Chapter 12

1. Which of the following dollar amounts of investments has decreased wing is not one of
the three fundamental methods of firm valuation?
a. Discounted Cash flow
b. Income or earnings - where the firm is valued on some multiple of accounting
income or earnings.
c. Balance sheet - where the firm is valued in terms of its assets
d. Market Share

2. What is the value of the firm usually based on?

a. The value of debt and equity.
b. The value of equity
c. The value of debt
d. The value of assets plus liabilities.

3. Internal rate of return is …

a. Rate at which discounted cash inflow is more than discounted cash outflow
b. Rate at which discounted cash inflow is less than discounted cash outflow
c. Rate at which discounted cash inflow is equal to the discounted cash outflow
d. Either a or b

4. Book value of assets includes

a. Fixed assets, current asset
b. Fixed assets, current asset, intangible asset
c. Fixed assets, current asset, fictitious asset
d. Fixed assets, current asset, intangible asset, fictitious asset

Chapter 13

1. In the real world, dividends

a. are usually more stable than earnings.
b. fluctuate more widely than earnings.
c. tend to be a lower percentage of earnings for mature firms.
d. are usually changed every year to reflect earnings changes, and these changes are
randomly higher or lower, depending on whether earnings increased or decreased.
e. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if
EPS =$2.00, then DPS will equal $0.80. Once the percentage is set, then dividend
policy is on "automatic pilot" and the actual dividend depends strictly on
earnings.

2. If a firm adheres strictly to the residual dividend policy, the issuance of new common
stock would suggest that
a. the dividend payout ratio is increasing.
b. no dividends were paid during the year.
c. the dividend payout ratio is decreasing.
 d. the dollar amount of investments has decreased
e. the dividend payout ratio has remained constant.

3. Which of the following should not influence a firm's dividend policy decision?
a. A strong preference by most shareholders for current cash income versus capital
gains.
b. Constraints imposed by the firm's bond indenture.
c. The fact that much of the firm's equipment has been leased rather than bought and
owned.
d. The fact that Congress is considering changes in the tax law regarding the
taxation of dividends versus capital gains.
e. The firm's ability to accelerate or delay investment projects.

4. Which of the following would be most likely to lead to a decrease in a firm's dividend
payout ratio?
a. Its access to the capital markets increases.
b. Its R&D efforts pay off, and it now has more high-return investment
opportunities.
c. Its accounts receivable decrease due to a change in its credit policy.
d. Its stock price has increased over the last year by a greater percentage than the
increase in the broad stock market averages.
e. Its earnings become more stable.

5. If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget
requires the use of all earnings for a given year (along with new debt according to the
optimal debt/total assets ratio), then the firm should pay
a. no dividends to common stockholders.
b. dividends only out of funds raised by the sale of new common stock.
c. dividends only out of funds raised by borrowing money (i.e., issue debt).
d. dividends only out of funds raised by selling off fixed assets.
e. no dividends except out of past retained earnings.

6. Which of the following statements is correct?

a. One advantage of the residual dividend policy is that it leads to a stable dividend
payout, which investors like.
b. An increase in the stock price when a company decreases its dividend is consistent
with signaling theory as postulated by MM.
c. If the "clientele effect" is correct, then for a company whose earnings fluctuate, a
policy of paying a constant percentage of net income will probably maximize the
stock price.
d. Stock repurchases make the most sense at times when a company believes its
stock is undervalued.
e. Firms with a lot of good investment opportunities and a relatively small amount of
cash tend to have above average payout ratios.
7. Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock.
The company is contemplating a 2-for-1 stock split. Which of the following best describes
what your position will be after such a split takes place?
a. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
b. You will have 100 shares of stock, and the stock will trade at or near $60 a share.
c. You will have 50 shares of stock, and the stock will trade at or near $120 a share.
d. You will have 50 shares of stock, and the stock will trade at or near $60 a share.
e. You will have 200 shares of stock, and the stock will trade at or near $120 a share.

8. Which of the following statements is correct?

a. If a company uses the residual dividend model to determine its dividend payments,
dividends payout will tend to increase whenever its profitable investment
opportunities increase.
b. The stronger management thinks the clientele effect is, the more likely the firm is to
adopt a strict version of the residual dividend model.
c. Companies may pay too high a price in a large open market repurchase if it takes
too long to complete.
d. An investor’s capital gains from selling stock in a repurchase are always taxed at a
higher rate than if the distribution were dividends.
e. The tax code encourages companies to pay dividends rather than reinvest earnings.

