Exam 4

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A ________ guarantees the borrower that a specified amount of funds will be available regardless of the tightness of money. A) revolving credit agreement B) line of credit C) short-term self-liquidating loan D) single payment note

A cancelable contractual arrangement whereby the lessee agrees to make periodic payments to the lessor, often for 5 or fewer years, to obtain an assetʹs services is called a(n) A) operating lease. B) financial lease. C) capital lease. D) direct lease.

A decrease in collection efforts will result in ________ in sales volume, ________ in the investment in accounts receivable, ________ in bad debt expenses, and ________ in collection expenditures. A) an increase; an increase; an increase; a decrease B) an increase; a decrease; an increase; an increase C) an increase; a decrease; an increase; a decrease D) a decrease; a decrease; a decrease; an increase

A decrease in the current asset to total asset ratio has the effects of ________ on profits and _______ on risk. A) an increase; an increase B) an increase; a decrease C) a decrease; a decrease D) a decrease; an increase

A firm expects to have funds of $150,000 idle for 60 days. If the firm could purchase marketable securities yielding 10 percent and pay brokerage fees of $1,500, the firm A) should make the investment since interest earned exceeds brokerage fees. B) should not make the investment since brokerage fees exceed interest earned. C) should leave the $150,000 in cash. D) should invest the funds for more than 60 days due to the favorable rate.

A form of debt or equity financing that possesses characteristics of both debt and equity financing is called A) hybrid security. B) convertible security. C) derivative security. D) none of the above.

A key consideration in the holding company decision is A) the risk-return tradeoff due to the leverage effect. B) the greater ʺdistanceʺ between top level and operating management. C) the risk of the domino effect if one company in the holding company fails. D) the risk from the separate ʺcompaniesʺ in the holding company being classed as one company.

A political risk that might affect all foreign firms in a host country is termed a ________ risk; a political risk that might affect only an individual firm or specific industry in a host country is termed a ________ risk. A) macro political; micro political B) micro political; macro political C) micro political; foreign exchange D) foreign exchange; micro political

A risk of the ________ financing strategy is unpredictable interest expense. A) aggressive B) conservative C) permanent D) seasonal

A security that is neither debt nor equity but derives its value from an underlying asset is called a(n) A) derivative security. B) hybrid security. C) option. D) operating lease.

All of the following are considered offshore centers EXCEPT A) Cuba. B) Singapore. C) London. D) Nassau.

All of the following are true of calls and puts EXCEPT A) options are issued by businesses. B) the presence of options trading in the firmʹs stock could, by increasing trading activity, stabilize the firmʹs share price in the marketplace. C) options are not a source of funding to the corporation. D) the financial manager of a corporation has very little need to deal with options.

All of the following managers would like to have large inventories EXCEPT the ________manager. A) financial B) marketing C) manufacturing D) purchasing

An applicantʹs capacity to repay its requested credit can be found through A) financial statement analysis. B) bank account balances. C) the applicantʹs payment history. D) the level of assets the applicant can pledge toward the loan.

An increase in accounts receivable turnover due to an increase in collection efforts will A) decrease the firmʹs marginal investments in accounts receivable. B) increase the firmʹs marginal investments in accounts receivable. C) decrease the firmʹs collection expense. D) increase the firmʹs bad debt expense.

An increase in the average collection period will result in ________ in the operating cycle. A) an increase B) a decrease C) an undetermined change D) no change

An increase in the current liabilities to total assets ratio has the effects of ________ on profits and ________ on risk. A) an increase; an increase B) an increase; a decrease C) a decrease; a decrease D) a decrease; an increase

An involuntary petition for reorganization may be filed against a firm if any one of the following conditions are met EXCEPT A) the book value of the firmʹs assets is less than the stated liabilities. B) past-due debts of $5,000 or more. C) three or more creditors who can prove aggregate claims of $5,000 against the firm. D) insolvency.

As credit standards are relaxed, sales are expected to ________ and the investment in accounts receivable is expected to ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

By offering credit to customers, the firm may A) increase the price of the good to cover its costs. B) decrease its investment in accounts receivable. C) decrease its investment in accounts payable. D) decrease the cost of goods purchased.

Collateral is typically required for a A) secured short-term loan. B) line of credit. C) short-term self-liquidating loan. D) single payment note.

Common forms of business combination include all of the following EXCEPT A) congeneric formation. B) consolidations. C) mergers. D) holding companies.

Company ________ are the procedures followed to collect accounts receivable when they come due. A) collection policies B) credit scorings C) credit policies D) credit analyses

Convertible bonds have all of the following characteristics EXCEPT A) conversion increases the firmʹs debt ratio. B) less expensive form of financing than straight bonds. C) enhanced marketability. D) a call feature.

Convertible securities can usually be sold with interest rates ________ other nonconvertible securities. A) lower than B) equal to C) higher than D) with no relation to

Current liabilities can be viewed as A) debts that mature in one year or less. B) debts that mature in more than one year. C) sources of cash inflows. D) none of the above

Funds on deposit at commercial banks having variable maturities and yields based on size, maturity, and prevailing money market conditions are A) negotiable certificates of deposit. B) commercial paper. C) savings accounts. D) money market mutual funds.

If a firm uses an aggressive financing strategy, A) it increases return and increases risk. B) it increases return and decreases risk. C) it decreases return and increases risk. D) it decreases return and decreases risk.

If the P/E paid is greater than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be A) positive. B) neutral. C) negative. D) uncorrelated.

If the cash discount period is increased, the firmʹs investment in accounts receivable due to discount takers still getting cash discounts but paying later is expected to A) increase. B) decrease. C) not change. D) change in an undetermined direction.

If the firmʹs cash discount period is increased, the sales volume can be expected to ________, the bad debt expenses can be expected to ________, and the profit per unit can be expected to _______. A) increase; decrease; decrease B) increase; increase; decrease C) decrease; increase; increase D) decrease; decrease; increase

If the firmʹs credit period is increased, the sales volume can be expected to ________, the investment in accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________. A) increase; decrease; decrease B) increase; increase; decrease C) increase; increase; increase D) decrease; decrease; decrease

Improvements to cash management include all of the following EXCEPT a reduction in A) the cash turnover. B) the cash conversion cycle. C) the average age of inventory. D) the average collection period.

In ________, an assignment may be made by the creditors to a third party who then has the power to liquidate the firmʹs assets. A) a voluntary private liquidation B) an involuntary private liquidation C) an involuntary liquidation under Chapter Seven of the Bankruptcy Reform Act of 1978 D) a voluntary liquidation under Chapter Seven of the Bankruptcy Reform Act of 1978

In a voluntary settlement, each creditor will be paid only 45 cents on the dollar immediately. This is an example of A) a composition. B) a combination of a composition and extension. C) an extension. D) a liquidation.

In the ABC system of inventory management, the ________ method or system is appropriate for monitoring B items. A) basic economic order quantity. B) materials requirement planning C) red-line D) just-in-time

In the EOQ model, if carrying costs increase while all other costs remain unchanged, the number of orders placed would be expected to A) increase. B) decrease. C) remain unchanged. D) change without regard to carrying costs.

Macro political risk and micro political risk in international business refer to the risk A) that will affect all foreign firms and the risk that will affect an individual firm or specific industry, respectively. B) of nationalization of the oil industry and the risk of a political revolution, respectively. C) that will affect an individual firm or specific industry and the risk that will affect all foreign firms, respectively. D) of sudden taxes on exporting the manufactured goods of a particular industry and the risk of the devaluation of the host countryʹs currency, respectively.

Much of the commercial paper is issued by A) commercial finance companies. B) small businesses. C) venture capitalists. D) small manufacturing firms.

One way to improve the cash conversion cycle is to A) speed up collections. B) slow down credit approvals. C) reduce inventory turnover. D) borrow funds.

Only the firmʹs permanent financing requirement (and not the seasonal requirement) is financed with ________ in the aggressive financing strategy. A) long-term sources B) short-term sources C) retained earnings D) accounts payable

Relative to cash flows affecting net working capital, all of the following are true EXCEPT A) cash inflows are generally more predictable than cash outlays. B) cash outlays for current liabilities are relatively predictable. C) the more predictable the cash inflows, the less net working capital a firm needs. D) because most firms are unable to match cash inflows to outflows with certainty, current assets that more than cover outflows for current liabilities are necessary.

Revolving credit agreements are A) guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time. B) non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any one time. C) credit arrangements made in cooperation with suppliers that allows the firms to roll over accounts payable each month. D) none of the above.

Seasonal build-ups of inventory and receivables are generally financed with A) short-term loans. B) long-term loans. C) accruals. D) stockholdersʹ equity.

Sound cash management techniques would support A) minimizing collection float, maximizing disbursement float, and minimizing the cash conversion cycle. B) minimizing collection float, maximizing disbursement float, and minimizing the cash turnover. C) maximizing collection float, minimizing disbursement float, and minimizing operating cash. D) minimizing collection float, maximizing disbursement float, and maximizing operating cash.

The ________ inventory contains the basic components of the production process. A) raw materials B) work-in-process C) finished goods D) capital goods

The ________ is the lowest rate of interest charged on business loans to the best business borrowers by the nationʹs leading banks. A) prime rate B) commercial paper rate C) federal funds rate D) treasury bill rate

The ability to use the same sales and distribution channels to reach customers of both businesses is a benefit of A) congeneric merger. B) conglomerate merger. C) horizontal merger. D) vertical merger.

The aggressive financing strategy is ________ method while the conservative financing strategy is ________ method. A) a high-profit, high-risk; a low-profit, low-risk B) a high-profit, low-risk; a low-profit, high-risk C) a low-profit, high-risk; a high-profit, low-risk D) a low-profit, low-risk; a high-profit, high-risk

The all-current-rate method dictated by the FASB No. 52 statement requires the translation of all balance sheet accounts at the ______ rate and all income statement items at the ________ rates. A) closing; average B) average; closing C) historical; current D) average; historical

The call price of the security generally exceeds the securityʹs par value by an amount equal to A) one yearʹs stated interest. B) the straight bond value. C) the market value of one share of common stock. D) the market premium.

The conservative financing strategy results in financing all projected funds requirements with ________ funds and use of ________ funds in the event of an unexpected cash outflow. A) long-term; short-term B) short-term; long-term C) permanent; seasonal D) seasonal; permanent

The cost of borrowing through the sale of commercial paper is typically ________ the prime bank loan rate. A) lower than B) the same as C) unrelated to D) higher than

The difference between the number of days resources are tied up in the operating cycle and the number of days the firm can use spontaneous financing before payment is made is the A) cash conversion cycle. B) average payment period. C) average collection period. D) average age of inventory.

The effect of exercising a warrant on the firmʹs capital structure reduces leverage ________ converting a convertible security. A) less than B) as much as C) more than D) without relationship to

The first step in the collection of overdue accounts is A) a letter. B) contacting a collection agency. C) legal actions. D) a personal visit.

The most difficult set of accounts to predict are A) current assets. B) stockholderʹs equity. C) fixed assets. D) long-term debt.

The primary advantage of a holding company, that permit(s) the firm to control a large amount of assets with a relatively small dollar investment is known as A) the leverage effect. B) tax effects. C) administrative costs. D) risk protection.

The primary source of secured short-term loans to businesses are A) commercial banks and commercial finance companies. B) savings and loans and factors. C) commercial paper dealers and investment bankers. D) life insurance companies and government securities brokers.

The principal nongovernmental marketable securities are all of the following EXCEPT A) agency issues. B) Eurodollar deposits. C) money market mutual funds. D) negotiable certificate of deposit.

The priority of claims established by Chapter Seven of the Bankruptcy Reform Act of 1978 gives priority to A) unpaid employee benefit plan contributions over unsecured customer deposits. B) common stockholders over taxes. C) taxes over expenses of administering the bankruptcy. D) preferred stockholders over claims of secured creditors.

The risk resulting from the effects of changes in foreign exchange rates on the firmʹs value is A) economic exposure. B) macro political risk. C) accounting exposure. D) micro political risk.

