

38. Foreign capital investments are undertaken for reasons that include all of the following except? A. Broader diversification possibilities B. Strategic advantages C. Higher potential returns D. Reduction of exchange rate exposure

Foundations of Financial Management - 10th Canadian Edition by Block

39. The Export Development Corporation (EDC): A. loans money to multinational firms. B. does feasibility studies for multinational firms. C. sells insurance policies to qualified multinational firms. D. reduces risk by taking an ownership share of exporting companies.

40. The Export Development Corporation (EDC): A. lends money to foreign purchasers of Canadian goods. B. issues letters of credit. C. makes parallel loans. D. makes fronting loans.

41. In a parallel loan arrangement: A. the Canadian parent firm lends dollars to the Canadian affiliate while the Dutch parent firm lends euros to the Dutch affiliate. B. the Canadian parent firm lends dollars to the Dutch affiliate while the Dutch parent lends euros to the Canadian affiliate. C. the Canadian parent lends euros to the Dutch affiliate while the Dutch parent lends dollars to the Canadian affiliate. D. the parent firms lend funds to each other while the affiliates lend funds to each other.

42. Eurocurrency are: A. Canadian dollars deposited in foreign banks. B. foreign dollars deposited in Canadian banks. C. investments of common market countries. D. Euro's converted to US dollars.

43. The lower borrowing costs in the Eurocurrency market as compared to Canada are often attributed to: A. lower inflation abroad. B. higher inflation in the Canada. C. slower money growth in Canada. D. smaller overhead costs and the absence of reserve requirements abroad.

44. In the Eurobond market: A. the interest rate is very high. B. the security is denominated in a currency that is different from that of the nation in which the bonds are issued. C. the British pound is the most important currency. D. disclosure requirements are very strict.

Foundations of Financial Management - 10th Canadian Edition by Block

45. Which of the following statements is not true about American Depositary Receipts (ADRs)? A. All the American shares owned of a foreign company are placed in trust in a New York bank. B. Most ADRs trade in the over-the-counter market. C. ADR prices tend to move parallel with the prices of the underlying security. D. Most ADRs trade on the New York Stock Exchange.

46. Which of the following statements is true about international equity (stock) markets? A. Japanese households are large investors in common stock. B. Commercial banks are generally not involved in the international securities business. C. Some foreign investors are more risk-averse than their counterparts in Canada and prefer dividend income over less certain capital gains. D. Foreign exchanges never include the listing of Canadian firms.

47. The International Finance Corporation (IFC) is: A. a unit of the world bank charged with the responsibility of providing capital to multinational corporations and others in international trade. B. a regulatory agency for international trade. C. a private firm that provides accounts receivable financing to international firms. D. a foreign affiliate of 10 major banks.

48. When Country A's currency strengthens against Country B's, citizens of Country A will: A. pay less to buy Country B's products. B. pay more to buy Country B's products. C. pay more to buy domestically produced products. D. not be affected by the change in their currency's value.

49. Legal, political, and economic factors are most conducive to which form of multinational corporation (MNC) organization? A. Exporter/Importer B. Licensing agreements C. Joint ventures D. Fully-owned foreign subsidiaries

50. Which of the following kinds of risk are NOT uniquely associated with MNCs? A. Exchange rate risk B. Business risk C. Political risk D. Translation risk

Foundations of Financial Management - 10th Canadian Edition by Block

51. If in 2012, the Canadian dollar's exchange rate with the Sudanese dinar was .0069 dollars per dinar and in 2015, the exchange rate was .0062 dollars per dinar, it would indicate that in the period from 2012 to 2015, the dollar: A. strengthened against the dinar. B. weakened against the dinar. C. was unrelated to the value of the dinar. D. the answer cannot be determined without knowing the number of dinars needed to buy a dollar.

52. The belief that shifts in exchange rates result from increasing or decreasing demand for a country's exports (or the corresponding opposite movements in supply of a country's imports) form the basis for the: A. purchasing power theory of exchange rates. B. interest rate parity theory of exchange rates. C. balance of payments theory of exchange rates. D. government intervention theory of exchange rates.

53. A firm exposed to exchange rate risk can hedge its risk by all of the following except: A. using the forward exchange market. B. borrowing in international money markets. C. utilizing foreign currency futures markets. D. speculating in foreign currency.

54. Considerations in a global cash management system include all of the following except: A. Obtain insurance in advance against such risks when the perceived political risk level is high. B. deciding how to reallocate cash once it has been centralized. C. creating the ability to withdraw cash from the subsidiary and centralize it. D. estimating the levels of local and corporate cash needs at given times.

55. For a Canadian company, foreign business operations are more complex because the: A. host country's economy are consistent with the domestic economy. B. rules of taxation are similar. C. operations of financial markets are similar. D. structure and operations of financial markets vary.

56. Assume that you had dollar quotes for the Japanese yen and the British pound. If you want to know the yen/pound exchange rate, you would rely on: A. forward rates. B. cross rates. C. spot rates. D. hedge ratios.

Foundations of Financial Management - 10th Canadian Edition by Block

57. As exchange rates change, they: A. reduce translation exposure for corporations with foreign investment. B. can not affect imports and exports between countries. C. will not affect the flow of funds between the countries. D. change the relative purchasing power between countries.

