Question 1. An investor owned hospital management firm has long-term debt, preferred stock, and common stock in the capital structure. The firm is planning to build a new hospital and will finance the construction with a new long-term bond issue at an interest rate of 10%. The firm's tax rate is 40%. For a cost of capital to decide whether to go ahead with this project, the firm should:
a. use 10%
b. use 6%.
c. use the weighted average current cost of preferred stock, common stock, and debt.
d. go ahead with the project if it fits into the firm's long-term plans.
Question 2. The interest rate on a proposed $100 million hospital bond issue would be 5% if current management is in place and would increase to 6% if a greedy group of aggressive managers looking out only for themselves take over the hospital. The annual agency costs associated with the structure of the deal is:
a. $6 million
b. $5 million.
c. $1 million.
d. there are no agency costs.
Question 3. If an organization using cash management services has its cash balance fall below the required compensating balance level, the bank will:
a. automatically tap the organization's line of credit.
b. automatically lower the compensating balance level to compensate for the shortfall.
c. allow the organization a three-day grace period to make additional collections to increase the cash balance above the normal compensating balance level.
d. both B and C.
Question 4. You have determined the profitability of a planned project by finding the present value of all the cash flows from the project. Which of the following would cause the project to look less appealing, that is, have a lower present value?
a. The discount rate decreases
b. The cash flows are extended over a longer period of time.
c. The discount rate increases.
d. Both B and C.
e. Both A and B.
Question 5. Deviations from the law of one price are:
a. corrected by financial participants exploiting arbitrage opportunities.
b. corrected by the government setting standard prices for goods and services.
c. corrected by senior managers responsible for pricing.
d. usually corrected very slowly.
Question 6. Which of the following costs would be placed in a shadow cost center?
a. The depreciation of plant and equipment.
b. The salaries for nurses in the nursing unit.
c. The salary for the chief executive officer of the organization
d. All of the above
Question 7. The ratio of current assets divided by current liabilities is a ratio in the following category:
a. financial leverage.
b. profitability.
c. asset utilization.
d. liquidity
Question 8. Which of the following are characteristics of short-term bank notes?
a. Payment in full is due on the maturity date.
b. They carry an interest rate based on the principal amount.
c. The amount is less than the principal amount, issued at a discount.
d. Both A and B.
e. Both A and C.
Question 9. Which of the following statements about the EOQ model described in McLean is false?
a. If annual demand were to increase, the EOQ would increase.
b. If annual demand were to double, the EOQ would also double.
c. If the ordering cost were to increase, the EOQ would increase.
d. All of the above are true.
Question 10. The opportunity cost of investing $1,000 for one year at an interest rate of 6% instead of an interest rate of 7% is:
a. $10
b. $70
c. $60
d. $0