The straight bond value is the ________ price at which a convertible bond would be traded. A) minimum B) optimum C) maximum D) average

The total payments of ________ lease over the lease period are greater than the cost of the leased asset to the lessor. A) a financial B) an operating C) a serial D) a direct

The usual capital markets used by U.S.-based MNCs that desire international ownership of their equity are A) Western Europe and Japan. B) Mexico and Canada. C) Saudi Arabia and South Africa. D) Liechtenstein and Panama.

When a firm decreases or cancels a cash discount, sales are expected to ________, the investment in accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit per unit is expected to ________. A) decrease; increase; increase; increase B) decrease; decrease; increase; increase C) increase; increase; decrease; decrease D) increase; decrease; decrease; decrease

When a firm stretches accounts payable without hurting its credit rating, the cost of foregoing the cash discount is A) reduced. B) increased. C) unaffected. D) immaterial.

When fewer units of a foreign currency are required to buy one dollar, the currency is said to have ________ with respect to the dollar. A) appreciated B) depreciated C) consolidated D) remained fixed

When warrants are exercised, A) only the number of common shares outstanding increases. B) debt is reduced. C) debt is reduced while common equity increases. D) there is no effect on the firmʹs capital structure.

________ are obligations of the U.S. Treasury with common maturities of one to seven years and that are generally issued in minimum denominations of $5,000. A) Treasury notes B) Treasury bills C) Federal agency issues D) Bankerʹs acceptances

________ is a pro rata cash settlement of creditor claims. A) A composition B) A creditor control agreement C) An extension D) A liquidation

________ is a procedure resulting in a number reflecting the applicantʹs credit strength, derived as a weighted average of the scores obtained on a variety of key financial and credit characteristics. A) Credit scoring B) Aging of receivables C) Credit analysis D) The economic order quantity model

________ is achieved by acquiring a company in the same general industry, but neither in the same line of business nor a supplier or a customer. A) Congeneric merger B) Conglomerate merger C) Horizontal merger D) Vertical merger

________ leases are noncancelable and are generally used for leasing land, buildings, and large pieces of fixed equipment. A) Financial B) Operating C) Serial D) Direct

A Eurobond is A) a bond sold primarily to Europeans. B) a bond sold primarily in countries other than the country of the currency in which the issue is denominated. C) a debt instrument sold exclusively in Europe. D) a bond issued in Liechtenstein.

A ________ is a telegraphic communication that, via bookkeeping entries, removes funds from the payerʹs bank and deposits them in an account of the payeeʹs bank. A) direct send B) wire transfer C) depository transfer check D) preauthorized check

A ________ is an agreement between a commercial bank and a business that states the maximum amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time, provided sufficient funds are available. A) revolving credit agreement B) line of credit C) short-term self-liquidating loan D) single payment note

A ________ is not a specific security but an arrangement whereby a bank or security dealer sells specific marketable securities to a firm and agrees to repurchase the securities in the future. A) negotiable certificate of deposit B) repurchase agreement C) money market mutual fund D) commercial paper issue

A ________ option is an option to purchase a specified number of shares of a stock on or before some future date at a specified price, whereas a ________ option is an option to sell a specified number of shares of a stock on or before some future date at a specified price. ________ are purchased if the stock price is expected to fall. A) put; call; Puts B) call; put; Puts C) put; call; Calls D) call; put; Calls

A ________ permits the firm to raise additional funds at some point in the future by selling common stock and thereby shifting the firmʹs capital structure to a less highly levered position. A) put option B) stock-purchase warrant C) conversion feature D) repurchase agreement

A capital or capitalized lease is otherwise known as A) an operating lease. B) a financial lease. C) a direct lease. D) a leveraged lease.

A combination of companies where the former corporations cease to exist is A) a congeneric formation. B) a consolidation. C) a merger. D) a holding company.

A computerized inventory system that simulates needed materials requirements for the finished product, and then compares production needs to available inventory balances to determine when orders should be placed is the A) basic economic order quantity system. B) materials requirement planning system. C) just-in-time system. D) red-line method.

A decrease in the average age of inventory will result in ________ in the cash conversion cycle. A) an increase B) a decrease C) an undetermined change D) no change

A decrease in the production time to manufacture a finished good will result in ________ in the cash conversion cycle. A) an increase B) a decrease C) an undetermined change D) no change

A field warehouse is A) a warehouse outside the metropolitan area. B) a warehouse on the borrowerʹs premises. C) a central warehouse storing the merchandise of several businesses. D) a warehouse located near the lender.

A firm is offered credit terms of 1/10 net 45 EOM by a major supplier. The firm has determined that it can stretch the credit period (net period only) by 25 days without damaging its credit standing with the supplier. Assuming the firm needs short-term financing and can borrow from the bank on a line of credit at an interest rate of 14 percent, the firm should A) give up the cash discount and finance the purchase with the line of credit. B) give up the cash discount and pay on the 70th day after the date of sale. C) take the cash discount and pay on the first day of the cash discount period. D) take the cash discount and finance the purchase with the line of credit, the cheaper source of funds.

A firm with a very low current ratio in comparison to the industry standard could lower the risk of unavailable short-term funds by moving toward ________ financing strategy. A) the aggressive B) the conservative C) a permanent D) a seasonal

A firm with highly unpredictable sales revenue would best choose ________ financing strategy to minimize risk. A) the aggressive B) the conservative C) the trade-off D) a seasonal

A firmʹs ________ specifies the repayment terms required of all credit customers. A) credit scoring B) credit terms C) credit policy D) credit standards

A form of debt or equity financing that possesses characteristics of both is called a(n) A) derivative security. B) hybrid security. C) option. D) operating lease.

A lease under which a lessor acts as an equity participant supplying only about 20 percent of the cost of the asset, while a lender supplies the balance is called a(n) A) operating lease. B) leveraged lease. C) sale-leaseback arrangement. D) direct lease.

A leveraged buyout needs to be carried out through A) a hostile takeover. B) a friendly merger. C) a vertical merger. D) a conglomerate merger.

A negative cash conversion cycle A) means that the operating cycle exceeds the average payment period. B) means that the average payment period exceeds the operating cycle. C) indicates that the firm is shortening its average payment period and lengthening its average collection period. D) is easy for a manufacturing firm to attain.

A noncancelable arrangement that requires the lessee to make payments for the use of an asset over a relatively long period of time is called a(n) A) operating lease. B) financial lease. C) sale-leaseback arrangement. D) direct lease.

A popular extension of materials requirement planning that integrates data from numerous areas such as accounting, finance, engineering, and manufacturing using a sophisticated computer system is called A) computerized materials integration II. B) manufacturing resource planning II. C) inventory allocation planning II. D) none of the above.

A(n) ________ in current liabilities ________ net working capital, thereby ________ the risk of technical insolvency. A) decrease; increases; increasing B) increase; decreases; increasing C) increase; increases; reducing D) decrease; decreases; reducing

All of the following goods represent appropriate collateral for a secured loan to a school supply manufacturer EXCEPT A) reams or rolls of paper. B) unbound pages. C) notebooks and binders. D) index cards.

All of the following may be true about tender offers EXCEPT A) they may add pressure to existing merger negotiations. B) management has the exclusive right to accept the offer. C) defensive tactics may be taken to ward off the offer. D) they may be made without warning as an abrupt attempt at a corporate takeover.

An attractive candidate for acquisition through a leveraged buyout should possess all of the following characteristics EXCEPT A) a solid profit history and reasonable expectations for growth. B) low fixed assets. C) a low level of debt. D) stable and predictable cash flows.

An increase in the average payment period will result in ________ in the cash conversion cycle. A) an increase B) a decrease C) an undetermined change D) no change

Appropriate collateral for a secured short-term loan is A) fixed assets. B) raw materials inventory and receivables. C) common stock in a privately-held corporation. D) work-in-process inventory.

As a foreign exchange hedge, currency swaps have all of the following characteristics EXCEPT A) an initial exchange by two parties of two principal amounts in two different currencies. B) principal amounts are reversed at the spot rate at maturity. C) each party pays the otherʹs interest payment. D) principal amounts are reversed at a pre-agreed rate at maturity.

As the price of the underlying stock rises above the exercise price of a warrant, the investorʹs ability to earn larger potential return diminishes. Therefore, the warrant premium will A) increase. B) decrease. C) remain unchanged. D) double.

Assets leased under ________ leases generally have a usable life longer than the term of the lease. A) financial B) operating C) capital D) direct

Certain financing plans are termed conservative when A) short-term financing is used frequently. B) working capital is relatively high. C) working capital is relatively low. D) risk is increased.

Commercial banks lend unsecured short-term funds in the following three basic ways. A) Single-payment note, lines of credit, and commercial paper. B) Single-payment note, lines of credit, and revolving credit agreements. C) Single-payment note, revolving credit agreements, and commercial paper. D) Commercial paper, lines of credit, and revolving credit agreements.

Commercial paper is usually sold at a discount from A) its cost. B) its par value. C) the prime rate. D) treasury notes.

Convertible bonds normally have ________ to permit the issuer to retire or encourage conversion. A) a put option B) a call feature C) a stock purchase warrant D) a striking price

Convertible preferred stock and convertible bonds are normally convertible over ________, respectively. A) a limited time period and an unlimited time period B) an unlimited time period and a limited time period C) a limited time period and a limited time period D) an unlimited time period and an unlimited time period

Delaying the payment of accounts payable in order to improve cash management is known as A) ruining the firmʹs credit rating. B) stretching the payables. C) reducing optimal cash requirements. D) float.

Depository banks holding Eurodollar deposits are A) generally more closely regulated than U.S. banks and are therefore more risky. B) generally less closely regulated than U.S. banks and are therefore more risky. C) generally more closely regulated than U.S. banks and are therefore less risky. D) largely located outside of the European countries and are therefore more risky.

FASB No. 52 is a statement issued by the Financial Accounting Standards Board requiring American MNCs to first convert the financial statement accounts of foreign subsidiaries into the countryʹs ________ currency and then translate the accounts into the parent firmʹs currency using the ________ method. A) spot; historical rate B) functional; all-current-rate C) principal; average rate D) forward rate; weighted average

Foreign exchange risk refers to the risk created by ________. A) the potential seizure of an MNCʹs operations in a host country B) the varying exchange rate between two currencies C) the fixed exchange rate between two currencies D) the potential nationalization of the MNCʹs operations by a host government

If the P/E paid is equal to the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be A) positive. B) neutral. C) negative. D) uncorrelated.

If the cash discount period is increased, the firmʹs investment in accounts receivable due to non-discount takers now paying earlier is expected to A) increase. B) decrease. C) not change. D) change in an undetermined direction.

In a ________, the lessor acts as an equity participant supplying part of the necessary capital while a lender supplies the remaining balance. A) direct lease B) leveraged lease C) sale-leaseback D) capital lease

In defending against a hostile takeover, the strategy that involves the firm repurchasing through negotiation a large block of stock at a premium from one or more shareholders in order to end those shareholdersʹ hostile takeover attempt is known as the ________ strategy. A) poison pill B) greenmail C) golden parachute D) shark repellent

In defending against a hostile takeover, the strategy that involves the target firm finding a more suitable acquirer and prompting it to compete with the initial hostile acquirer to take over the firm is called the ________ strategy. A) poison pill B) white knight C) golden parachute D) greenmail

In economic conditions characterized by a scarcity of short-term funds, a firm would best choose the ________ financing strategy. A) aggressive B) conservative C) permanent D) seasonal

In economic conditions characterized by short-term interest rates which exceed long-term interest rates, the financing strategy which would maximize profits is ________ strategy. A) the aggressive B) the conservative C) the trade-off D) a seasonal

In general, the more net working capital a firm has, A) the greater its risk. B) the lower its risk. C) the less likely are creditors to lend to the firm. D) the lower its level of long-term funds.

In terms of inventory management multinational firms A) must deal mainly with exchange rate fluctuations and tariffs. B) must deal with a wide number of factors, including exchange rate fluctuations, tariffs, non-tariff barriers, integration schemes such as the EEC, and other rules and regulations. C) have only economic factors to consider, since this is a current asset and is minimally affected by political factors. D) have only political factors to consider, since inventory is minimally affected by foreign economic factors.