58. The Eurobond market has which of the following characteristics? A. Eurobond issues are denominated in the currency where the bond is sold. B. Disclosure requirements in the Eurobond market are much less stringent than those required by Canadian securities commissions. C. Eurobond issues are underwritten by the European Central Bank. D. Eurobond issues are denominated in euros.

59. A particular country's pattern of exporting more than is being imported is likely to: A. have no effect on that country's currency. B. depress other countries' currencies. C. decrease the value of that country's currency. D. stabilize the relative purchasing power between countries.

60. The CPA Canada Handbook recommends when a foreign operation is designated as integrated: A. it causes instability in the currencies in international money and foreign exchange markets. B. the market value of assets and liabilities denominated in foreign currencies is subject to change. C. it exploits local labour with low wages. D. its transactions be captured as if they had been performed by the parent company.

61. You are on your way to Mexico. The current exchange rate is 12 pesos to the dollar. When you arrive, you convert $1,000 for how many pesos? A. 12,000 B. 120 C. 83 D. 0.018

62. While shopping in the Mexican market, you find that limes cost 20 pesos each. You remember that back home they cost 80 cents each. If the Purchasing Power Parity Theory holds, the rate of exchange is: A. 25 pesos/dollar or 4 cents/peso. B. 80 pesos/dollar or 4 cents/peso. C. 5 pesos/dollar or 20 cents/peso. D. 5 pesos/dollar or 4 cents/peso.

Foundations of Financial Management - 10th Canadian Edition by Block

63. You are leaving Mexico and have 3,500 pesos to change into dollars. The exchange rate is now 10 pesos to the dollar. How many dollars will you receive? A. $35.00 B. $350.00 C. $150.00 D. $35,000.00

64. The surplus which appreciates the value of the currency is known as: A. Purchasing Power Parity. B. Balance of Payments. C. Current Capital. D. Interest Rate Parity.

65. The current spot exchange rate between the Japanese yen and the Canadian dollar is ×75.00/$. The yen is expected to appreciate by 6% against the dollar over the next six months. What do you expect the spot exchange rate between the yen and the dollar to be six months from now? A. ×70.50/$ B. ×79.50/$ C. ×84.00/$ D. ×75.00/$

66. In international finance, the chance of experiencing a drop in revenue or an increase in cost in international business transactions is called: A. credit risk. B. political risk. C. economic value exposure. D. transaction exposure.

67. The following are the prices in the foreign exchange market between the Canadian dollar and United States dollar (USD).

What was the discount or premium on 3-month forward and 6 month for United States dollars? A. 2.59% premium/6.65% premium B. 2.59% discount/6.65% discount C. 1.03% premium/0.73% premium D. 1.03% discount/0.73% discount

Foundations of Financial Management - 10th Canadian Edition by Block

68. Which of the following statements about foreign affiliates is true? A. In general, foreign affiliates are less profitable than domestic businesses B. Foreign affiliates usually raise the portfolio risk of the parent company C. Foreign affiliates may have a significant positive impact on the host company's economic growth, employment, trade, and balance of payments D. Foreign affiliates are created only to take advantage of indirect loan arrangements

69. A long-term debt issue sold simultaneously in several different national capital markets, but denominated in a currency different than the nation of that issue is called a(an): A. world bond. B. international capital bond. C. floating bond. D. eurobond.

70. Which of the following statements about the International Finance Corporation is true? A. The decision to assist a venture depends only on potential benefit to the host country's economy. B. IFC assumes managerial responsibility and exercises no voting rights. C. IFC may either buy equity shares or provide long-term loans. D. IFC only provide long-term loans, but not buy equity shares.

71. Which of the following is a reason for Canadian firms to operate in foreign markets? A. More expensive labour B. Reduce international diversification C. Tax rate increases D. Increased savings of production costs

72. Which of the following is commonly used to minimize transaction exposure in foreign exchange dealings? A. Hedging in the interest swap market B. Hedging in the money market C. Hedging in the stock market D. Hedging in the treasury bills market

73. Government expropriation is an example of: A. Transaction risk. B. Business risk. C. Political risk. D. Translation risk.

Foundations of Financial Management - 10th Canadian Edition by Block

74. Since most foreign currency values fluctuate from time to time, the monetary value of an international transaction or investment, measured in either the seller's or the buyer's currency, is likely to change over time. True False

75. Canadian firms expand their operations outside of Canada's borders because the average rate of return for foreign investment is often higher than the rate of return on domestic investments. True False

76. Canada is the world's major importer and exporter, and has by far the greatest investment in foreign countries. True False

77. An exporter is able to satisfy foreign demand for a product while avoiding long-term investment although this method is riskier than other alternatives. True False

78. A joint venture with a private entrepreneur in a host country exposes the multinational corporation to the least amount of political risk. True False

79. A joint venture with a local entrepreneur exposes the firm to the least amount of political risk and is a preferred method of investment by foreign governments. True False

80. A foreign affiliate may be an exporter, a joint venture, or a fully owned foreign subsidiary. True False

81. A foreign affiliate lowers the portfolio risk of its parent company because the foreign and domestic economies tend to be fairly similar. True False

