(TCO 6) Which of the following is true regarding income bonds? (Points : 4)Are relatively uncommonCan be exchanged for a fixed number of shares at maturity onlyCan be exchanged for a fixed number of shares before maturityAllow the holder to require the issuer to buy the bond back
2. (TCO 6 and 7) Financial leverage deals with: (Points : 4)the relationship of fixed and variable costs.the percentage of debt in the capital structure.the entire income statement.the entire balance sheet.
3. (TCO 6) Company A has a bond outstanding with $90 annual interest payment, a market price of $820, and a maturity date in five years. Assume the par value to be $1,000. What is the bond’s current yield? (Points : 4)9%Cannot be determinedNone of the above
4. (TCO 2) Which of the following does not reduce collection float? (Points : 4)consolidate all lockboxes into one lockbox, located near the home office.consolidate all lockboxes into one lockbox, located far from the home office.make sure all checks it receives are properly dated and signed.utilize the benefits of the Check Clearing Act for the 21st Century.
5. (TCO 2) Storage and tracking costs, insurance and taxes, and losses due to theft are examples of: (Points : 4)Inventory depletion costsSunk costsCarrying costsShortage costs
6. (TCO 1) Recent announcements of massive layoffs have increased stock prices for certain companies. Critics argue that this reaction encourages companies to fire employees. Do you agree or disagree? (Points : 10)
7. (TCO 4) What are sunk costs? Provide at least two real-life examples of sunk costs for a project. Should sunk costs be included as incremental cash flows? Why or why not? Explain your rationale. (Points : 10)
8. (TCO 8) What is the difference between business risk and financial risk? If Company A has a higher business risk than Company B, should its cost of capital be higher? Why or why not? Explain your rationale. (Points : 10)
9. (TCO 2) What are the costs associated with extending (or not extending) a credit policy to customers? (Points : 10)
10. (TCO 6 and 7) How can you calculate the cost of debt? What methods can you use? Provide at least two examples. (Points : 10)
1. (TCO 1) Which of the following are capital structure concerns?
I. how to obtain short-term financingII. the company’s financing mixIII. the cost of fundsIV. how and where to raise money (Points : 4)I and III, II and IIIII, III and IVI, III and IVAll of the above
2. (TCO 1) Market values reflect which of the following: (Points : 4)The amount someone is willing to pay today for an asset.The value of the asset based on generally-accepted accounting principles.The assets historical cost.A and B onlyNone of the above
3. (TCO 1) Use the following tax table to answer this question:
Taxable Income Tax Rate$0- $50,000 15%$50,001- 75,000 25$75,001- 100,000 34$100,001- 335,000 39$335,001- 10,000,000 34
McKenzie, Inc. earned $144,320 in taxable income for the year. What is the companys approximate average tax rate? (Points : 4)27%29%31%33%35%
4. (TCO 3) Regional Bank offers you an APR of 19 percent compounded semiannually, and Local Bank offers you an EAR of 20.10 percent for a new automobile loan. You should choose ______________ because its _______ is lower. (Points : 4)Regional Bank, APRLocal Bank, EARRegional Bank, EARLocal Bank, APR
5. (TCO 3) You deposited $8,000 in your bank account today. Which of the following will increase the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all that apply: (Points : 4)a decrease in the interest rateincreasing the initial amount of your depositdecreasing the frequency of the interest paymentsextending the length of the investment period
6. (TCO 3) Amy needs to save $20,000 in cash to buy a new car five years from today. She expects to earn 6.5 percent, compounded annually, on her savings. How much does she need to deposit today, if this is the only money she saves for this purpose? (Points : 4)$12,468.07$12,502.14$14,597.62$17,044.32$17,129.01
7. (TCO 3) Paper Pro needed a new store. The company spent $65,000 to refurbish an old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost at eight percent interest for 11 years. What is the amount of each monthly payment? (Points : 4)$91.05$284.13$556.50$682.87$731.60
8. (TCO 3) Which type of loan is comparable to the present value of a future lump sum? (Points : 4)effective annual rateamortizedinterest-onlyannual percentagepure discount
9. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 16 percent? Assume annual payments. (Points : 4)$1315$1300$756$1000
10. (TCO 6) The market where new securities are offered is called the _____ market. (Points : 4)primarymainsecondaryprincipaldealer
11. (TCO 7) Which one of the following statements concerning financial leverage is correct? (Points : 4)The benefits of leverage are unaffected by the amount of a firm’s earnings.The use of leverage will always increase a firm’s earnings per share.The shareholders of a firm are exposed to greater risk anytime a firm uses financial leverage.Earnings per share are unaffected by changes in a firm’s debt-equity ratio.Financial leverage is beneficial to a firm only when the firm has minimal earnings.