In the EOQ model, ________ costs are the fixed clerical cost of writing a purchase order, processing the paper work, and verifying the invoice. A) basic B) order C) carrying D) processing

In theory, the conservative financing strategy ignores A) all current liabilities. B) the spontaneous forms of short-term financing. C) current assets. D) the high risk associated with this strategy.

In working capital management, risk is measured by the probability that a firm will become A) liquid. B) technically insolvent. C) unable to meet long-term obligations. D) less profitable.

Key disadvantages of holding companies include all of the following EXCEPT A) they result in increased risk because of the leverage effect. B) they result in triple taxation. C) they are difficult to analyze. D) they are costly to administer.

Lenders recognize that by having an interest in collateral they can reduce losses if the borrowing firm defaults, A) and the presence of collateral reduces the risk of default. B) but the presence of collateral has no impact on the risk of default. C) therefore lenders prefer to lend to customers from whom they are able to require collateral. D) therefore lenders will impose a higher interest rate on unsecured short-term borrowing.

Many holders of convertible bonds will not convert when the firmʹs common stock price exceeds the conversion price because A) the common stock price may go up further. B) they already have the market price benefit and may still receive fixed periodic interest payments. C) of the dilution of EPS. D) interest payments are tax deductible.

Nongovernmental issues typically have slightly higher yields than government issues with similar maturities due to the slightly ________ associated with them. A) higher profitability B) higher risk C) lower risk D) stronger secondary market

Normally, the acquiring firm pays a price that is a premium above the market price of the acquired firm. This means that the ratio of exchange in market price is A) always less than 1. B) always greater than 1. C) usually negative. D) equal to 1.

One of the key motives for combinations is the tax benefit of A) reducing the marginal tax rate. B) taking advantage of the other firmʹs tax loss carryforward. C) using capital gains. D) increasing additional recaptured depreciation.

One of the most common designations for the beginning of the credit period is A) 2/10. B) the date of invoice. C) the end of the month. D) the transaction date.

Pledges of accounts receivable and factoring of accounts receivable are made on ________ basis, respectively. A) a nonrecourse and a notification B) a nonnotification and a notification C) a notification and a recourse D) a notification and a nonrecourse

Relative to cash flows of domestic firms, by diversifying internationally, multinationals A) can increase cash flows. B) can achieve further risk reduction. C) are unable to change the risk. D) are not attempting to change risk.

Short-term loans that businesses obtain from banks and through commercial paper are A) negotiated and secured. B) negotiated and unsecured. C) spontaneous and secured. D) spontaneous and unsecured.

Short-term self-liquidating loans are intended to A) finance capital assets. B) cover seasonal peaks in financing caused by inventory and receivable buildups. C) finance merger/acquisition activity. D) recapitalize the firm.

Short-term self-liquidating loans are intended to A) finance capital assets. B) cover seasonal peaks in financing caused by inventory and receivables buildup. C) finance merger and/or acquisition activity. D) recapitalize the firm.

The ________ financing strategy requires the firm to pay interest on excess funds borrowed but not needed throughout the entire year. A) aggressive B) conservative C) permanent D) seasonal

The ________ inventory consists of all items currently in the production process. A) raw materials B) work-in-process C) finished goods D) capital goods

The ________ is a major South American trading bloc that includes countries that account for more than half of total Latin American GDP. A) North American Free Trade Agreement (NAFTA) B) Mercosur Group C) Latin and South American Free Trade Area (LASTA) D) Group of Seven

The ________ is a technique that divides inventory into three groups, according to dollar investment. A) exponential smoothing technique B) ABC system C) EOQ model D) LIFO model

The ________ is the taxation technique that increases the U.S. income of an MNC by the amount of foreign income (before foreign taxes). The U.S. tax calculation is then based on that higher level. A) unitary tax law B) grossing up procedure C) GmbH D) nationalization procedure

The ________ is the time period that elapses from the point when the firm makes the outlay to purchase raw materials on account to the point when payment is made to the supplier of the goods. A) cash conversion cycle B) average payment period C) average age of inventory D) average collection period

The ________ of a firm is the amount of time that elapses from the point when the firm makes an outlay to purchase raw materials to the point when cash is collected from the sale of the finished good. A) cash turnover B) cash conversion cycle C) average age of inventory D) average collection period

The ________ value is the price the bond would sell for in the market without the conversion feature. A) conversion B) straight bond C) striking price D) market premium

The acquisition of a ʺcash-richʺ company allows the acquiring company A) to reap greater tax benefits. B) to reduce leverage and to increase borrowing power. C) to develop better managers. D) to achieve economies of scale in some phase of the business.

The aggressive financing strategy is risky in two respects: the firm operates with a low level of _______, and the firm has only a limited amount of ________ capacity. A) current liabilities; short-term borrowing B) net working capital; short-term borrowing C) current assets; long-term borrowing D) net working capital; long-term borrowing

The aggressive financing strategy results in the firm financing its short-term needs with ________ funds and its long-term needs with ________ funds. A) long-term; short-term B) short-term; long-term C) permanent; seasonal D) seasonal; permanent

The combination of a dress manufacturer and a credit bureau is an example of A) congeneric merger. B) conglomerate merger. C) horizontal merger. D) vertical merger.

The combination of two or more companies to form a completely new corporation is a A) congeneric formation. B) consolidation. C) merger. D) holding company.

The consequences of missing a financial lease payment are ________ those of missing an interest or principal payment on debt. A) less severe than B) the same as C) more severe than D) unrelated to

The costs associated with inventory can be divided into the following groups EXCEPT A) order costs. B) marginal costs. C) carrying costs. D) total costs.

The credit applicantʹs ________ is its ability to repay the requested credit. A) character B) capacity C) capital D) collateral

The credit applicantʹs character includes all of the following EXCEPT A) moral commitment to pay. B) level of liquid assets. C) past payment history. D) pending legal judgments.

The dominant organized options exchange is the A) over-the-counter exchange. B) Chicago Board Options Exchange. C) American Stock Exchange. D) New York Stock Exchange.

The ease of salability of marketable securities refers to A) safety of return. B) safety of principal. C) safety of maturity. D) risk of payments.

The economic order quantity (EOQ) is the order quantity which minimizes A) the order cost per order. B) the total inventory costs. C) the carrying costs per unit per period. D) order quantity in units.

The firm in a merger transaction that is being pursued as a takeover potential is called the A) acquiring company. B) target company. C) holding company. D) conglomerate.

The major external sources of credit information are all of the following EXCEPT A) financial statement. B) customers. C) Dun & Bradstreet. D) bank checking.

The majority of actively traded warrants are listed on the A) over-the-counter exchange. B) American Stock Exchange. C) New York Stock Exchange. D) NASDAQ.

The overriding goal for merging is to A) increase cash flows. B) maximize shareholder wealth as reflected in the acquirerʹs share price. C) maximize shareholder wealth as reflected in the share price of the target firm. D) maximize operating efficiency.

The prime rate of interest fluctuates with A) the changing supply and demand relationship for long-term funds. B) the changing supply and demand relationship for short-term funds. C) the risk of the firm borrowing the funds. D) demand in the bond market.

The reduction of risk resulting from combining firms with differing seasonal or cyclical patterns of sales or earnings is a key benefit of A) congeneric merger. B) conglomerate merger. C) horizontal merger. D) vertical merger.

The sale of a unit of a firm to existing management is often achieved through A) a limited partnership. B) a leveraged buyout. C) an employee stock option. D) a cash exchange.

The two major sources of short-term financing are A) a line of credit and accounts payable. B) accounts payable and accruals. C) a line of credit and accruals. D) accounts receivable and notes payable.

The type of lease in which the lessor acquires or purchases the asset in order to lease to a given lessee is known as A) a financial lease. B) a direct lease. C) an operating lease. D) a leveraged lease.

The use of a large amount of debt to finance the acquisition of other firms is a A) conglomerate merger. B) leveraged buyout. C) hostile merger. D) congeneric buyout.

When a portion of the firmʹs fixed assets are financed with current liabilities, the firm A) has positive net working capital. B) has negative net working capital. C) has excessive amounts of current assets. D) is in a low-risk position.

When managing accounts payable, a good strategy to employ that wonʹt hurt your credit rating is to A) pay early. B) pay as late as possible. C) never pay. D) pay on the due date.

When the creditworthiness of a customer is established, the firm will grant that customer A) a credit policy. B) a line of credit. C) a credit rating. D) a credit position.

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, the merged firmʹs earnings per share will initially A) decline. B) remain constant. C) increase. D) drop to zero.

When warrants are used as ʺsweetenersʺ by a new firm, the firm is essentially allowing creditors to A) vote along with common stockholders. B) share in the possible future success of the firm. C) protect their interest. D) receive extra income.

Which of the following statements about put and call options is false? A) They are traded on organized exchanges. B) They are a form of deferred equity financing by the firm. C) They can be used to lock in a gain or prevent a loss on a stock holding. D) They provide the buyer with an opportunity to earn larger returns than simply buying or selling common stock.

With a floating-rate note, the interest rate on the note changes A) when the risk level of the borrower changes. B) when the prime rate changes. C) when the demand for loans changes. D) when bank profits change.

________ are funds denominated in U.S. dollars and deposited in banks located outside the United States. A) Negotiable certificates of deposit B) Eurodollar deposits C) Bankerʹs acceptances D) Money market mutual funds

________ are liabilities for services received for which payment has yet to be made. The most common accounts are taxes and wages. A) Notes payable B) Accruals C) Accounts payable D) Accounts receivable

________ are obligations of the U.S. Treasury with common maturities of 91 to 182 days and that have a strong secondary market. A) Treasury notes B) Treasury bills C) Federal agency issues D) Bankerʹs acceptances

________ ensure that money lent under a line of credit agreement is actually being used to finance seasonal needs. A) Operating change restrictions B) Annual cleanups C) Compensating balances D) Commitment fees

________ involves the combination of firms in unrelated businesses. A) Congeneric merger B) Conglomerate merger C) Horizontal merger D) Vertical merger

________ involves the sale of accounts receivable. A) A trust receipt loan B) Factoring C) A field warehouse arrangement D) Pledging of accounts receivable

________ is a short-term, unsecured promissory note issued by firms with a high credit standing. These notes are primarily issued by commercial finance companies. A) A line of credit B) Commercial paper C) A revolving line of credit D) A self-liquidating loan

________ is a treaty that has governed world trade throughout most of the post World War II era. A) NAFTA B) GATT C) WTO D) CAFTA

________ lease is a contractual arrangement whereby the lessee agrees to make periodic payments to the lessor for five or fewer years for an assetʹs services. This type of lease may also be canceled at the option of the lessee. A) A financial B) An operating C) A capital D) A direct

________ may replace the operating management with a selected creditor. A) A composition B) A creditor control agreement C) An extension D) A liquidation

________ refers to funds that have been dispatched by a payer but are not in a form that can be spent by the payee. A) The cash conversion cycle B) Float C) A direct send D) Lockboxes

.If the firmʹs cash discount period is decreased or cancelled, the sales volume can be expected to _______, the bad debt expenses can be expected to ________, and the profit per unit can be expected to ________. A) increase; decrease; decrease B) increase; increase; decrease C) decrease; increase; increase D) decrease; decrease; increase

.The interest rate charged on secured short-term loans to a corporation is generally higher than that charged on unsecured short-term loans because A) secured loans are less risky than unsecured loans. B) the risk of default is lower on secured loans. C) it is costly to negotiate and administer secured loans. D) lenders of secured loans must pay more for their funds.

1.30) Business combinations are used by firms to externally expand in order to achieve all of the following objectives EXCEPT A) to increase productive capacity. B) to increase liquidity. C) to increase common stock outstanding. D) to acquire needed assets.