82. A foreign exchange rate is the rate at which a foreign currency changes relative to the dollar. True False

Foundations of Financial Management - 10th Canadian Edition by Block

83. Currency exchange rates may be either floating or fixed. True False

84. In a free market, the exchange rate between two currencies is determined by the supply of and demand for those currencies with the influence of the central bank. True False

85. Foreign exchange risk is the risk that a person or business will not be able to exchange currencies. True False

86. The Purchasing Power Parity Theory states that currency exchange rates tend to vary inversely with their respective purchasing powers in order to provide similar purchasing powers. True False

87. Balance of payments is a method of keeping the foreign exchange market in equilibrium. True False

88. A forward exchange rate is used to help determine the value of a currency at a future point in time. True False

89. Translation exposure occurs because of changes in foreign exchange rates. True False

90. Transaction exposure results in foreign exchange gains and losses. True False

91. Multinational firms tend to have a lower level of portfolio risk than comparable Canadian firms. True False

92. When a bank issues a letter of credit the bank absorbs ALL of the credit risk to the exporter. True False

Foundations of Financial Management - 10th Canadian Edition by Block

93. In the financing of a foreign affiliate, the simplest and most common arrangement is a direct loan from the parent company to the subsidiary. True False

94. In a fronting loan arrangement, the intermediary bank extends a risk-free loan to the foreign affiliate. True False

95. The lending rate for borrowers in the Eurocurrency market is based on the prime lending rate. True False

96. Selling common stock to residents of foreign countries is illegal in most countries, although it minimizes risk for any multinational corporation. True False

97. Because of political risk, it is generally disadvantageous for Canadian firms to list their stocks on the world stock exchanges. True False

98. A bear market (declining stock prices) will tend to exert a depressing effect on the value of a country's currency. True False

99. Expected future value of a currency is reflected in its spot rate. True False

100. The future rates of currency tend to increase for dates further in the future because of the increasing uncertainty over time. True False

101. Forward contracts tend to be created in organized exchanges like the International Money Market of the Toronto Futures Exchange. True False

Foundations of Financial Management - 10th Canadian Edition by Block

102. A money market hedge does not require the use of a futures exchange. True False

103. When a country has a weak currency relative to other countries, visiting that country is much more expensive for residents of other countries. True False

104. The purchasing power parity theory of exchange rates suggests that exchange rates will adjust until the cost of equivalent goods is approximately equal in each country. True False

105. A firm that might suffer a loss as a result of a decline in the value of the Japanese yen could offset part of that risk by selling Japanese yen futures. True False

106. Investors and firms who diversify their Canadian portfolios by buying foreign stocks or investing in foreign subsidiaries take on a much higher level of risk than if they had invested in domestic stocks or companies. True False

107. In international finance, the term "Balance of Payments" refers to the balance owing from one government to another. True False

108. Cash management considerations tend not to be the major determinants of transfer pricing policy. True False

109. Japanese stocks typically have price-earnings multiples that are much higher than Canadian stocks. True False

110. A fronting loan is simply a parent's loan to its foreign subsidiary channelled through a financial intermediary, usually a large international bank. True False

Foundations of Financial Management - 10th Canadian Edition by Block

111. The North American Free Trade Agreement (NAFTA) has opened up opportunities for truly competitive Canadian enterprises, while threatening the viability of others not able to match international levels of efficiency. True False

112. The eurobond market offers tax flexibility for borrowers and investors. True False

113. The most widely used currency in the Eurobond market is the euro. True False

114. Eurobond issues are sold simultaneously in several national capital markets, but denominated in a currency different from that of the nation in which the bonds are issued. True False

115. There is no guarantee that any currency will stay strong relative to other currencies, but the U.S. dollar is the exception. True False

116. Transaction exposure associated with changes in the exchange rates between countries can be hedged with a currency futures contract. True False

117. Expropriation is a form of transaction exposure. True False

118. A forward rate reflects the future value of a currency based on expectations. True False

Foundations of Financial Management - 10th Canadian Edition by Block

119. Despite higher risks, what are 3 reasons foreign capital investments are undertaken?

120. Why do foreign investments offer higher rates of return than the rate of return on domestic investments?

121. List and discuss the 3 risks of international financial management.

122. List and discuss in detail the main factors that influence exchange rates.

Foundations of Financial Management - 10th Canadian Edition by Block

123. The Daily Planet has a wholly owned foreign subsidiary in Malaysia. The subsidiary earns 25 million ringgits per year before taxes in Malaysia. The foreign income tax rate is 30%. The subsidiary repatriates the entire aftertax profits in the form of dividends to the Daily Planet. The Canadian corporate tax rate is 40% of foreign earnings before taxes. A) Compute aftertax cash flow to the Daily Planet from this investment (in ringgits).

B) If the exchange rate is .40 ($/ringgits), what is the after tax cash flow in dollars? C) CCA related cash flow is 3 million ringgits per year for five years for another Daily Planet investment in Malaysia. The cash flow will earn 10% per year. After five years, it will then be translated back to dollars at an exchange rate of .47 ($/ringgit). The Daily Planet applies a 15% discount rate to foreign cash flows. What is the present value (in dollars) of the CCA related cash flow?

Foundations of Financial Management - 10th Canadian Edition by Block

125. Assume the following spot and forward rates for the euro ($/Euro).

A) What is the dollar value of one euro in the spot market? B) Suppose you issued a 90-day forward contract to exchange 100,000 euros into Canadian dollars. How many dollars are involved? C) How many euros can you get for one dollar in the spot market? D) What is the 120-day forward premium?