Chapter 14

1. The investment proposal with the greatest relative risk would have
a. the highest standard deviation of net present value.
b. the highest coefficient of variation of net present value.
c. the highest expected value of net present value.
d. the lowest opportunity loss likelihood.

2. Managerial options can be viewed as

a. methods for reducing agency risk through the use of incentives.
b. methods for reducing total firm risk through diversification.
c. strategies for increasing management compensation.
d. opportunities for altering management decisions in the future.

3. If two projects are completely independent (or unrelated), the measure of correlation
between them is:
a. 0
b. .5
c. 1
d. -1

4. Probability-tree analysis is best used when cash flows are expected to be

a. independent over time.
b. risk-free.
 c. related to the cash flows in previous periods.
d. known with certainty.

Chapter 16

1. Which of the following will cause an increase in net working capital, other things held
constant?
a. A cash dividend is declared and paid.
b. Merchandise is sold at a profit, but the sale is on credit.
c. Long-term bonds are retired with the proceeds of a preferred stock issue.
d. Missing inventory is written off against retained earnings.
e. Cash is used to buy marketable securities.

2. Firms generally choose to finance temporary current operating assets with short-term
debt because
a. short-term interest rates have traditionally been more stable than long-term
interest rates.
b. a firm that borrows heavily on a long-term basis is more apt to be unable to repay
the debt than to affirm that it borrows short term.
c. the yield curve is normally downward sloping.
d. short-term debt has a higher cost than equity capital.
e. matching the maturities of assets and liabilities reduces risk under some
circumstances, and also because short-term debt is often less expensive than long-
term capital.

3. Which of the following actions should Reece Windows take if it wants to reduce its cash
conversion cycle?
a. Take steps to reduce the DSO.
b. Start paying its bills sooner, which would reduce the average accounts payable
but not affect ales.
c. Sell common stock to retire long-term bonds.
d. Sell an issue of long-term bonds and use the proceeds to buy back some of its
common stock.
e. Increase average inventory without increasing sales.

4. Which of the following statements is most consistent with efficient inventory

management? The firm has a
a. low incidence of production schedule disruptions.
b. below average total assets turnover ratio.
c. relatively high current ratio.
d. relatively low DSO.
e. below average inventory turnover ratio.

5. Which of the following is NOT commonly regarded as being a credit policy variable?
a. Collection policy
b. Credit standards.
 c. Cash discounts.
d. Payments deferral period.
e. Credit period.
6. Which of the following is NOT directly reflected in the cash budget of a firm that is in
the zero tax bracket?
a. Depreciation.
b. Cumulative cash.
c. Repurchases of common stock.
d. Payment for plant construction.
e. Payments lags.

7. Which of the following items should a company report directly in its monthly cash
budget?
a. Cash proceeds from selling one of its divisions.
b. Accrued interest on zero coupon bonds that it issued.
c. New shares issued in a stock split.
d. New shares issued in a stock dividend
e. Its monthly depreciation expense.

8. Which of the following statements concerning the cash budget is CORRECT?

a. Cash budgets do not include financial items such as interest and dividend
payments.
b. Cash budgets do not include cash inflows from long-term sources such as the
issuance of bonds.
c. Changes that affect the DSO do not affect the cash budget.
d. Capital budgeting decisions have no effect on the cash budget until projects go
into operation and start producing revenues.
e. Depreciation expense is not explicitly included, but depreciation's effects are
reflected in the estimated tax payments.

Chapter 18

1. What is the Capital Market?

a. Market in which securities are bought and sold.
b. A financial market in which long-term debt or equity-backed securities are bought
and sold.
c. Entrepreneurs in one country copy an existing market.
d. A market structure is defined by a large number of small firms competing against
each other.

2. In which Market debt and stocks are traded and the maturity period is more than a year?
a. Money Market
b. Share Market
c. Short Term Market
d. Capital Market
3. What is a Counter Market?
a. Market in which participants trade directly between two parties.
b. Strategies in the stock market or futures market in which the time duration
between entry and exit is within a range of a few days to a few weeks.
c. An investment that is found on the asset side of a company's balance sheet.
d. A financial market in which long-term debt or equity-backed securities are bought
and sold.