A ________ allows the firm to force conversion. A) warrant B) option C) call feature D) striking price

A ________ gives the holder an option to purchase a certain number of shares of common stock at a specified price over a certain period of time. A) put option B) convertible bond C) stock-purchase warrant D) repurchase agreement

A ________ is a professionally managed portfolio of marketable securities and is sold in fractional parts. A) negotiable certificate of deposit B) repurchase agreement C) money market mutual fund D) commercial paper issue

A ________ is an option included as part of a bond or preferred stock that permits the holder to convert the security into a specified number of shares of common stock. A) put option B) stock-purchase warrant C) conversion feature D) repurchase agreement

A ________ is an unsigned check drawn on one of the firmʹs bank accounts and deposited into its account at another bank. A) direct send B) wire transfer C) depository transfer check D) preauthorized check

A ________ is normally initiated by a firm that needs funds for operations. An asset previously owned by a lessee is sold to the lessor. A) direct lease B) leveraged lease C) sale-leaseback D) capital lease

A ________ permits the firmʹs capital structure to be changed without increasing the total financing. A) put option B) stock-purchase warrant C) conversion feature D) repurchase agreement

A bond that is initially sold primarily in countries other than the country of the currency in which the issue is denominated is called A) an international bond. B) a foreign bond. C) a Eurobond. D) a double Dutch bond.

A convertible security that cannot be forced into conversion using the call feature is A) a general obligation bond. B) a debenture. C) an overhanging issue. D) a noncallable common equity issue.

A credit manager typically gives primary attention to ________ in extending credit to an applicant. A) collateral and capacity B) collateral and conditions C) character and capacity D) character and capital

A customer sends payment to a post office box which is emptied by the firmʹs bank daily. The bank then processes the payments and notifies the firm of the dayʹs collections. This collection technique is known as A) a direct send. B) concentration banking. C) the lockbox system. D) controlled disbursing.

A decrease in the current liabilities to total assets ratio has the effects of ________ on profits and ________ on risk. A) an increase; an increase B) an increase; a decrease C) a decrease; a decrease D) a decrease; an increase

A divestiture that results in an operating unit becoming an independent company is a A) sale of a line of business. B) sale of a unit to existing management. C) spin-off of an operating unit. D) leveraged buyout.

A firm may have a negative cash conversion cycle if it A) carries very little inventory and sells its products on credit. B) carries high inventory and sells its products on credit. C) carries very little inventory and sells its products for cash. D) carries high inventory and sells its products for cash.

A firm which uses the aggressive financing strategy plans to purchase raw materials in large quantities to take price discounts. The firm will finance the purchase with a loan. The most likely consequence of this action is A) a decrease in the current ratio. B) an increase in net working capital. C) an undetermined change in the current ratio. D) an increase in long-term debt.

A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30 days to 45 days. This will result in a/an A) decrease of 30 days in the cash conversion cycle. B) increase of 15 days in the cash conversion cycle. C) decrease of 15 days in the cash conversion cycle. D) increase of 30 days in the cash conversion cycle.

A firmʹs credit ________ provides guidelines for determining whether to extend credit to a customer and how much credit to extend. A) scoring B) terms C) policy D) standards

A firmʹs credit terms cover all of the following EXCEPT A) cash discount. B) cash discount period. C) credit standards. D) credit period.

A form of divestiture in which an operating unit becomes an independent company by issuing shares in it on a pro rata basis to the parent companyʹs shareholders is called A) leverage buyout. B) employee stock option. C) spin-off. D) merger.

A friendly merger transaction is typically consummated through all of the following EXCEPT A) a cash purchase. B) an exchange of the acquirerʹs stock. C) a tender offer. D) an exchange of the acquirerʹs stock and bonds.

A hostile merger is typically accomplished through A) a cash purchase. B) an exchange of the acquirerʹs stock. C) a tender offer. D) an exchange of the acquirerʹs stocks and bonds.

A lease under which a lessee sells an asset for cash to a prospective lessor and then leases back the same asset is called a(n) A) operating lease. B) leveraged lease. C) sale-leaseback arrangement. D) direct lease.

A letter written by a companyʹs bank to the companyʹs foreign supplier, stating that the bank will guarantee payment of an invoiced amount if all the underlying agreements are met is called A) a letter of invoice. B) a letter of intent. C) a letter of credit. D) none of the above.

A partnership between a multinational company and a foreign investor in which contractually specified amounts of money and expertise are contributed by the participants for stated proportions of ownership and profit is a A) multinational corporation. B) floating relationship. C) joint venture. D) consolidation.

A security that is neither debt nor equity but derives its value from an underlying asset that is often another security is called A) hybrid security. B) convertible security. C) derivative security. D) none of the above.

A spin-off results in the divested unit A) being sold to existing management resulting in new owners. B) becoming an independent company with new owners. C) becoming an independent company with the same owners as the parent company. D) being managed independently, but still under the ownership of the parent company.

A technique that provides the analyst with the information concerning the proportion of each type of account that has been outstanding for a specified period of time is called A) credit analysis. B) credit scoring. C) aging of receivables. D) the economic order quantity model.

A terminal warehouse is A) a warehouse located at the airport. B) a warehouse on the borrowerʹs premises. C) a central warehouse storing the merchandise of several businesses. D) a warehouse located near the lender.

A(n) ________ in current assets ________ net working capital, thereby ________ the risk of technical insolvency. A) decrease; increases; increasing B) increase; decreases; increasing C) increase; increases; reducing D) decrease; decreases; reducing

A(n) ________ is undertaken with the goal of restructuring the acquired company in order to improve its cash flow and unlock its hidden value. A) operating merger. B) strategic merger. C) financial merger. D) hostile takeover.

Advantages of leasing from the lesseeʹs perspective include all of the following EXCEPT A) capability of effectively depreciating land. B) ability to avoid restrictive covenants that are normally part of a long-term loan. C) benefit of the salvage value at the end of the term of the lease reverts to the lessor. D) 100 percent financing.

All of the following are advantages of holding companies EXCEPT A) possible state tax benefits realized by each subsidiary in its state of incorporation. B) since each subsidiary is a separate corporation, the failure of one company should cost the holding company no more than its investment in that subsidiary. C) reduced federal corporate taxes due to the holding company status. D) lawsuits or legal actions against a subsidiary will not threaten the remaining companies.

All of the following are considered to be major or ʺhardʺ currencies EXCEPT A) the Japanese yen. B) the British pound. C) the Mexican peso. D) the U.S. dollar.

All of the following are positive approaches of coping with political risk EXCEPT A) use of locals in management. B) joint venture with local banks. C) license or patent restrictions under international agreement. D) local sourcing.

All of the following are true of stock-purchase warrants EXCEPT A) when a firm makes a large issue of debt, the attachment of stock-purchase warrants may add to the marketability of the issue. B) warrants are similar to conversion features on debt. C) suppliers of debt are more likely to require warrants on an issue of debt from an existing corporation than from a new firm. D) the attachment of warrants may lower the required interest rate.

An advantage of a convertible security is that it provides for deferred common stock financing. The purpose of deferring the sale of common stock is to A) increase the leverage of the firm. B) dilute the ownership interest. C) minimize dilution in earnings per share. D) time the sale of common stock when the price per share is basing.

An increase in the current asset to total asset ratio has the effects of ________ on profits and ________ on risk. A) an increase; an increase B) an increase; a decrease C) a decrease; a decrease D) a decrease; an increase

An international bond that is sold primarily in countries other than the country of the currency in which the issue is denominated is called A) international bond. B) foreign bond. C) Eurobond. D) None of the above.

Appropriate collateral for a loan secured under a trust receipt inventory loan is A) drill bits. B) pencils. C) recreation vehicles. D) bananas.

As credit standards are tightened, sales are expected to ________ and the investment in accounts receivable is expected to ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

At the time of issuance, the issuer of a convertible security normally establishes a conversion price ________ the current market price of the firmʹs stock. A) below B) equal to C) above D) unrelated to

Because managing inventory is just like managing any other investment, decisions about the level of inventory should be guided by A) the value of the inventory. B) the effect of inventory levels on sales. C) a cost-benefit analysis. D) the effect of inventory levels on customer relations.

Business failure may be caused by all of the following EXCEPT A) low or negative returns. B) technical insolvency. C) book value of assets that exceed liabilities. D) liabilities that exceed market value of assets.

Cash acquisitions of going concerns are best analyzed using A) an investment opportunity schedule. B) ratio analysis. C) capital budgeting techniques. D) the weighted marginal cost of capital theory.

Commercial paper is generally issued in multiples of A) $1,000 or more. B) $10,000 or more. C) $100,000 or more. D) $1,000,000 or more.

Convertible preferred stock is normally converted into A) secured bonds. B) debentures. C) shares of common stock. D) warrants.

Disbursement float has all of the following basic components EXCEPT A) mail. B) processing. C) collection. D) clearing

FASB Standard No. 13 establishes requirements for the explicit disclosure of certain types of lease obligations on the firmʹs balance sheet. To qualify as a capital lease, any of the following elements may be present EXCEPT A) the lease transfers ownership of the property to the lessee by the end of the lease. B) the lease contains an option to purchase the property at a ʺbargainʺ price. C) the lease term is less than 75 percent of the economic life of the property. D) at the beginning of the lease, the present value of the lease payment is equal to 90 percent or more of the fair market value of the leased property less any investment tax credit received by the lessor.

Financing that arises from the normal operations of the firm is said to be A) expected. B) accrued. C) spontaneous. D) payable.

Financing that matures in one year or less and has specific assets pledged as collateral is called A) spontaneous financing. B) unsecured short-term financing. C) secured short-term financing. D) none of the above.

For ________ currencies, changes in the value of foreign exchange rates are called ________. A) floating; appreciation B) floating; revaluation or devaluation C) fixed; revaluation or devaluation D) fixed; appreciation or depreciation

For puts and calls, the exercise price is called A) the expected value. B) the market price. C) the striking price. D) the option price.

Generally, a combination of two firms of unequal size is called A) a congeneric formation. B) a consolidation. C) a merger. D) a holding company.

Ideally a firm would like to have a A) negative operating cycle. B) positive operating cycle. C) negative cash conversion cycle. D) positive cash conversion cycle.

If a firm increases its current assets relative to total assets, A) it increases return and reduces risk. B) it increases return and increases risk. C) it reduces return and reduces risk. D) it reduces return and increases risk.

If the P/E paid is less than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be A) positive. B) neutral. C) negative. D) uncorrelated.

In a line credit arrangement, the firm pays interest on A) the full line of credit. B) the unused portion of the line of credit. C) only the amount actually borrowed. D) only the amount actually borrowed and commitment fees on any unused portion of the loan.

In a voluntary settlement, each creditor will be paid 20 cents on the dollar in 120 days. The remaining 80 cents on the dollar will be paid within an additional 60 days. This is an example of A) a composition. B) a combination of a composition and extension. C) an extension. D) a liquidation.

In capital budgeting for a multinational, the starting discount rate to which risks stemming from foreign exchange and political factors can be added, and from which benefits reflecting the parentʹs lower capital costs may be subtracted is A) the cost of capital of the parent (multinational) company. B) the risk-free rate of the parent company, adjusted for risk relevant to the foreign subsidiary. C) the local cost of equity capital applicable to the local business and financial environments within which a subsidiary operates. D) the weighted average cost of capital applicable to all foreign subsidiaries combined.

In defending against a hostile takeover, the strategy involving the payment of a large, debt-financed, cash dividend is the ________ strategy. A) shark repellent B) golden parachute C) leveraged recapitalization D) white knight

In defending against a hostile takeover, the strategy that involves the target firm creating securities that give their holders certain rights that become effective when a takeover is attempted is called the ________ strategy. A) shark repellent B) greenmail C) poison pill D) golden parachute

In the ABC system of inventory management, the ________ method or system could be utilized to control C items. A) basic economic order quantity B) materials requirement planning C) red-line D) just-in-time

In the EOQ model, ________ costs are the variable costs per unit of holding an item of inventory for a specified time period. A) basic B) order C) carrying D) processing

In the aggressive financing strategy, a firm anticipating a large increase in sales should finance the increase in working capital with A) the sale of common stock. B) the sale of a bond issue. C) a line of credit. D) a long-term note from the bank.

In the international context, the ________ interest rate involves only the MNC parentʹs currency, while the ________ interest rate includes any forecast appreciation or depreciation of a foreign currency relative to that of the MNC parent. A) effective; nominal B) macro; nominal C) nominal; effective D) nominal; micro

Inventory insurance costs are an example of ________ costs. A) order B) marginal C) carrying D) total

Joint venture laws and restrictions may result in any of the following negative implications for the operation of a foreign-based subsidiary EXCEPT A) foreign ownership may result in disagreement among the partners regarding the distribution of profits. B) operating in foreign countries may result in difficulties obtaining the remission of profits. C) joint venture agreements may stem a certain degree of risk due to political hostility. D) foreign management policies may be detrimental to the usual policies of the MNC.