126. Assume the following spot and forward rates for the euro ($/euro).

A) What is the dollar value of one euro in the spot market? B) Suppose you issued a 120-day forward contract to exchange 200,000 euros into Canadian dollars. How many dollars are involved? C) How many euros can you get for one dollar in the spot market? D) What is the 120-day forward premium?

Foundations of Financial Management - 10th Canadian Edition by Block

127. The Daily Planet has a wholly owned foreign subsidiary in Brazil. The subsidiary earns 30 million reals per year before taxes in Brazil. The foreign income tax rate is 30%. The subsidiary repatriates the entire aftertax profits in the form of dividends to the Daily Planet. The U.S. corporate tax rate is 40% of foreign earnings before taxes. a) Compute after-tax cash flow to the Daily Planet from this investment (in reals). Use the table below.

b) If the exchange rate is .56 ($/reals), what is the after-tax cash flow in dollars? c) Depreciation related cash flow is 2 million reals per year for five years for another Daily Planet investment in Brazil. The exchange rate is expected to be .59 ($/reals). The Daily Planet applies a 15% discount rate to foreign cash flows. What is the present value (in dollars) of the depreciation related cash flow?

Foundations of Financial Management - 10th Canadian Edition by Block

129. Assume the following spot and forward rates for the New Zealand dollar ($/NZD).

a) What is the U.S. dollar value of one New Zealand dollar in the spot market? b) Suppose you issued a 90-day forward contract to exchange 100,000 New Zealand dollars into U.S. dollars. How many U.S. dollars are involved? c) How many New Zealand dollars can you get for one U.S. dollar in the spot market? d) What is the 120-day forward premium?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 21 Key

1. A multinational corporation may be defined as: A. a company which owns property in a foreign country. B. a company which hires foreign labourers. C. a company which carries on some business activity outside of its own national borders. D. a company which conducts business with employees and corporations from around the world.

Accessibility: Keyboard Navigation Block - Chapter 21 #1 Difficulty: Easy Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #2 Difficulty: Easy Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #3 Difficulty: Easy Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #4 Difficulty: Easy Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #5 Difficulty: Easy Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #6 Difficulty: Easy Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #7 Difficulty: Medium Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #8 Difficulty: Easy Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Topic: 21-06 Exchange Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #9 Difficulty: Easy Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-06 Exchange Rates Topic: 21-10 Factors Influencing Exchange Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

10. You are leaving Mexico and have 3,500 pesos to change into dollars. The exchange rate is now 1,500 pesos to the dollar. How many dollars will you receive? A. $0.43 B. $2.33 C. $23.33 D. $30.00

Accessibility: Keyboard Navigation Block - Chapter 21 #10 Difficulty: Easy Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Topic: 21-06 Exchange Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #11 Difficulty: Easy Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

12. Which of the following hedging strategies is not used to minimize transaction exposure? A. Eurobond market B. Forward exchange market C. Money market D. Currency futures market

Accessibility: Keyboard Navigation Block - Chapter 21 #12 Difficulty: Easy Learning Objective: 21-06 Evaluate techniques to hedge or reduce foreign exchange risk. Topic: 21-13 Hedging (Risk Reduction) Techniques Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #13 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #14 Difficulty: Easy Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #15 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #16 Difficulty: Easy Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Memory

17. The following are the prices in the foreign exchange market between the Canadian dollar and another local currency (LC).

What was the discount or premium on 3-month forward for LC? A. 1.2980% premium B. 0.0325% premium C. 0.0325% discount D. 1.2980% discount

Block - Chapter 21 #17 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

18. Which of the following hedging strategies involves a loan without a futures contract? A. Eurobond market B. Forward exchange market C. Money market D. IMM contract

Accessibility: Keyboard Navigation Block - Chapter 21 #18 Difficulty: Easy Learning Objective: 21-06 Evaluate techniques to hedge or reduce foreign exchange risk. Topic: 21-13 Hedging (Risk Reduction) Techniques Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #19 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #20 Difficulty: Medium Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-03 Reasons for Capital Investment Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #21 Difficulty: Medium Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-08 Political Risk Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #22 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #23 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #24 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #25 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #26 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #27 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #28 Difficulty: Medium Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-02 Capital Investment Topic: 21-03 Reasons for Capital Investment Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #29 Difficulty: Easy Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

30. If the Brazilian real is equal to $0.46, a Canadian dollar is equal to how many Brazilian reals? A. 1.36 B. 1.96 C. 2.17 D. 0.38

Accessibility: Keyboard Navigation Block - Chapter 21 #30 Difficulty: Easy Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Topic: 21-06 Exchange Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #31 Difficulty: Medium Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Concept

32. Which of the following factors will not increase the value of a currency in foreign markets? A. High interest rates B. High inflation C. Positive balance of payments D. Strong stock market rally

Accessibility: Keyboard Navigation Block - Chapter 21 #32 Difficulty: Medium Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #33 Difficulty: Medium Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

34. The spot rate of the British pound to the dollar is 1.68 ($/≤,). The 180 day forward rate is $1.71, the annualized forward premium is: A. 1.018%. B. 3.636%. C. 7.273%. D. 2.036%.