4. What are Convertible Bonds?

a. Fixed-income instruments, usually issued by high-rated companies in the form of
a public issue to accumulate long-term capital appreciation.
b. The financial security cannot be redeemed early by the issuer except with the
payment of a penalty.
c. Bonds can be redeemed or paid off by the issuer prior to the bonds' maturity date.
d. A fixed-income corporate debt security that yields interest payments.

5. What is Short Term Market?

a. Market in which securities are bought and sold.
b. Strategies in the stock market or futures market in which the time duration
between entry and exit is within a range of a few days to a few weeks.
c. Market in which participants trade directly between two parties.
d. An investment that is found on the asset side of a company's balance sheet.

6. What is a Secondary Market?

a. The amount the seller receives following the sale of an asset after all costs and
expenses are deducted.
b. Where securities are traded by investors
c. The value of the assets of the Company or the value of the assets being disposed
of, determined without regard to any liabilities associated with such assets.
d. None of the above

7. What is Human Capital?

a. Part of the country's current output and imports is not consumed or exported
during the accounting period.
b. Providing borrowers with a lump sum of cash upfront in exchange for specific
borrowing terms.
c. The financial worth of a laborer's experience and abilities.
d. None of the above.

8. What are Primary Markets?

a. The amount the seller receives following the sale of an asset after all costs and
expenses are deducted.
b. The value of the assets of the Company or the value of the assets being disposed
of, determined without regard to any liabilities associated with such assets.
c. Where investors buy and sell securities they already own.
 d. Market in which new Securities are issued by the Corporations to raise funds

Chapter 19

1. A contract is, or contains, a lease if the contract conveys the right __________ an
identified asset for a period of time in exchange for consideration.
a. To use
b. To control the use of
c. To obtain economic benefits from
d. To recognise depreciation changes of

2. Which of the following best describes current practice in accounting for leases?
a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.

3. Which of the following shall a lessee recognise at the commencement date?

a. A right-of use asset
b. A lease liability
c. Deferred income
d. A and B
e. B and C

4. An essential element of a lease conveyance is that the

a. lessor conveys less than his or her total interest in the property.
b. lessee provides a sinking fund equal to one year's lease payments.
c. property that is the subject of the lease agreement must be held for sale by the
lessor prior to the drafting of the lease agreement.
d. term of the lease is substantially equal to the economic life of the leased
property.

5. At the commencement date, a lessee shall measure the right-of-use asset at __________.
a. Cost
b. Fair value
c. Present value
d. Value in use

6. The amount to be recorded as the cost of an asset under capital lease is equal to the
a. present value of the minimum lease payments.
b. present value of the minimum lease payments or the fair value of the asset,
whichever is lower.
c. present value of the minimum lease payments plus the present value of any
unguaranteed residual value.
d. carrying value of the asset on the lessor's books.
7. Which of the following is an advantage of leasing?
a. Off-balance-sheet financing
b. Less costly financing
c. 100% financing at fixed rates
d. All of these

8. The methods of accounting for a lease by the lessee are

a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. none of these.

Chapter 20

1. The riskiness of the cash flows to the lessee, with the possible exception of residual value,
is about the same as the riskiness of the lessee’s
a. Equity cash flows.
b. Capital budgeting project cash flows.
c. Debt cash flows.
d. Pension fund cash flows.
e. None of the statements above is correct.

2. Operating leases usually have terms that include

a. Maintenance of the equipment.
b. Only partial amortization
c. Cancellation clauses.
d. Statements a and c are correct.
e. All of the statements above are correct

3. Which of the following statements about convertibles is correct?

a. The coupon interest rate on convertibles is generally higher than on straight debt.
b. new equity funds are raised by the issuer when convertibles are converted.
c. Investors are willing to accept lower interest rates on convertibles because they
are less risky than straight debt.
d. At issue, a convertible’s conversion (exercise) price is often set equal to the
current underlying stock price.
e. None of the statements above is correct

4. Which of the following statements concerning warrants is most correct?

a. Warrants cannot be traded separately from the bond with which they are
associated.
b. A warrant is a long-term option to buy a stated number of shares of common stock
at a specified price.
 c. Warrants are long-term call options that have value because holders can buy the
firm’s common stock at the exercise price regardless of how high the market price
climbs.
d. Statements a, b, and c are correct.
e. Statements b and c are correct