Laws in some U.S. states that tax multinationals (both American and foreign) on a percentage of their total worldwide income rather than the usual taxation of the MNCsʹ earnings arising within their jurisdiction are called A) multinational tax laws. B) state corporate tax laws. C) unitary tax laws. D) universal tax laws.

Lenders require collateral to A) reduce the risk of default. B) control the borrowing firm. C) reduce the losses if the borrower defaults. D) extend to the borrower an unsecured loan.

Leveraged buyouts are clear examples of A) strategic mergers. B) vertical mergers. C) financial mergers. D) congeneric mergers.

Many holders of convertible bonds will not convert when the firmʹs common stock price exceeds the conversion price. To protect itself against this behavior, the firm includes a ________ on the convertible security. A) warrant B) option C) call feature D) striking price

Most commercial paper has maturities ranging from A) six months to one year. B) one year to three years. C) three days to 270 days. D) seven days to 30 days.

Most commercial paper is purchased by A) manufacturers. B) governments and individuals. C) banks and life insurers. D) the federal government.

Most firms employ ________ financing strategy. A) an aggressive B) a conservative C) a trade-off D) a seasonal

One major risk a firm assumes in an aggressive financing strategy is A) the possibility that collections will be slower than expected. B) the possibility that long-term funds may not be available when needed. C) the possibility that short-term funds may not be available when needed. D) the possibility that it will run out of cash.

Several U.S. states have imposed ________, which tax MNCs on a percentage of their total worldwide income. A) grossing up procedures B) joint ventures C) unitary tax laws D) national entry control systems

Short-term instruments issued by the Federal Home Loan Bank, the Federal National Mortgage Association, and the Federal Land Bank are examples of A) Treasury notes. B) Treasury bills. C) federal agency issues. D) bankerʹs acceptances.

The ________ inventory consists of items that have been produced but not yet sold. A) raw materials B) work-in-process C) finished goods D) capital goods

The ________ is an inventory management technique that compares production needs to available inventory balances and determines when orders should be placed for various material inputs. A) ABC system B) EOQ model C) MRP system D) JIT system

The ________ is an inventory technique that takes into account various operating and financial costs to determine the order quantity for a specific inventory item. A) exponential smoothing technique B) ABC system C) EOQ model D) LIFO model

The ________ is the time period that elapses from the point when the firm uses the raw materials in manufacturing a finished good to the point when the finished good is sold. A) cash turnover B) cash conversion cycle C) average age of inventory D) average collection period

The ________ of a firm is the amount of time that elapses from the point when the firm inputs material and labor into the production process to the point when cash is collected from the sale of the finished product that contains these production inputs. A) cash conversion cycle B) average age of inventory C) operating cycle D) average collection period

The ________ uses no, or very little, safety stock. A) basic economic order quantity system B) materials requirement planning system C) just-in-time system D) red-line method

The available options of the firm with an overhanging issue to finance the call include all of the following EXCEPT A) selling additional debt resulting in a higher debt ratio. B) using current retained earnings. C) selling additional common equity resulting in less dilution of EPS. D) selling additional preferred stock resulting in higher financial leverage.

The basic strategies for determining the appropriate financing mix are A) seasonal and permanent. B) short-term and long-term. C) aggressive and conservative. D) current and fixed.

The basic strategies that should be employed by the business firm in managing cash include all of the following EXCEPT A) paying accounts payable as late as possible without damaging the firmʹs credit rating. B) turning over inventory as quickly as possible, avoiding stockouts. C) operating in a fashion that requires maximum cash. D) collecting accounts receivable as quickly as possible without damaging customer rapport.

The call price of the security generally ________ the securityʹs par value. A) is less than B) is equal to C) is greater than D) has no relation to

The call privilege is generally not exercised until the conversion value of the security is ________ the call price. A) 5 to 10 percent below B) equal to C) 10 to 15 percent above D) 25 to 30 percent above

The combination of two or more companies that results in the firm maintaining the identity of one of the firms is A) congeneric formation. B) consolidation. C) merger. D) holding company.

The conversion of current assets from inventory to receivables to cash provides the ________ of cash used to pay the current liabilities, which represents a(n) ________ of cash. A) outflow; inflow B) use; source C) source; use D) inflow; outflow

The cost of giving up a cash discount on a credit purchase is A) added on to the price of the goods. B) deducted from the price of the goods. C) the implied interest rate paid in order to delay payment for an additional number of days. D) the true purchase price of the goods.

The credit applicantʹs ________ is the financial strength of the applicant as reflected by its ownership position. A) character B) capacity C) capital D) collateral

The depth of a market is determined by A) the ability to absorb the purchase or sale of a large number of securities. B) the number of participants. C) the ability to absorb the purchase or sale of a large dollar amount of securities. D) the safety of principal.

The disposition of the financial manager, marketing manager, and manufacturing manager toward inventory levels is to keep them ________, ________, and ________, respectively. A) high; low; high B) low; high; low C) low; high; high D) high; low; low

The effective interest rate generally is A) higher on a loan if interest is paid at maturity. B) lower if the loan is a discount loan. C) higher if the loan is a discount loan. D) not affected by whether the loan is a discount loan or a loan with interest paid at maturity.

The exercise price or option price of a warrant is normally set ________ the market price of the firmʹs stock at the time of issuance. A) below B) equal to C) above D) with respect to

The existence of ________ allows multinationals to take advantage of unregulated financial markets to invest and raise short-term funds in a variety of countries and to protect themselves from foreign exchange exposure. A) a strong U.S. dollar B) the International Monetary Fund C) Eurocurrency markets D) European Economic Council

The firm in a merger transaction that attempts to merge or takeover another company is called the A) target company. B) holding company. C) acquiring company. D) conglomerate.

The following securities are all popular hybrid securities EXCEPT A) financial leases. B) convertible securities. C) options. D) stock purchase warrants.

The goal of a firmʹs cash management is to A) increase the cash conversion cycle. B) increase the payment period. C) minimize cash requirement. D) maximize cash outflows.

The goal of working capital management is to A) balance current assets against current liabilities. B) pay off short-term debts. C) achieve a balance between risk and return in order to maximize the firmʹs value. D) achieve a balance between short-term and long-term assets so that they add to the achievement of the firmʹs overall goals.

The long-run effect on the earnings per share of the merged firm depends largely on A) the pre-merger P/E ratio. B) the ratio of exchange. C) the synergy of the merged firm. D) the tax considerations.

The major type of loan made by banks to businesses is the A) fixed-asset-based loan. B) short-term secured loan. C) short-term self-liquidating loan. D) capital improvement loan.

The market value of a convertible bond will exceed the conversion value or straight bond value, whichever is greater, by an amount called the market premium. This premium exists because A) markets are efficient. B) buyers and sellers do not usually agree on the conversion value. C) purchasers expect future stock price movements to be positive. D) the straight bond value is close to the conversion value.

The market value of a warrant is generally ________ the theoretical value of the warrant. A) below B) equal to C) above D) not related to

The motive for divestiture is likely to be all of the following EXCEPT A) to generate cash for expansion of other product lines. B) to get rid of poorly performing operations. C) to head off bankruptcy. D) to streamline the corporation.

The option buyer who expects a stock price to decline will purchase A) a call. B) a warrant. C) a put. D) a convertible bond.

The philosophy of the ________ is that the firm would have only work -in process inventory. A) basic economic order quantity system B) materials requirement planning system C) just-in-time system D) red-line method

The portion of a firmʹs current assets financed with long-term funds may be called A) working capital. B) accounts receivable. C) net working capital. D) inventory.

The priority of claims established by Chapter Seven of the Bankruptcy Reform Act of 1978 gives priority to claims of A) unsecured creditors over claims of secured creditors. B) preferred stockholders over claims of unsecured creditors. C) wages payable over claims of unsecured creditors. D) farmers in grain storage over expenses of administering the bankruptcy.

The purpose of managing current assets and current liabilities is to A) achieve as low a level of current assets as possible. B) achieve as low a level of current liabilities as possible. C) achieve a balance between profitability and risk that contributes to the firmʹs value. D) achieve as high a level of current liabilities as possible.

The risk of an investment in a Eurodollar deposit is partially due to A) the fact that the center of the Eurodollar market is in London. B) the fact that the majority of these deposits are not in the form of U.S. dollars. C) the presence of some foreign exchange risk. D) the fact that these instruments only pay interest at maturity.

The risk resulting from the effects of changes in foreign exchange rates on the translated value of a firmʹs accounts denominated in a given foreign currency is A) economic exposure. B) macro political risk. C) accounting exposure. D) micro political risk.

The similarities of a right and a warrant include all of the following EXCEPT A) they both give the holder an option to acquire a certain number of shares of common stock at a specified price. B) they both result in new equity capital for the firm. C) they are both issued with exercise or subscription prices below the prevailing market price of stock. D) they both may be traded independently from the security to which they were attached.

The transfer by a multinational firm of capital, managerial, and technical assets from its home country to a host country is termed A) an MNC. B) an SDI. C) an FDI. D) a CAPM.

Theory and empirical evidence indicate that the capital structures of multinational companies A) are basically the same as those of domestic firms. B) differ, but all multinationals are similar no matter the domicile country. C) not only differ from domestic firms, but differ also based upon the country in which they are domiciled. D) differ only because of their operating structure.

Typically, reasons for undertaking mergers are A) only financial. B) only strategic. C) strategic or financial. D) in conflict with wealth maximization.

When a call is made on a convertible security, the holder of the security will most likely A) not take any action. B) allow the call to be exercised and accept the call premium. C) convert the security into common stock. D) sell the security in the secondary market.

When making a cash acquisition of a going concern, the acquiring corporation must be certain A) to adjust after-tax cash flows. B) to recognize different accounting techniques. C) to adjust the discount rate for risk differences. D) to consider the problems of assimilating the acquired management.

When managing accounts receivable, a good strategy to employ without losing future sales is to A) send the accounts to a collection agency. B) tighten the credit terms. C) offer cash discount. D) make frequent personal visits to the customer.

When managing inventories, a good strategy is to increase inventory turnover by doing the following EXCEPT A) increase raw materials turnover. B) shorten the production cycle. C) produce low-cost short cycle goods. D) increase finished goods turnover.

When the price of the firmʹs common stock ________ the conversion price, the market price of the convertible security will normally ________ to a level close to its conversion value. A) falls below; rise B) rises above; fall C) rises above; rise D) equals; fall

Which of the following is NOT one of the five Cʹs of credit? A) character B) capital C) capability D) collateral

Which of the following is true of a Eurodollar deposit? A) Eurodollar deposits tend to provide yields below nearly all other marketable securities with similar maturities due to their low risk. B) Eurodollar deposits are non-negotiable and pay interest only at maturity, hence the yield is higher than on other marketable securities with similar maturities. C) Eurodollar deposits tend to provide yields above nearly all other marketable securities with similar maturities due to the higher risk. D) Eurodollar deposits tend to provide higher yields above nearly all other marketable securities with similar maturities due to the absence of an active secondary market.

While credit scoring provides sound credit information, it is frequently NOT used in business because A) the scoring information is difficult to obtain. B) scoring standards are too rigid. C) most business transactions involve mercantile credit which cannot be scored. D) mercantile credit decisions are easily quantifiable.