Accessibility: Keyboard Navigation Block - Chapter 21 #34 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

35. The Chinese renminbi is selling for $0.1652 and the British pound is selling for $1.6581. The cross rate between the renminbi and the pound is: A. 10.0400. B. 0.1004. C. 9.9600. D. 0.0996.

Accessibility: Keyboard Navigation Block - Chapter 21 #35 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-12 Cross Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #36 Difficulty: Medium Learning Objective: 21-06 Evaluate techniques to hedge or reduce foreign exchange risk. Topic: 21-13 Hedging (Risk Reduction) Techniques Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #37 Difficulty: Medium Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-03 Reasons for Capital Investment Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #38 Difficulty: Easy Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-03 Reasons for Capital Investment Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #39 Difficulty: Easy Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-08 Political Risk Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

40. The Export Development Corporation (EDC): A. lends money to foreign purchasers of Canadian goods. B. issues letters of credit. C. makes parallel loans. D. makes fronting loans.

Accessibility: Keyboard Navigation Block - Chapter 21 #40 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #41 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

42. Eurocurrency are: A. Canadian dollars deposited in foreign banks. B. foreign dollars deposited in Canadian banks. C. investments of common market countries. D. Euro's converted to US dollars.

Accessibility: Keyboard Navigation Block - Chapter 21 #42 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #43 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #44 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #45 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #46 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #47 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #48 Difficulty: Medium Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #49 Difficulty: Medium Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

50. Which of the following kinds of risk are NOT uniquely associated with MNCs? A. Exchange rate risk B. Business risk C. Political risk D. Translation risk

Accessibility: Keyboard Navigation Block - Chapter 21 #50 Difficulty: Medium Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #51 Difficulty: Medium Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #52 Difficulty: Medium Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #53 Difficulty: Easy Learning Objective: 21-06 Evaluate techniques to hedge or reduce foreign exchange risk. Topic: 21-13 Hedging (Risk Reduction) Techniques Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #54 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-17 Global Cash Management Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #55 Difficulty: Easy Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #56 Difficulty: Easy Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-12 Cross Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #57 Difficulty: Easy Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #58 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #59 Difficulty: Easy Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #60 Difficulty: Easy Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

61. You are on your way to Mexico. The current exchange rate is 12 pesos to the dollar. When you arrive, you convert $1,000 for how many pesos? A. 12,000 B. 120 C. 83 D. 0.018

Accessibility: Keyboard Navigation Block - Chapter 21 #61 Difficulty: Easy Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Topic: 21-06 Exchange Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #62 Difficulty: Easy Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #63 Difficulty: Easy Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Topic: 21-06 Exchange Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

64. The surplus which appreciates the value of the currency is known as: A. Purchasing Power Parity. B. Balance of Payments. C. Current Capital. D. Interest Rate Parity.

Accessibility: Keyboard Navigation Block - Chapter 21 #64 Difficulty: Easy Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #65 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #66 Difficulty: Easy Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

67. The following are the prices in the foreign exchange market between the Canadian dollar and United States dollar (USD).

Block - Chapter 21 #67 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #68 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #69 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 21 #70 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #71 Difficulty: Medium Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-02 Capital Investment Topic: 21-03 Reasons for Capital Investment Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #72 Difficulty: Medium Learning Objective: 21-06 Evaluate techniques to hedge or reduce foreign exchange risk. Topic: 21-13 Hedging (Risk Reduction) Techniques Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

73. Government expropriation is an example of: A. Transaction risk. B. Business risk. C. Political risk. D. Translation risk.

Accessibility: Keyboard Navigation Block - Chapter 21 #73 Difficulty: Medium Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #74 Difficulty: Easy Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Topic: 21-05 Foreign Exchange Risk Type: Memory

75. Canadian firms expand their operations outside of Canada's borders because the average rate of return for foreign investment is often higher than the rate of return on domestic investments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #75 Difficulty: Easy Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-03 Reasons for Capital Investment Type: Memory

76. Canada is the world's major importer and exporter, and has by far the greatest investment in foreign countries. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #76 Difficulty: Easy Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-01 The Scope Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

77. An exporter is able to satisfy foreign demand for a product while avoiding long-term investment although this method is riskier than other alternatives. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #77 Difficulty: Medium Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Concept

78. A joint venture with a private entrepreneur in a host country exposes the multinational corporation to the least amount of political risk. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #78 Difficulty: Easy Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

79. A joint venture with a local entrepreneur exposes the firm to the least amount of political risk and is a preferred method of investment by foreign governments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #79 Difficulty: Medium Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

80. A foreign affiliate may be an exporter, a joint venture, or a fully owned foreign subsidiary. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #80 Difficulty: Easy Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

81. A foreign affiliate lowers the portfolio risk of its parent company because the foreign and domestic economies tend to be fairly similar. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #81 Difficulty: Easy Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation. Topic: 21-14 The Multinational Corporation Type: Memory

82. A foreign exchange rate is the rate at which a foreign currency changes relative to the dollar. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #82 Difficulty: Easy Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Topic: 21-06 Exchange Rates Type: Memory

83. Currency exchange rates may be either floating or fixed. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #83 Difficulty: Easy Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

84. In a free market, the exchange rate between two currencies is determined by the supply of and demand for those currencies with the influence of the central bank. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #84 Difficulty: Easy Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

85. Foreign exchange risk is the risk that a person or business will not be able to exchange currencies. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #85 Difficulty: Easy Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Topic: 21-05 Foreign Exchange Risk Type: Memory