5. Which of the following statements is most correct?

a. Financial leases are fully amortized.
b. Financial leases can be canceled.
c. Financial leases provide for maintenance services.
d. Operating leases can never be canceled.
e. All of the statements above are correct

6. The lease analysis should compare the cost of leasing to the

a. Cost of owning using debt.
b. Cost of owning using equity.
c. After-tax cost of debt to measure the effect of leasing on the cost of equity.
d. Average cost of all fixed charges.
e. Cost of owning using the weighted average cost of capital for the firm

7. Which of the following are methods of reporting earnings when warrants or convertibles
are outstanding?
a. Basic EPS.
b. Primary EPS.
c. Diluted EPS.
d. All of the statements above are correct.
e. None of the statements above is correct.

8. Financial Accounting Standards Board (FASB) Statement 13 requires that for an

unqualified audit report, financial (or capital) leases must be included in the balance sheet
by reporting the
a. Value of the leased asset as a fixed asset.
b. Present value of future lease payments as an asset.
c. Present value of future lease payments as a liability.
d. Statements a and b are correct.
b. Statements a and c are correct

Chapter 21

1. One difference between a financial lease and operating lease is that:

a. there is an often a call option in a financial lease.
b. there is often an option to buy in an operating lease.
c. an operating lease is often cancellable by the lessee.
d. a financial lease is often cancellable by the lessee.
2. The type of lease that includes a third party, a lender, is called a(n):
a. sale and leaseback.
b. direct leasing arrangement.
c. leveraged lease.
d. operating lease.

3. The principal reason for the existence of leasing is that:

a. intermediate-term loans are difficult to obtain.
b. this is a type of financing unaffected by changes in tax law.
c. companies, financial institutions, and individuals derive different benefits from
owning assets.
d. leasing is a renewable source of intermediate-term funds.

4. One advantage of a financial lease is that:

a. it has a shorter maturity than term loans.
b. it never appears as a liability on the balance sheet.
c. it eliminates the needs to make periodic payments.
d. it provides a way to indirectly depreciate land.

5. A way to analyze whether debt or lease financing would be preferable is to:

a. compares the net present values under each alternative, using the cost of capital
as the discount rate.
b. compares the net present values under each alternative, using the after-tax cost
of borrowing as the discount rate.
c. compares the payback periods for each alternative.
d. compares the effective interest costs involved for each alternative.

6. Medium-term notes (MTNs) have maturities that range up to

a. one year (but no more).
b. two years (but no more).
c. ten years (but no more).
d. thirty years (or more)

7. A direct lease, a sale and leaseback, and a leveraged lease are all examples of
a. operating leases.
b. financial leases.
c. full-service leases.
d. "off-balance sheet" methods of financing.

8. A conventional revolving credit agreement allows a firm:

a. to borrow a fixed amount for the entire commitment period.
b. to borrow for a short-period with a right to renew the loan during the
commitment period.
c. to possibly include a provision to convert the credit agreement into a term loan
contract at maturity.
 d. to do all of the above.

Chapter 22

1. A $500 par-value convertible debenture is selling at $520. If the conversion ratio is 20,
what is the conversion price?
a. $19.23
b. $20.18
c. $25.00
d. $26.00

2. The call price of a convertible bond is generally

a. equal to the conversion ratio times the market price per share of common stock.
b. greater than the face value of the bond.
c. equal to the face value of the bond divided by the conversion ratio.
d. equal to the value at maturity.

3. A company has just issued convertible bonds with $1,000 par value and a conversion ratio
of 40. Which of the following is most likely to be the market price per share of the
company's common stock at present?
a. Under $25.
b. $25.
c. Between $25 and $30.
d. Above $30.

4. A(n) ______ is a bond that may be exchanged for common stock of the same corporation.
a. exchangeable bond
b. debenture
c. convertible bond
d. warrant

5. If a warrant carries a right to buy one share of common stock and is exercisable at $20 per
common share while the market price of a share is $30, the theoretical value of the
warrant is:
a. $20.
b. $10. ($30-$20)
c. $5.
d. $0.