________ are not obligations of the U.S. Government, but most purchasers feel that they are implicitly guaranteed by the federal government. A) Treasury notes B) Treasury bills C) Federal agency issues D) Bankerʹs acceptances

________ arise from a short-term credit arrangement used by businesses to finance transactions involving firms in foreign countries or firms with unknown credit capacities. A) Negotiable certificates of deposit B) Eurodollar deposits C) Bankerʹs acceptances D) Money market mutual funds

________ effectively raises the interest cost to the borrower on a line of credit. A) An operating change restriction B) An annual cleanup C) A compensating balance D) A commitment fee

________ float is the delay between the receipt of a check and the actual deposit of it into the firmʹs account. A) Disbursement B) Deposit C) Processing D) Clearing

________ float is the time that elapses between the deposit of a check by the payee and the actual availability of funds. This component is attributable to the time required for a check to go through the banking system. A) Mail B) Processing C) Clearing D) Disbursement

________ float results from the delay between the time when a customer deducts a payment from the checking account ledger and the time when the vendor actually receives the funds in a spendable form. A) Mail B) Processing C) Collection D) Disbursement

________ is a method of consciously anticipating the mail, processing, and clearing time involved with the payment process. A) Controlled disbursing B) Concentration banking C) Playing the float D) An overdraft system

________ is an arrangement whereby the firmʹs creditors receive full payment, although not immediately. A) A composition B) A creditor control agreement C) An extension D) A liquidation

________ is an international body that polices world commercial trading practices and that mediates disputes between two or more member countries. A) NAFTA B) GATT C) WTO D) CAFTA

________ may result in expansion of operations in an existing product line and elimination of a competitor. A) Congeneric merger B) Conglomerate merger C) Horizontal merger D) Vertical merger

________ results from the combination of firms in the same line of business. A) Congeneric growth B) Conglomerate diversification C) Horizontal growth D) Vertical growth

.In a revolving credit agreement, the firm pays interest on A) the full line of credit. B) the unused portion of the line of credit. C) only the amount actually borrowed. D) the amount actually borrowed and commitment fees on any unused portion of the loan.

A ________ is a method of structuring a financial merger, whereas a ________ involves the sale of the firmʹs assets. A) leveraged buyout; bankruptcy B) congeneric buyout; divestiture C) horizontal merger; leveraged divestiture D) leveraged buyout; divestiture

A ________ is a type of loan made to a business by a commercial bank. This type of loan is made when the borrower needs additional funds for a short period but does not believe the need will continue or reoccur on a seasonal basis. A) revolving credit agreement B) line of credit C) short-term self-liquidating loan D) single payment note

A ________ occurs when the operations of the acquiring and target firms are combined in order to achieve economies and thereby cause the performance of the merged firm to exceed that of the pre-merged firm. A) financial merger B) hostile takeover C) operating merger D) strategic merger

A convertible bond is almost always ________ with a call feature. A) a mortgage bond B) an income bond C) an equipment trust certificate D) a debenture

A financial merger is undertaken to increase A) operating efficiency, which is used to increase cash flows. B) cash flows, which are used to increase dividends to shareholders. C) market share, which is used to maximize shareholder wealth. D) cash flows, which are used to service the debt typically incurred to finance the merger transaction.

A firm can reduce its cash conversion cycle by A) increasing the average age of inventory. B) increasing the average collection period. C) decreasing the average payment period. D) increasing the average payment period.

A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not have the cash available to take the discount. The firm has a credit line available at a local bank at an interest rate of 12 percent. The firm should A) give up the cash discount, financing the purchase with the line of credit. B) take the cash discount and pay on the 45th day after the date of sale. C) take the cash discount and pay on the first day of the cash discount period. D) take the cash discount, financing the purchase with the line of credit, the cheaper source of funds.

A firm which uses the aggressive financing strategy plans to purchase a major fixed asset financed with a loan. The most likely consequence of this action is A) a decrease in the current ratio. B) an increase in net working capital. C) a decrease in the risk of technical insolvency. D) an increase in long-term debt.

A formal proposal to purchase a given number of shares of a firmʹs stock at a specified price is a A) warrant. B) stock purchase option. C) right. D) tender offer.

A lease under which a lessor owns or acquires the assets that are leased to a given lessee is called a(n) A) operating lease. B) financial lease. C) sale-leaseback arrangement. D) direct lease.

A major impetus fueling financial mergers during the 1980s was A) high interest rates. B) high tax rates. C) high cash balances that could be utilized for takeovers. D) ready availability of junk bond financing.

A merger involving the purchase of a specific product line, rather than the whole company is A) an operating merger. B) a financial merger. C) a selective lines merger. D) a variation of the strategic merger.

A merger of a paper manufacturer and a logging company is an example of A) congeneric merger. B) conglomerate merger. C) horizontal merger. D) vertical merger.

A partnership under which the participants have contractually agreed to contribute specified amounts of money and expertise in exchange for stated proportions of ownership and profit is called A) limited partnership. B) GmbH. C) S.A.R.L. D) joint venture.

A reorganization plan must meet all of the following criteria EXCEPT A) it must be fair and equitable. B) it must be feasible. C) it maintains the priorities of the contractual claims of all parties. D) the market value of the firmʹs assets must exceed the stated liabilities.

A short-term financial decision based on an MNC managementʹs expectation that the local foreign currency will appreciate may be A) increasing local customersʹ accounts receivable and increasing local notes payable. B) decreasing local notes receivable and decreasing accruals. C) increasing local inventories and increasing local notes payable. D) increasing local accounts receivable and decreasing local accounts payable.

Accruals and accounts payable are ________ sources of short-term financing. A) negotiated, secured B) negotiated, unsecured C) spontaneous, secured D) spontaneous, unsecured

All of the following are disadvantages of holding companies EXCEPT A) increased risk. B) double taxation. C) high cost of administration. D) legal responsibility for subsidiaries.

All of the following are factors that can influence the operations of an MNC EXCEPT A) foreign ownership of portions of equity. B) existence of multinational capital markets. C) foreign currency fluctuations. D) consolidation of financial statements based on only one currency.

All of the following are reasons for mergers EXCEPT A) increasing managerial skills. B) tax considerations. C) synergism. D) monopoly control of the markets.

All of the following goods represent appropriate collateral for a secured loan to a candy manufacturer EXCEPT A) boxes. B) cocoa beans. C) individually wrapped chocolates. D) cream.

All of the following must be considered when making a lease-versus-purchase decision EXCEPT A) the after-tax cash flows for each year under the lease alternative. B) the after-tax cash flows for each year under the purchase alternative. C) the present value of all cash flows. D) the depreciation expense under the lease.

All of the following securities are government issues EXCEPT A) Treasury notes. B) Treasury bills. C) Federal agency issues. D) Eurodollar deposits.

An attempt to gain control of the firm by buying sufficient shares of the target firm in the marketplace is known as a ________ and is typically accomplished through a ________. A) friendly takeover; tender offer B) hostile takeover; merger C) friendly takeover; merger D) hostile takeover; tender offer

An important aspect of the firmʹs reorganization plan is the recapitalization of the firmʹs capital structure. The goal of restructuring the firmʹs debt includes all of the following EXCEPT A) providing a reasonable level of earnings for the owners. B) exchanging debt for equity. C) reducing the fixed-payment obligations. D) decreasing the times interest earned ratio.

An increase in collection efforts will result in ________ in sales volume, ________ in the investment in accounts receivable, ________ in bad debt expenses, and ________ in collection expenditures. A) an increase; a decrease; an increase; a decrease B) an increase; a decrease; a decrease; an increase C) an increase; a decrease; an increase; an increase D) a decrease; a decrease; a decrease; an increase

An increase in the average payment period will result in ________ in the operating cycle and ________ in the cash conversion cycle. A) an increase; a decrease B) a decrease; a decrease C) a decrease; no change D) no change; a decrease

An increase in the average payment period will result in ________ in the operating cycle. A) an increase B) a decrease C) an undetermined change D) no change

Appropriate collateral for a loan secured under a floating inventory lien is A) cars. B) drill presses. C) file cabinets. D) paper clips.

As a foreign exchange hedging tool, options have all of the following characteristics EXCEPT A) the right to buy or sell an amount of foreign currency. B) specifies price. C) specifies time period. D) represents an obligation to buy or sell.

Between two major currencies, the spot exchange rate is the rate ________ and the forward exchange rate is the rate ________. A) on that date; today B) at some specified future date; today C) today; on that date D) on that date; at some specified future date

Business failure may be caused by all of the following EXCEPT A) corporate maturity. B) mismanagement. C) economic downturns. D) increasing liquidity.

Compared to a line of credit, a revolving credit agreement generally will be A) a lower cost, higher risk method of short-term borrowing. B) a lower cost, lower risk method of short-term borrowing. C) a higher cost, higher risk method of short-term borrowing. D) a higher cost, lower risk method of short-term borrowing.

Comprehensive rules, regulations, and incentives aimed at regulating the inflow of direct foreign investments involving MNCs and at extracting more benefits from their presence are termed A) unitary tax laws. B) foreign direct investments. C) Eurocurrency markets. D) national entry control systems.

Disadvantages of leasing from the lesseeʹs perspective include all of the following EXCEPT A) the return to the lessor is quite high. B) prohibition on leasehold improvements. C) under a financial lease, an asset may subsequently become obsolete. D) the maximum claim of the lessor in the event of bankruptcy is three years of lease payments.

Each of the following instruments demonstrates the safety of principal characteristic common to marketable securities EXCEPT A) Treasury bills. B) Treasury notes. C) bankerʹs acceptances. D) common stock.

FASB Standard No. 13 requires explicit disclosure of ________ obligation on the firmʹs balance sheet. For this type of lease, the present value for all of its payments is shown as an asset and the total lease payment obligation is included as a liability on the firmʹs balance sheet. A) an operating lease B) a leveraged lease C) a sale-leaseback D) a capital lease

Foreign bonds are sold primarily in A) countries other than the country in which the issue is denominated. B) Western Europe. C) Japan. D) the country of the currency of issue.

From the firmʹs point-of-view, the issuance of convertible bonds has all of the following advantages EXCEPT A) a temporary source of cheap funds. B) tax-deductible interest payments. C) the deferred sale of common stock. D) upon conversion, an increase in financial leverage.

Greater control over the acquisition of raw materials or the distribution of finished goods is an economic benefit of A) congeneric merger. B) conglomerate merger. C) horizontal merger. D) vertical merger.

If a firm gives up the cash discount on goods purchased on credit, the firm should pay the bill A) as late as possible. B) as soon as possible. C) before the credit period ends. D) on the last day of the credit period.

If the firm decides to take the cash discount that is offered on goods purchased on credit, the firm should A) pay as soon as possible. B) pay on the last day of the credit period. C) take the discount no matter when the firm actually pays. D) pay on the last day of the discount period.

If the firmʹs credit period is decreased, the sales volume can be expected to ________, the investment in accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________. A) increase; decrease; decrease B) increase; increase; decrease C) increase; increase; increase D) decrease; decrease; decrease

In defending against hostile takeover attempts, a company will approve anti-takeover amendments to the corporate charter that constrain the firmʹs ability to transfer managerial control of the firm as a result of a merger. This is called the ________ strategy. A) golden parachute B) greenmail C) poison pill D) shark repellent

In defending against hostile takeover attempts, a company will include provisions in the employment contracts of key executives that provide them with sizable compensation if the firm is taken over. This is called the ________ strategy. A) shark repellent B) white knight C) greenmail D) golden parachute

In the financial statement of the firm, puts and calls A) determine cash management policy. B) influence the capital structure decision. C) affect bond quality. D) have no influence.

Key advantages of holding companies include all of the following EXCEPT A) they permit a firm to control a large amount of assets with relatively small dollar investment. B) they help in terms of risk protection because the failure of one of the companies does not result in the failure of the entire firm. C) lawsuits or legal actions against a subsidiary do not threaten the remaining companies. D) All of the above are advantages.

Loans on which the interest is paid in advance are often called A) premium loans. B) reduced-principle loans. C) called loans. D) discount loans.

Most firms seeking merger partners will hire the services of A) a commercial banker. B) an investment broker. C) a private contractor. D) an investment banker.

Net working capital is defined as A) a ratio measure of liquidity best used in cross-sectional analysis. B) the portion of the firmʹs assets financed with short-term funds. C) current liabilities minus current assets. D) current assets minus current liabilities.

The Euromarket is dominated by the A) French franc. B) Japanese yen. C) Deutsche mark. D) U.S. dollar.