86. The Purchasing Power Parity Theory states that currency exchange rates tend to vary inversely with their respective purchasing powers in order to provide similar purchasing powers. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #86 Difficulty: Medium Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

87. Balance of payments is a method of keeping the foreign exchange market in equilibrium. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #87 Difficulty: Medium Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

88. A forward exchange rate is used to help determine the value of a currency at a future point in time. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #88 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

89. Translation exposure occurs because of changes in foreign exchange rates. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #89 Difficulty: Easy Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Memory

90. Transaction exposure results in foreign exchange gains and losses. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #90 Difficulty: Easy Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-07 Exchange Rate Exposure Type: Memory

91. Multinational firms tend to have a lower level of portfolio risk than comparable Canadian firms. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #91 Difficulty: Medium Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-03 Reasons for Capital Investment Type: Concept

92. When a bank issues a letter of credit the bank absorbs ALL of the credit risk to the exporter. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #92 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

93. In the financing of a foreign affiliate, the simplest and most common arrangement is a direct loan from the parent company to the subsidiary. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #93 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

94. In a fronting loan arrangement, the intermediary bank extends a risk-free loan to the foreign affiliate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #94 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

95. The lending rate for borrowers in the Eurocurrency market is based on the prime lending rate. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #95 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

96. Selling common stock to residents of foreign countries is illegal in most countries, although it minimizes risk for any multinational corporation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #96 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

97. Because of political risk, it is generally disadvantageous for Canadian firms to list their stocks on the world stock exchanges. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #97 Difficulty: Medium Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-08 Political Risk Type: Memory

98. A bear market (declining stock prices) will tend to exert a depressing effect on the value of a country's currency. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #98 Difficulty: Medium Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Concept

99. Expected future value of a currency is reflected in its spot rate. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #99 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Memory

100. The future rates of currency tend to increase for dates further in the future because of the increasing uncertainty over time. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #100 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

101. Forward contracts tend to be created in organized exchanges like the International Money Market of the Toronto Futures Exchange. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #101 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Memory

102. A money market hedge does not require the use of a futures exchange. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #102 Difficulty: Medium Learning Objective: 21-06 Evaluate techniques to hedge or reduce foreign exchange risk. Topic: 21-13 Hedging (Risk Reduction) Techniques Type: Memory

103. When a country has a weak currency relative to other countries, visiting that country is much more expensive for residents of other countries. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #103 Difficulty: Medium Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Topic: 21-06 Exchange Rates Type: Concept

104. The purchasing power parity theory of exchange rates suggests that exchange rates will adjust until the cost of equivalent goods is approximately equal in each country. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #104 Difficulty: Medium Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

105. A firm that might suffer a loss as a result of a decline in the value of the Japanese yen could offset part of that risk by selling Japanese yen futures. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #105 Difficulty: Medium Learning Objective: 21-06 Evaluate techniques to hedge or reduce foreign exchange risk. Topic: 21-13 Hedging (Risk Reduction) Techniques Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 21 #106 Difficulty: Medium Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-03 Reasons for Capital Investment Type: Concept

107. In international finance, the term "Balance of Payments" refers to the balance owing from one government to another. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #107 Difficulty: Medium Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

108. Cash management considerations tend not to be the major determinants of transfer pricing policy. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #108 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-17 Global Cash Management Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

109. Japanese stocks typically have price-earnings multiples that are much higher than Canadian stocks. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #109 Difficulty: Medium Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Memory

110. A fronting loan is simply a parent's loan to its foreign subsidiary channelled through a financial intermediary, usually a large international bank. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #110 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 21 #111 Difficulty: Easy Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-01 The Scope Type: Memory

112. The eurobond market offers tax flexibility for borrowers and investors. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #112 Difficulty: Easy Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

113. The most widely used currency in the Eurobond market is the euro. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #113 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

114. Eurobond issues are sold simultaneously in several national capital markets, but denominated in a currency different from that of the nation in which the bonds are issued. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #114 Difficulty: Medium Learning Objective: 21-08 Outline potential ways to finance international operations. Topic: 21-15 Financing International Business Operations Topic: 21-16 Funding Of Transactions Type: Memory

115. There is no guarantee that any currency will stay strong relative to other currencies, but the U.S. dollar is the exception. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #115 Difficulty: Medium Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Concept

116. Transaction exposure associated with changes in the exchange rates between countries can be hedged with a currency futures contract. TRUE

Accessibility: Keyboard Navigation Block - Chapter 21 #116 Difficulty: Easy Learning Objective: 21-06 Evaluate techniques to hedge or reduce foreign exchange risk. Topic: 21-13 Hedging (Risk Reduction) Techniques Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

117. Expropriation is a form of transaction exposure. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #117 Difficulty: Easy Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-08 Political Risk Type: Memory

118. A forward rate reflects the future value of a currency based on expectations. FALSE

Accessibility: Keyboard Navigation Block - Chapter 21 #118 Difficulty: Easy Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Memory

119. Despite higher risks, what are 3 reasons foreign capital investments are undertaken? • Higher potential returns • Strategic advantages • Broader diversification possibilities

Block - Chapter 21 #119 Difficulty: Medium Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-03 Reasons for Capital Investment Type: Concept

120. Why do foreign investments offer higher rates of return than the rate of return on domestic investments? Foreign investments offer higher rates of return for several reasons: • Resource availability and ease of exploitation lowers production costs. • Significantly lower wages results in lower production costs. • Larger, more concentrated markets produce better revenues. • Corporate income tax rates are often lower than in Canada. • Canadian taxes on income earned may be postponed until it is repatriated (brought back to Canada).

