Problem 1. The owners of a corporation enjoy unlimited liability.
True OR False
Problem 2. Which of the following is a characteristic of an efficient market?
a. Small number of individuals.
b. Opportunities exist for investors to profit from publicly available information.
c. Security prices reflect fair value of the firm.
d. Immediate response occurs for new public information.
Problem 3. According to the DuPont Analysis, an increase in net profit margin will decrease return on assets.
True OR False
Problem 4. The lower the average collection period ratio, the more efficient is the firm in managing its investment in accounts receivable.
True OR False
Problem 5. Which of the following is not a reason why financial analysts use ratio analysis?
a. Ratios help to pinpoint a firm's strengths.
b. Ratios restate accounting data in relative terms.
c. Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices.
d. Some of a firm's weaknesses can be identified through the usage of ratios.
Problem 6. A new issue of common stock is considered a primary market transaction in the money market.
True OR False
Problem 7. Activities of the investment banker include:
a. assuming the risk of selling a security issue.
b. selling new securities to the ultimate investors.
c. providing advice to firms issuing securities.
d. all of the above.
Problem 8. The percentages used in the percent-of-sales method comes from pro forma financial statements.
True OR False
Problem 9. The primary purpose of a cash budget is to:
a. determine the level of investment in current and fixed assets.
b. determine accounts payable.
c. provide a detailed plan of future cash flows.
d. determine the estimated income tax for the year.
Problem 10. The present value of the future sum of money is inversely related to both the number of years until payment is received and the opportunity rate.
True OR False
Problem 11. Assuming two investments have equal lives, a high discount rate tends to favor:
a. the investment with large cash flow early.
b. the investment with large cash flow late.
c. the investment with even cash flow.
d. neither investment since they have equal lives.
Problem 12. The degree of operating leverage applies to:
a. sales.
b. net income.
c. earnings per share.
d. all of the above.
Problem 13. Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to:
a. business risk.
b. financial leverage.
c. operating leverage.
d. all of the above.
Problem 14. The percent of sales method of forecasting assumes that fixed assets vary proportionately with sales.
True OR False
Problem 15. If profit margins increase as sales increase, the need for external finance is reduced.
True OR False
Problem 16. Whenever the IRR on a project equals that project's required rate of return, the NPV equals zero.
True OR False
Problem 17. A machine costs $1,000, has a three-year life, and has an estimated salvage value of $100. It will generate after-tax annual cash flows (ACF) of $600 a year, starting next year. If your required rate of return for the project is 10%, what is the NPV of this investment? (Round your answer to the nearest $10.)
a. $490
b. $570
c. $900
d. -$150
Problem 18. Working capital refers to investment in current assets, while net working capital is the difference between current assets and current liabilities.
True OR False
Problem 19. Which of the following best describes commercial paper?
a. Long-term promissory notes of large corporations that maintain high credit ratings
b. Short-term promissory notes of large corporations that maintain high credit ratings
c. Preferred stock of large corporations that maintain high credit ratings
d. All of the above
e. None of the above
Problem 20. Which of the following does not have an important direct effect on cash flow?
a. The payment patterns of customers
b. The time it takes for suppliers to process payments made by check
c. The ability of the banking system to process checks efficiently
d. The general direction of the Federal Reserve Board's interest rate policy
Problem 21. Which of the following is not a good reason for holding cash rather than marketable securities? Cash is held:
a. to meet daily business transaction needs.
b. to provide the CEO with a travel slush fund.
c. when yields on marketable securities are so low that brokerage costs would nearly eat up the entire yield.
d. to make the balance sheet look good.
Problem 22. As inflation increases, the cost of carrying inventory decreases.
True OR False
Problem 23. The main reason that firms lease is to provide them with a source of off-balance sheet financing.
True OR False
Problem 24. Which of the following is not an advantage of leasing for the lessee?
a. The lessor must bear the risk that the equipment will be obsolete even before it is returned at the end of the lease.
b. A lease usually has no restrictive financial covenants on the lessee; the primary duty is to make the lease payments on time.
c. The lessee must dispose of the equipment at the end of the lease.
d. An operating lease can lead to an income tax deduction of the entire lease payment.
Problem 25. Common stockholders bear more risk than debtholders but less risk than preferred stockholders.
True OR False
Problem 26. Which of the following provisions is unique to preferred stockholders and usually not available to common stockholders?
a. Cumulative dividends feature
b. Voting rights
c. Fixed dividend
d. Both a & c
Problem 27. Since depreciation is a sunk cost, it is not necessary to consider depreciation in estimating cash flows for a new capital project.
True OR False
Problem 28. NPV and IRR can provide ranking inconsistencies when projects have unequal lives.
True OR False
Problem 29. Which of the following would decrease free cash flows? A decrease in:
a. depreciation expense.
b. interest expense.
c. incremental sales.
d. both a & c.
e. all of the above.
Problem 30. The average cost of capital is the appropriate rate to use when evaluating new investments, even though the new investments might be in a higher risk class.
True OR False
Problem 31. As the tax rate increases, the weighted average cost of capital decreases.
True OR False
Problem 32. Cost of capital is:
a. the coupon rate of debt.
b. a hurdle rate set by the board of directors.
c. the rate of return that must be earned on additional investment if firm value is to remain unchanged.
d. the average cost of the firm's assets.
Problem 33. The objective of capital structure management is to maximize the market value of the firm's equity.
True OR False
Problem 34. Financial leverage is distinct from operating leverage since it accounts for the use of:
a. debt.
b. fixed operating costs.
c. preferred stock.
d. both a and c.
e. all of the above.
Problem 35. What price must a company typically pay to buy another company? The price will:
a. include some premium over the current market value of the target's equity.
b. be the market value of the target's equity.
c. be the book value of the target's equity.
d. include some discount relative to the current market value of the target's equity.
Problem 36. A merger that is driven by the potentially large reduction in the staffing of overlapping functions and the integration of the two companies' strong similar product lines is referred to as a:
a. conglomerate merger.
b. vertical merger.
c. horizontal merger.
d. diversification merger.
Problem 37. The major advantage of the forward market is risk reduction.
True OR False
Problem 38. Multinational corporations can have lower cost of capital and more continuous access to external finance compared to a domestic firm.
True OR False
Problem 39. A multinational corporation exposes the firm to the least amount of political risk with the use of:
a. import/export licenses.
b. licensing agreements.
c. joint ventures with foreign companies.
d. wholly-owned foreign subsidiaries.
Problem 40. The optimal capital structure involves
a. maximizing the cost of all funds
b. minimizing the cost of all funds
c. using no financial leverage
d. minimizing the weighted average of the cost of funds