The ________ is a major trade agreement signed by the United States and five Central American Countries. A) North American Free Trade Agreement (NAFTA) B) Mercosur Group C) Latin and South American Free Trade Area (LASTA) D) Central American Free Trade Agreement (CAFTA)

The ________ is a significant economic force currently made up of 25 nations with a population of more than 295 million that permits free trade within the countries that make up this group. A) North American Free Trade Agreement (NAFTA) B) Mercosur Group C) Asian Economic Area Network (ASEAN) D) European Union (EU)

The ________ is an inventory management technique that minimizes inventory investment by having materials inputs arrive at exactly the time they are needed for production. A) ABC system B) EOQ model C) MRP system D) JIT system

The ________ is the time period that elapses from the point when the firm sells a finished good on account to the point when the receivable is collected. A) cash conversion cycle B) average payment period C) average age of inventory D) average collection period

The actual ratio of exchange in a stock-exchange acquisition is the ratio of the A) amount paid per share of the target company to the per share book value of the acquiring firm. B) book value per share of the target company to the per share market price of the acquiring firm. C) market value per share of the target company to the per share market price of the acquiring firm. D) amount paid per share of the target company to the per share market price of the acquiring firm.

The basic characteristics of warrants include all of the following EXCEPT it A) acts as a sweetener in financing. B) is detachable. C) lowers the required interest rate. D) has an exercise period shorter than one month.

The basic components of collection float include all of the following EXCEPT ________ float. A) mail B) processing C) clearing D) disbursement

The capital structures of MNCs are influenced by all of the factors below EXCEPT A) international capital markets. B) international diversification. C) country factors. D) all of the above.

The center of the Euro-equity market, which deals in international equity issues is A) New York. B) Geneva. C) Tokyo. D) London.

The combination of two or more companies that results in one of the corporations having a voting control of one or more of the other companies is a A) congeneric formation. B) consolidation. C) merger. D) holding company.

The creation of a high-debt, private corporation with improved cash flow and value is the goal in A) issuing junk bonds. B) a financial merger. C) a conglomerate merger. D) a leveraged buyout.

The credit applicantʹs ________ is the amount of assets the applicant has available for use in securing the credit. A) character B) capacity C) capital D) collateral

The firmʹs credit ________ defines the minimum criteria for the extension of credit to a customer. A) scoring B) terms C) policy D) standards

The firmʹs financing requirements can be separated into A) current liabilities and long-term funds. B) current assets and fixed assets. C) current liabilities and long-term debt. D) seasonal and permanent.

The first international capital market, a market with uniform rules and regulations governing major stock exchanges, was finally established and began operations in 2002 A) at The Hague. B) in New York. C) in London. D) none of the above.

The goals of divestiture include all of the following EXCEPT A) raising funds. B) focusing operations. C) enhancing profitability. D) expanding operations.

The interest rate charged on a secured short-term loan to a corporation is typically ________ the interest rate on an unsecured loan. A) lower than B) the same as C) unrelated to D) higher than

The key motives for using convertible securities in the firmʹs financing mix include all of the following EXCEPT A) a form of deferred stock financing. B) a sweetener for financing. C) a method of raising temporarily cheap funds. D) an eventual shift in the capital structure to a more levered position.

The major variables that should be considered when evaluating proposed changes in credit standards are all of the following EXCEPT A) sales volume. B) the investment in accounts receivable. C) bad debt expenses. D) level of liquid assets.

The most stringent step in the collection process is A) letters. B) personal visits. C) collection agencies. D) legal action.

The purchaser of a convertible issue sacrifices a portion of his or her interest return A) to raise temporarily cheap funds. B) due to the reduced risk of default. C) when the call feature is exercised. D) for the potential opportunity to become a common shareholder in the future.

The responsibilities of the debtor in possession include all of the following EXCEPT A) the valuation of the firm as a going concern. B) drawing up a plan of reorganization. C) recommending a recapitalization plan. D) liquidating the assets of the firm.

The result of spin-off to the parent company is A) additional stock to the parent. B) additional cash from the sale. C) additional debt by the parent. D) no additional cash or stock to the parent.

The risk attached to international cash flows are all of the following EXCEPT A) business and financial risks. B) inflation and foreign exchange risks. C) political risks. D) risk of local management.

The selling of some of a firmʹs assets is called A) business failure. B) vertical segmentation. C) reverse merger. D) divestiture.

The straight bond value is A) the conversion premium minus the conversion value. B) the stock value minus the present value of the interest payments. C) the market value minus the conversion value. D) the present value of the interest and principal payments discounted at a rate the firm would have to pay on a nonconvertible bond.

The three basic types of inventory are all of the following EXCEPT A) raw materials B) work-in-process C) finished goods D) capital goods

The yield on commercial paper is generally higher than the yield on A) negotiable CDs. B) a corporate bond. C) common stock. D) a Treasury bill.

Typically in a leveraged buyout approximately ________ percent (if not more) of the purchase price is financed with debt. A) 30 B) 50 C) 70 D) 90

When a firm initiates or increases a cash discount, sales are expected to ________, the investment in accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit per unit is expected to ________. A) decrease; increase; increase; increase B) decrease; decrease; increase; increase C) increase; increase; decrease; decrease D) increase; decrease; decrease; decrease

When a firm undertakes a merger in order to eliminate redundant functions or increase market share, this is an example of A) financial merger. B) hostile takeover. C) friendly merger. D) strategic merger.

When a firm undertakes a merger to improve its sources and supply of raw materials, this is an example of a A) financial merger. B) hostile takeover. C) friendly merger. D) strategic merger.

When should credit standards be relaxed? A) When sales are expected to increase. B) When costs are expected to decrease. C) When costs are expected to increase faster than sales if the standards are not relaxed. D) When the profit contribution from sales is greater than the cost contribution.

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, both the acquiring and the target companies have the same A) debt ratio. B) book value per share. C) return on equity. D) P/E ratio.

Which of the following is NOT an advantage of factoring? A) Accounts receivable immediately turned into cash. B) Elimination of credit and collection department. C) Creation of a known pattern of cash flows. D) The effective interest rate.

_______ float results from the lapse between the time when a firm deducts a payment from its checking account ledger and the time when funds are actually withdrawn from its account. A) Mail B) Processing C) Collection D) Disbursement

________ are established to eliminate the necessity of checking a major customerʹs credit each time a major purchase is made. A) Credit standards B) Credit policies C) Credit departments D) Lines of credit

________ are short-term money market instruments that can be easily converted into cash. A) Preferred stocks B) Treasury bonds C) Accounts receivable D) Marketable securities

________ are the major source of unsecured short-term financing for business firms. A) Accounts receivable B) Accruals C) Notes payable D) Accounts payable

________ involves the strategic use of mailing points and bank accounts to lengthen mail and clearing floats. A) A direct send B) Concentration banking C) A lockbox D) Controlled disbursing

________ is a short-term, unsecured promissory note issued by a corporation with a very high credit standing. A) A negotiable certificate of deposit B) A repurchase agreement C) A money market mutual fund D) A commercial paper

________ is an arrangement initiated by the debtor firm to negotiate with the creditors about a plan for sustaining or liquidating the firm. A) An involuntary reorganization B) An involuntary liquidation C) A filing of Chapter Seven of the Bankruptcy Reform Act of 1978 D) A voluntary settlement

________ is the procedure for evaluating mercantile credit applicants. A) Credit scoring B) Credit standards C) Credit policy D) Credit analysis

________ results when a firm acquires a supplier or a customer. A) Congeneric merger B) Conglomerate merger C) Horizontal merger D) Vertical merger

An attractive candidate for acquisition through leveraged buyout should possess which of the following characteristics? A) A good position in its industry with a solid profit history and reasonable expectations of growth. B) A relatively low level of debt. C) A relatively high level of ʺbankableʺ assets that can be used as loan collateral. D) Stable and predictable cash flows that are adequate to meet interest and principal payments on the debt and provide adequate working capital. E) All of the above.

The ʺstakeholdersʺ in targeted takeover companies include the A) customers. B) creditors. C) employees. D) stockholders. E) all of the above.

.3.30) Revolving credit agreements are non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

FALSE

.Treasury notes are obligations of the U.S. Treasury that are issued weekly on an auction basis and have common maturities of 91 and 182 days. Due to the existence of a strong secondary market, these notes are quite attractive marketable security investments.

FALSE

1.16) An operating merger occurs when the operations of the acquiring and target firms are combined in order to achieve economies and thereby cause the performance of the merged firm to exceed that of the pre-merged firm.

FALSE

1.8) Consolidation involves the combination of two or more firms, and the resulting firm maintains the identity of one of the firms.

FALSE

A call option is an option to sell a specified number of shares of a stock on or before some future date at a stated price.

FALSE

A congeneric merger is a merger combining firms in unrelated businesses.

FALSE

A congeneric merger is a merger in which a firm acquires a supplier or a customer.

FALSE

A consolidation is a corporation that has voting control of one or more other corporations.

FALSE

A conversion feature is an option that is included as part of a common stock issue that allows its holder to change the stock into a stated number of shares of preferred stock.

FALSE

A direct lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making periodic payments for its use.

FALSE

A financial lease is a cancelable contractual arrangement whereby the lessee agrees to make periodic payments to the lessor, often for five or fewer years, for an assetʹs services.

FALSE

A financial merger is a merger transaction undertaken to achieve economies of scale.

FALSE

A firm can raise capital by issuing securities such as convertibles, warrants, calls and puts.

FALSE

A firm is said to be technically insolvent when its total assets is less than its total liabilities and stockholdersʹ equity.

FALSE

A firm should take the cash discount if the firmʹs cost of borrowing from the bank is greater than the cost of giving up a cash discount.

FALSE

A firmʹs credit policy generally includes determining credit selection, credit terms, and collection.

FALSE

A firmʹs credit selection is the process of determining the minimum requirements for extending credit to a customer.

FALSE

A firmʹs credit standard is a procedure for ranking of an applicantʹs overall credit strength, derived as a weighted average of scores on key financial and credit characteristics.

FALSE

A firmʹs credit terms specify the minimum requirements for extending credit to a customer.

FALSE

A fixed-rate loan is a loan whose rate of interest is established at a fixed increment above the prime rate and is allowed to vary above prime only when the prime rate varies until maturity.

FALSE

A functional currency is the currency of the parent companyʹs country.

FALSE

A holding company is a corporation which is controlled by one or more other corporations.

FALSE

A horizontal merger is a merger in which one firm acquires another firm in the same general industry but neither in the same line of business nor a supplier or customer.

FALSE

A hybrid security is neither debt nor equity but instead derives its value from an underlying asset.

FALSE

A leveraged lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making fixed periodic payments for its use.

FALSE

A merger occurs when two or more firms are combined to form a completely new corporation.

FALSE

A method of acquisition in which the acquiring firm exchanges its shares of stock for shares of the target company according to a predetermined ratio is called a leveraged buyout.

FALSE

A poison pill is a takeover defense in which the target firm finds an acquirer more to its liking than the initial hostile acquirer and prompts the two to compete to take over the firm.

FALSE

A popular extension of materials requirement planning is inventory integration automation II, which integrates data from numerous areas such as finance, accounting, marketing, engineering, and manufacturing using a sophisticated computer system.

FALSE

A relaxation of credit standards is expected to affect profits positively due to lower carrying costs whereas tightening credit standards would affect profits negatively as a result of higher carrying costs.

FALSE

A revolving credit agreement is a form of financing consisting of short-term, unsecured promissory notes issued by firms with a high credit standing.

FALSE

A short-term self-liquidating loan is a secured short-term loan in which the use to which the borrowed money is put provides the mechanism through which the loan is repaid.

FALSE

A single-payment note is a secured fund which can be obtained from a commercial bank when a borrower needs additional funds for a short period.

FALSE

A strategic merger is a merger transaction undertaken with the goal of restructuring the acquired company in order to improve its cash flow and unlock its hidden value.

FALSE

A takeover targetʹs management may not support a proposed takeover due to a very high tender offer.

FALSE

A trust receipt inventory loan is an arrangement in which the lender receives control of the pledged inventory collateral, which is warehoused by a designated agent.

FALSE

A vertical merger is a merger of two firms in the same line of business.

FALSE

A vertical merger may result in expansion of operations in an existing product line and elimination of a competitor.

FALSE

A white knight is a takeover defense in which a firm issues securities that give their holders certain rights that become effective when a takeover is attempted and that make the target firm less desirable to a hostile acquirer.