Block - Chapter 21 #120 Difficulty: Medium Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision. Topic: 21-03 Reasons for Capital Investment Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

121. List and discuss the 3 risks of international financial management. The three risks of international financial management include foreign exchange risk, economic exposure, and political risk. Foreign Exchange Risk: When conducting business internationally, corporations or investors inevitably must deal with more than one currency. The international monetary system, to accommodate trade established a freely floating rate system to replace the rigid fixed exchange rate system. Since most foreign currency values fluctuate from time to time, the monetary value of an international transaction or investment, measured in either the seller's or the buyer's currency, is likely to change over time. As a result, the value of an investment or the expected receipt (payment) of funds from a commercial transaction will be more or less than the value originally established. The relationship between the values of two currencies is known as the foreign exchange rate. Economic Exposure: This identifies the market value of assets and liabilities, denominated in foreign currencies, which is subject to change in economic value because of fluctuations in exchange rates. This economic exposure is a measure of concern to financial practitioners, but it is sometimes difficult to measure. Foreign exchange risk refers to the possible change in value of foreign exchange rates. Importers, exporters, investors, and multinational corporations (MNC) are all exposed to foreign exchange risk. The foreign exchange risk impacts on the economic exposure of a multinational company in foreign countries. We identify foreign exchange risk as accounting or translation exposure and as transaction exposure. Accounting or translation exposure is the amount of loss or gain resulting from the treatment of foreign investments in the parent company's books, based on the accounting rules established by the parent company's government. Transaction exposure is identified as the foreign exchange gains and losses resulting from international transactions that are realized when foreign funds are converted to Canadian dollars. These gains or losses, because they are realized, will be reflected in the corporation's income statement and do represent a real loss or gain in economic value. As a consequence of these transactional gains and losses, the volatility of reported earnings per share increases. Hedging techniques that can be used to minimize this transaction exposure by fixing the value for the foreign currency transaction. Political Risk: Risk associated with direct investment in foreign countries. Risks include the following: • The government may change several times during the foreign firm's tenure in that country, and the new government may not be as friendly or as cooperative as the previous administration. An unfriendly government may impose foreign exchange restrictions, or the foreign ownership share may be limited to a set percentage of the total. • Repatriation (transfer) of a subsidiary's profit to the parent company may be blocked, at least temporarily. • The government may expropriate (take over) the foreign subsidiary's assets. The multinational company may experience a sizable loss of income and/or property as a result of this political interference.

Block - Chapter 21 #121 Difficulty: Hard Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision. Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow. Topic: 21-05 Foreign Exchange Risk Topic: 21-07 Exchange Rate Exposure Topic: 21-08 Political Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

122. List and discuss in detail the main factors that influence exchange rates.

Foundations of Financial Management - 10th Canadian Edition by Block

The present international monetary system consists of a mixture of freely floating exchange rates and fixed rates. The currencies of Canada's major trading partners are traded in free markets. In such a market, the supply of, and the demand for, those currencies determine the exchange rate between two currencies. This activity, however, is subject to intervention by many countries' central banks. Factors that tend to increase the supply or decrease the demand schedule for a given currency bring down the value of that currency in foreign exchange markets. Similarly, the factors that tend to decrease the supply or increase the demand for a currency raise the value of that currency. Fundamental factors such as inflation, interest rates, foreign trade balances, and government policies are important in explaining both the short-term and long-term fluctuations of a currency value. Inflation: When the inflation rate between two countries is different, the exchange rate adjusts to correspond to the relative purchasing powers of the countries. Currency exchange rates tend to vary inversely with their respective purchasing powers to provide the same or similar purchasing power in each country. This is called the purchasing power parity theory. Purchasing power parity is based on the "law of one price." Identical goods should be priced the same, after adjusting for the exchange rate differential. Otherwise there is an incentive to buy in one country and sell in another at a profit. Such action will drive the price of the identical goods toward each other. Interest Rates: All else being equal, the value of a currency offering higher interest rate will appreciate relative to the foreign currency. If investors could earn 3% interest per year in Canada and 5% per year in Britain, they would prefer to invest in Britain, provided the inflation rate and perceived risk is the same in both countries. As investors sell Canadian dollars to buy British pounds, the value of the pound appreciates relative to the dollar. At the same time, the increased demand for British securities also tends to reduce the interest rate differential between the United Kingdom and Canada. Thus, interest rates and exchange rates adjust until the foreign exchange market and the money market reach equilibrium. This interplay between interest rate differentials and exchange rates is called the interest rate parity theory. Interest rate parity suggests that the interest rate paid (charged) on similar-risk financial instruments should be the same through the forward exchange rate. The forward exchange rate is the exchange rate at which monies can be exchanged when the financial instrument matures. Balance of Payments: Surplus in the balance of payments appreciates the value of the currency while continuous deficits in the balance of payments depress the value of a currency. When a country sells (exports) more goods and services to foreign countries than it purchases (imports) from abroad, it has a surplus in its balance of trade. Conversely, continuous deficits in the balance of payments depress the value of a currency because such deficits would increase the supply of that currency relative to the demand. Government Policies: Monetary and fiscal policies also affect the currency value in foreign exchange markets. A national government may, through its central bank, intervene in the foreign exchange market, buying and selling currencies as it sees fit to support the value of its currency relative to others. Sometimes a given country may deliberately pursue a policy of maintaining an undervalued currency to promote cheap exports. At times, some nations affect the foreign exchange rate indirectly by restricting the flow of funds into and out of the country. Expansionary monetary policy and excessive government spending are primary causes of inflation; continual use of such policies eventually reduces the value of the country's currency. Other Factors: Other factors may also affect the demand for a country's currency and its exchange rate. A pronounced and extended stock market rally in a country attracts investment capital from other countries, thus creating a huge demand by foreigners for that country's currency. This increased demand tends to increase the value of that currency. Similarly, a significant drop in demand for a country's principal exports worldwide is expected to result in a corresponding decline in the value of its currency. Political turmoil within a country has often been responsible for driving capital out of a country into more stable countries. A mass exodus of capital, due to the fear of political risk, undermines the value of a country's currency in the foreign exchange market. If widespread labour strikes appear to weaken the nation's economy, they also have a depressing influence on its currency value. The Canadian dollar also seems to be perceived as a play on commodity prices because of the influence natural resources have on our economy. All of these factors do not necessarily influence all currencies to the same degree. Some factors may have an