6. A warrant is a relatively ______ option to purchase _______ at a specified exercise price

over a specified period of time.
a. short-term; bonds
b. long-term; bonds
c. short-term; common stock
d. long-term; common stock
7. Some options have a current theoretical value _____ and yet ______.
a. that is negative; sell for positive prices
b. that is positive; have a zero current price
c. of zero; sell for positive prices
d. all of the above

8. An exchangeable bond:
a. can be exchanged for another bond of a different company.
b. can be exchanged for another bond of the same company.
c. involves the common stock of another company.
d. is the same thing as a convertible bond.

Chapter 23

1. The restructuring of a corporation should be undertaken if

a. the restructuring can prevent an unwanted takeover.
b. the restructuring is expected to create value for shareholders.
c. the restructuring is expected to increase the firm's revenue.
d. the interests of bondholders are not negatively affected.

2. The "information effect" refers to the notion that

a. a corporation's actions may convey information about its future prospects.
b. management is reluctant to provide financial information that is not required by
law.
c. agents incur costs in trying to obtain information.
d. the financial manager should attempt to manage sensitive information about the
firm.

3. In the long run, a successful acquisition is one that:

a. enables the acquirer to make an all-equity purchase, thereby avoiding additional
financial leverage.
b. enables the acquirer to diversify its asset base.
c. increases the market price of the acquirer's stock over what it would have been
without the acquisition.
d. increases financial leverage.

4. Bidding companies often pay too much for the acquired firm. The hubris hypothesis
explains this by suggesting that the bidders
a. have too little information to make an optimal decision.
b. have big egos and this impedes rational decision-making.
c. have difficulty in thinking strategically over the long-term.
d. are overly influenced by the tax consequences of an acquisition.

5. A tender offer is
 a. a goodwill gesture by a "white knight."
b. a would-be acquirer's friendly takeover attempt.
c. a would-be acquirer's offer to buy stock directly from shareholders.
d. viewed as sexual harassment when it occurs in the workplace.

6. The public sale of common stock in a subsidiary in which the parent usually retains
majority control is called
a. a pure play.
b. a spin-off.
c. a partial sell-off.
d. an equity carve-out.

7. One means for a company to "go private" is

a. divestiture.
b. the pure play.
c. the leveraged buyout (LBO).
d. the prepackaged reorganization.

8. Recent accounting changes in the US _______.

a. eliminated the purchase method, allowing only the pooling-of-interests method for
mergers and acquisitions
b. eliminated the pooling-of-interests method, allowing only the purchase method for
mergers and acquisitions
c. allows for both the purchase method and the pooling-of-interests method for
mergers and acquisitions
d. outlawed the recording of goodwill for any merger or acquisition

Chapter 24

1. Which of the following is a legitimate reason for international investment?

a. Dividends from a foreign subsidiary are tax exempt in the United States.
b. Most governments do not tax foreign corporations.
c. There are possible benefits from international diversification.
d. International investments have less political risk than domestic investments.

2. The forward market is especially well-suited to offer hedging protection against

a. translation risk exposure.
b. transactions risk exposure.
c. political risk exposure.
d. taxation.

3. Suppose that the Japanese yen is selling at a forward discount in the forward-exchange
market. This implies that most likely
a. this currency has low exchange-rate risk.
b. this currency is gaining strength in relation to the dollar.
 c. interest rates are higher in Japan than in the United States.
d. interest rates are declining in Japan.

4. Following FASB Statement No. 52, gains or losses from currency translation are shown:
a. on the income statement as currency gains (or losses).
b. on the balance sheet as an adjustment to owners' equity.
c. on the balance sheet as an adjustment to cash.
d. nowhere because gains or losses from currency changes need not be shown.

5. All of the following are hedges against exchange-rate risk EXCEPT

a. balancing monetary assets and liabilities.
b. use of spot market.
c. foreign-currency swaps.
d. adjustment of funds commitments between countries.

6. A multinational can centralize cash management and attempt to reduce exchange rate risk
exposure through the use of
a. a reinvoicing center.
b. a bill of lading.
c. a time draft.
d. countertrade.

7. Forfaiting most closely resembles

a. export factoring.
b. countertrade.
c. netting.
d. reinvoicing.

8. The euro is the name for

a. a currency deposited outside its country of origin.
b. a bond sold internationally outside of the country in whose currency the bond is
denominated.
c. a common European currency.
d. a type of sandwich.