12. (TCO 3) SmithKline Company’s bonds are currently selling for $1,157.75 per $1000 par-value bond. The bonds have a 10 percent coupon rate and will mature in 10 years. What is the approximate yield to maturity? (Points : 4)6.96%7.69.0.1%
13. (TCO 8) Which of the following is true regarding bonds? (Points : 4) Most bonds do not carry default risk.Municipal bonds are free of default risk.Bonds are not sensitive to changes in the interest rates.Moodys and Standard and Poors provide information regarding a bonds interest rate risk.None of the above is true
14. (TCO 8) Two years ago, Maple Enterprises issued six percent, 20-year bonds and Temple Corp issued six percent, 10-year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm’s bond prices in the market, assuming they have equal risk? (Points : 4)Maple’s decreased more than Temple’sTemple’s decreased more than Maple’sMaple’s increased more than Temple’sThey are both priced the same
15. (TCO 6) Star Industries has one bond issue outstanding. An indenture provision prohibits the firm from redeeming the bonds during the first two years. This provision is referred to as a _____ provision. (Points : 4)deferred callmarketliquiditydebenture
(TCO 8) Weak form market efficiency states that the value of a security is based on: (Points : 4)all public and private information.historical information only.all publicly available information.all publicly available information, plus any data that can be gathered from insider trading.random information with no clear distinction as to the source of that information.
2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 9 percent (after-tax) and common equity at a cost of 16 percent. Assume debt and common equity each represent 50 percent of the firm’s capital structure. What is the weighted average cost of capital? (Points : 4)between 4.5% and 8%more than 13%between 12 and 13%between 13 and 14%none of the above
3. (TCO 5, 6 and 7) An issue of common stock’s most recent dividend is $3.75. Its growth rate is eight percent. What is its price if the market’s rate of return is 16 percent? (Points : 4)$25.01$46.88$50.63none of these
4. (TCO 5, 6 and 7) Which of the following is true regarding the cost of debt? (Points : 4)It is the same as cost of equity.It is the interest rate that the firm pays on current/existing borrowing.An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding.All of the above are true.
5. (TCO 5) Retained earnings has a cost associated with it because: (Points : 4)new funds must be raised.there is an opportunity cost associated with stockholder funds.Ke> gflotation costs increase the cost of funding.
6. (TCO 4) A project has the following cash flows. What is the internal rate of return?
Year 0 1 2 3Cash flow -$520,000 $112,900 $367,200 $204,600(Points : 4)less than 10%approximately 14%more than 16%more than 18% but less than 20%
7. (TCO 5, 6 and 7) Which one of the following is a correct statement? (Points : 4)Current tax laws favor debt financing.A decrease in the dividend growth rate increases the cost of equity.An increase in the systematic risk of a firm will decrease the firm’s cost of capital.A decrease in a firm’s debt-equity ratio will usually decrease the firm’s cost of capital.The cost of preferred stock decreases when the tax rate increases.
8. (TCO 5, 6 and 7) The preferred stock of Blue Sky Air pays an annual dividend of $7.25 a share and sells for $54 a share. The tax rate is 35 percent. What is the firm’s cost of preferred stock? (Points : 4)8.56 percent9.32 percent11.85 percent13.43 percent14.47 percent
9. (TCO 2) Which one of the following occurs if a firm files for Chapter 7 bankruptcy, but does not generally occur if the firm files for Chapter 11 bankruptcy? (Points : 4)a petition is filed in federal courtadministrative fees are incurreda list of creditors is compiledpre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firma trustee-in-bankruptcy is elected by the creditors
10. (TCO 5) Which of the following statements is true regarding the cost of capital? (Points : 4)The cost of capital should not consider any flotation costs.All other being equal, it is preferable to use book value weights than market value weights.The WACC is the most appropriate discount rate for all projects.Depends primarily on the use of the funds, not the source.
11. (TCO 2) Which of the following increases the cash account? (Points : 4)Goods are sold on creditAn interest payment on a notes payable is madeA payment due is received from a clientRaw materials are purchased and paid for with credit
12. (TCO 2) Which of the following statements is true? (Points : 4)Firms should avoid offering credit at all cost.An increase in a firm’s average collection period generally indicates that an increased number of customers are taking advantage of the cash discount.The costs of the credit application process and the costs expended in the collection process are carrying costs of granting credit.Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.The optimal credit policy, is the policy that produces the largest amount of sales for a firm.
13. (TCO 2) All else constant, a decrease in the accounts receivable period will: (Points : 4)lengthen the accounts payable period.shorten the inventory period.lengthen the operating cycle.shorten the cash cycle.shorten the accounts payable period.
14. (TCO 2) The Yellow Box has the following estimated quarterly sales for next year. The accounts receivable period is 45 days. What is the expected accounts receivable balance at the end of the third quarter? Assume each month has 30 days.
Q1 Q2 Q3 Q4Sales $1,200 $1,400 $1,800 $1,700(Points : 4)$600$750$900$1,050$1,200
15. (TCO 1) Which of the following statements is true regarding the goal of financial management? (Points : 4)The goal of maximizing the value per share of existing stock is relevant to all organizations.The ultimate goal of financial management is maximizing earnings and profits.For a company considering international operations, the goal will be the same but the company will have to consider the local, social, economical, and political environment in the decision-making process.None of the above are true statements.