Foundations of Financial Management - 10th Canadian Edition by Block

overriding influence on one currency's value, but their influence on another currency may be negligible at that time. In other words, exchange rates are partially measures of our confidence in the future performance of a particular economy. An event that may destroy our confidence in one economy's future may not do so in another.

Block - Chapter 21 #122 Difficulty: Hard Learning Objective: 21-04 Characterize the factors influencing exchange rates. Topic: 21-10 Factors Influencing Exchange Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

This value translated back to the present after five years at a 15% discount rate is equal to:

Block - Chapter 21 #123 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

124. Suppose a Swedish krona sells for $0.1625 and a British pound sells for $1.6523. What is the exchange rate (cross rate) of the Swedish krona to the British pound? That is, how many Swedish kronas are equal to a British pound? One dollar is worth 6.154 Swedish kronas ($1.00/0.1625) and one pound is worth $1.6523. Thus: 6.154 Swedish kronas per dollar times $1.6523 equals 10.17 Swedish kronas per British pound. The answer is 10.17.

Block - Chapter 21 #124 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-12 Cross Rates Type: Concept

125. Assume the following spot and forward rates for the euro ($/Euro).

Block - Chapter 21 #125 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

126. Assume the following spot and forward rates for the euro ($/euro).

Block - Chapter 21 #126 Difficulty: Medium Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 21 #127 Difficulty: Hard Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

128. Suppose a Swedish krona sells for $0.1309 and a British pound sells for $1.5119. What is the exchange rate (cross rate) of the Swedish krona to the British pound? That is, how many Swedish kronas are equal to a British pound? One dollar is worth 7.639 Swedish kronas ($1.00/0.1309) and one pound is worth $1.5119. Thus 7.639 Swedish kronas per dollar times $1.5119 equals 11.55 Swedish kronas per British pound. The answer is 11.55.

Block - Chapter 21 #128 Difficulty: Hard Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

129. Assume the following spot and forward rates for the New Zealand dollar ($/NZD).

d) Forward premium =

Forward premium = = 4.33%

× 100

Block - Chapter 21 #129 Difficulty: Hard Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts. Topic: 21-11 Spot Rates and Forward Rates Type: Concept

× 100

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 21 Summary Category

# of Questions

Accessibility: Keyboard Navigation

116

Block - Chapter 21

129

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 21-01 Identify and then analyze reasons for a foreign investment decision.

Learning Objective: 21-02 Examine the effects of exchange and political risk on the foreign investment decision.

Learning Objective: 21-03 Assess the effects of exchange rates on the firms profitability and cash flow.

Learning Objective: 21-04 Characterize the factors influencing exchange rates.

Learning Objective: 21-05 Utilize spot; cross; and forward exchange rates and compute forward premiums and discounts.

Learning Objective: 21-06 Evaluate techniques to hedge or reduce foreign exchange risk.

Learning Objective: 21-07 Explain the purposes and nature of the multinational operations of the corporation.

Learning Objective: 21-08 Outline potential ways to finance international operations.

Topic: 21-01 The Scope

Topic: 21-02 Capital Investment

Topic: 21-03 Reasons for Capital Investment

Topic: 21-05 Foreign Exchange Risk

Topic: 21-06 Exchange Rates

Topic: 21-07 Exchange Rate Exposure

Topic: 21-08 Political Risk

Topic: 21-10 Factors Influencing Exchange Rates

Topic: 21-11 Spot Rates and Forward Rates

Topic: 21-12 Cross Rates

Topic: 21-13 Hedging (Risk Reduction) Techniques

Topic: 21-14 The Multinational Corporation

Topic: 21-15 Financing International Business Operations

Topic: 21-16 Funding Of Transactions

Topic: 21-17 Global Cash Management

Type: Concept

Type: Memory