FALSE

Accounts payable are spontaneous secured sources of short-term financing that arise from the normal operations of the firm.

FALSE

Acquisitions are especially attractive when the acquired firmʹs stock price is high, because fewer shares must be exchanged to acquire the firm.

FALSE

Although several economic and political factors can influence foreign exchange rate movements, by far the most important explanation for long-term changes in exchange rates is fiscal policy that a country adopts.

FALSE

An aging schedule breaks down accounts receivable into groups on the basis of the first letter of the name of the company that owes on the account.

FALSE

An attractive candidate for acquisition through leveraged buyout usually has a relatively high level of debt and a low level of ʺbankableʺ assets.

FALSE

An operating lease is noncancelable and obligates the lessee to make payments for the use of an asset over a predefined period of time.

FALSE

An operating lease is often also referred to as a capital lease.

FALSE

As credit standards are relaxed, sales are expected to increase and the investment in accounts receivable is expected to decrease.

FALSE

As the ratio of current assets to total assets increases, the firmʹs risk increases.

FALSE

At the end of the term of the lease agreement, the salvage value of an asset, if any, is realized by the lessee.

FALSE

Because firms are unable to match cash inflows to outflows with certainty, most of them need current liabilities that more than cover outflows for current assets.

FALSE

Because managing inventory is just like managing any other investment, decisions about the level of inventory should be guided by the effect of inventory levels on sales.

FALSE

Both theory and empirical evidence indicate that the capital structures of MNCs are no different from those of purely domestic firms.

FALSE

Both warrants and rights result in new capital equity. However, warrants are issued at an exercise price below the prevailing market price of the stock; rights are generally issued at a subscription price above the prevailing market price.

FALSE

Business risk is the risk of being unable to make the scheduled fixed financing payments on debt and preferred stock.

FALSE

By efficiently managing the firmʹs operating and cash conversion cycles, the financial manager can maintain a high level of cash investment and thereby contribute toward maximization of share value.

FALSE

Call options are purchased with the expectation that the market price of the underlying security will fall while put options are purchased with the expectation that the market price of the underlying security will rise.

FALSE

Chapter 7 of the Bankruptcy Reform Act of 1978 outlines the procedures for reorganizing a failed (or failing) firm, whether its petition is filed voluntarily or involuntarily.

FALSE

Collection float is experienced by the payer and is a delay in the receipt of funds.

FALSE

Collection float results from the lapse between the time that a firm deducts a payment from its checking account ledger and the time that funds are actually withdrawn from its accounts.

FALSE

Commercial finance companies are lending institutions that make only unsecured loans-both short-term and long-termto businesses.

FALSE

Commercial paper is a form of financing that consists of short-term, secured promissory notes issued by firms with a high credit standing.

FALSE

Commercial paper is a short-term loan issued by commercial banks that have variable yields based on size, maturity, and prevailing money market conditions.

FALSE

Contingent securities such as common stocks and bonds affect the reporting of a firmʹs earnings per share (EPS).

FALSE

Contrary to convertibles, warrants provide for the injection of additional equity capital into the firm at some future date.

FALSE

Controlled disbursing is a method of consciously anticipating the mail, processing, and clearing time involved with the payment process.

FALSE

Current U.S. tax laws require the separation of financial statements of subsidiaries and the operating results for some subsidiaries are excluded from the parent entirely for some countries such as China and India.

FALSE

Disagreements among European Union country members over the disposition of garbage and manufacturing refuse generated primarily by Eastern European countries have come to be known as the Euro Trash Issue.

FALSE

Disbursement float is experienced by the payee and is a delay in the actual withdrawal of funds.

FALSE

Disbursement float results from the delay between the time that a payer or customer deducts a payment from its checking account ledger (disburses it) and the time that the payee or vendor actually receives these funds in a spendable form.

FALSE

Exchange rate risk hedging tools include Monte Carlo swaps, synthetic insurance contracts, and inventory swaps.

FALSE

Factoring accounts receivable is a relatively expensive source of unsecured short-term funds.

FALSE

Factoring accounts receivable is a relatively inexpensive source of unsecured short-term funds that allows firms to turn accounts receivable immediately into cash.

FALSE

Factoring accounts receivable is a relatively inexpensive source of unsecured short-term funds.

FALSE

Federal agency issues are obligations of the U.S. Treasury and are readily accepted as low-risk securities.

FALSE

Financial mergers involve merging firms in order to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.

FALSE

Fixed assets are the most desirable short-term loan collateral since they normally have a longer life, or duration, than the term of the loan.

FALSE

Fluctuations in foreign exchange markets can affect foreign revenues and profits of a multinational company, but they have no impact on its overall value.

FALSE

For firms that are in a financial position to take a cash discount, it is generally a more financially sound decision not to take the discount if the terms offered are 2/10 net 30.

FALSE

Foreign bond is an international bond that is sold primarily in countries other than the country of the currency in which the issue is denominated.

FALSE

Generally the increment above the prime rate on a floating-rate loan will be higher than on a fixed-rate loan of equivalent risk because the lender bears higher risk with a floating-rate loan.

FALSE

Greater control over the acquisition of new materials or the distribution of finished goods is an economic benefit of horizontal merger.

FALSE

If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is increased.

FALSE

If a lessee leases (under a financial lease) an asset that subsequently becomes obsolete, it can require the lessor to replace it with an equally productive asset in real term over the remaining term of the lease.

FALSE

If one borrows $1,000 at 8 percent interest on a discount basis, the effective rate of interest is about 9.7 percent.

FALSE

If possible, it would be a more financially sound decision to pay employees once every two weeks rather than once a month.

FALSE

If the firmʹs credit period in decreased, the sales volume can be expected to increase, the investment in accounts receivable can be expected to increase, and the bad debt expenses can be expected to increase.

FALSE

In 2003-2004, the United States signed a regional trade pact with south pacific countries including the Philippines, Indonesia, Malaysia called the South Pacific American Trade Agreement or SPAMTA.

FALSE

In a voluntary settlement, composition is an arrangement in which the creditor committee replaces the firmʹs operating management and operates the firm until all claims have been settled.

FALSE

In analyzing an applicantʹs creditworthiness, the credit manager typically gives primary attention to two of the five Cʹs of credit collateral and condition since they represent the most basic requirements for extending credit to an applicant.

FALSE

In credit terms, EOM (End-of-Month) indicates that the accounts payable must be paid by the end of the month in which the merchandise has been purchased.

FALSE

In general, an international bond is one that is initially sold in the country of the borrower and, then, often distributed in several countries.

FALSE

In general, the market value of a convertible security is likely to be less than its straight value or conversion value.

FALSE

In international trade when a U.S. company sells a product in France, the U.S. company experiences an exchange rate gain if the franc depreciates against the dollar before the U.S. exporter collects on its accounts receivable.

FALSE

In pledging accounts receivable, the percentage advanced against the adjusted collateral is determined by the borrower based on its overall evaluation of the quality of the acceptable receivables and the expected cost of their liquidation.

FALSE

In the broadest sense, activities involving expansion or contraction of a firmʹs operations or changes in its assets or ownership structure are called corporate maneuvering.

FALSE

Inventory is attractive as collateral since it normally has a market value greater than its book value, which is used to establish its value as collateral.

FALSE

Leasing is considered a source of financing provided by the lessee to the lessor.

FALSE

Like business bankruptcy and business failure, divestiture is most often undertaken to relieve pressure by creditors such as bondholders and banks due to the firmʹs relatively high debt levels.

FALSE

Lines of credit are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

FALSE

Mail float is the delay between the deposit of a check by a payee and the actual availability of the funds.

FALSE

Methods of divestiture include the sale of a product line to another firm, the sale of a unit to existing management, the donation of a unit to a charity, and the liquidation of assets.

FALSE

Micro political risk is the risk faced by all foreign firms in a host country related to political change, revolution, and the adoption of new policies of a government that may result in changes in ownership structure, closure or expropriation.

FALSE

Most stock purchase warrants are non-detachable, which means that the bondholders must keep the warrants until they mature.

FALSE

NAFTA is a treaty establishing free trade and open markets between Europe and the United States.

FALSE

NAFTA is an international financial market that provides for borrowing and lending currencies outside their country of origin.

FALSE

National entry control systems are comprehensive rules, regulations, and immigration policies introduced by xenophobic host governments to regulate inflows of foreign workers.

FALSE

Nonmanufacturing firms are more likely to have positive cash conversion cycles; they generally carry smaller, faster-moving inventories and often sell their products for cash.

FALSE

Notes payable can be either spontaneous secured or spontaneous unsecured financing and result from the normal operations of the firm.

FALSE

One advantage of leasing is that in many cases, the return to the lessor is quite high so the firm in need of the asset might be better off borrowing to purchase it.

FALSE

One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively high level of debt and a low level of relatively liquid assets that could be used as loan collateral.

FALSE

One of the key inputs to the final credit decision is the credit analystʹs subjective judgment of a firmʹs creditworthiness since it can provide a better feel of a firmʹs operation than any quantitative figures.

FALSE

One of the major reasons for not attaching a warrant is that investors require the issuing firm to pay a higher interest rate if a warrant is attached than if it is not.

FALSE

One of the responsibilities of the Debtor in Possession (DIP) is the liquidation of the firmʹs assets.

FALSE

Playing the float involves the strategic use of mailing points and bank accounts to lengthen mail float and clearing float, respectively.

FALSE

Pledges of accounts receivable are normally made on a notification basis because the lender does not trust the borrower to collect the pledged account receivable and remit these payments as they are received.

FALSE

Popular takeover defense methods include white knights, poison pills, greenmail, financial sabotage, and shark repellents.

FALSE

Primary motives for merging include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and acquiring new upper-level management personnel.

FALSE

Renewal options are provisions frequently included in both operating and financial leases that allow the lessee to purchase the leased asset at maturity.

FALSE

Renewal options normally require the lessor to maintain the assets and to make insurance and tax payments.

FALSE

Self-liquidating loans are mainly invested in productive assets (i.e., fixed assets) which provide the mechanism through which the loan is repaid.

FALSE

Since Treasury bills are issued in bearer form, they are considered to be virtually risk-free.

FALSE

Since the purchaser of a convertible security is given an opportunity to become a common stockholder and to share in the firmʹs future success, convertibles can normally be sold with higher interest rates than nonconvertibles.

FALSE

Spontaneous liabilities such as accounts payable and accruals represent a use of financing that arise from the normal course of business.

FALSE

Spontaneous liabilities such as accounts payable and notes payable represent a source of financing that arise from the normal course of business.

FALSE

Subsidiary companies simply are corporations that have voting control of one or more other corporations and the companies they control are often referred to as holding companies.

FALSE

Tangshan Mining borrowed $10,000 for one year under a line of credit with a stated interest rate of 8 percent and a 10 percent compensating balance. Normally, the firm keeps a balance of about $800 in its checking account. Based on this information, the effective annual interest rate on the loan was 8.89 percent.

FALSE

Tangshan Mining borrowed $10,000 for one year under a revolving credit agreement that authorized and guaranteed the firm access to $20,000. The revolving credit agreement had a stated interest rate of 8 percent and charged the firm a half percent commitment fee on the unused portion of the agreement. Based on this information, the effective annual interest rate on the loan was 9.50 percent.

FALSE

Tangshan Mining issued $10,000 of commercial paper for $9,925 for 60 days. Based on this information, the effective annual rate of interest on the commercial paper would be about 4.19 percent.

FALSE

Technical insolvency occurs when a firmʹs liabilities exceed the fair market value of its assets.

FALSE

The ABC system is an inventory management technique for determining the optimal order quantity for an item of inventory.

FALSE

The Mercosur Group is a major European trading bloc made up of former Soviet bloc countries in Eastern Europe.

FALSE

The U.S. approaches used in hostile takeovers is an affective method of changing corporate control and used in many areas of the world including Great Britain, China, and Japan.

FALSE

The aggressive financing strategy is a strategy by which the firm finances all projected funds requirements with long-term funds and uses short-term financing only for emergencies or unexpected outflows.

FALSE

The aggressive financing strategy is a strategy by which the firm finances its current assets with short-term funds and its fixed assets with long-term funds.

FALSE

The average investment in accounts receivable is equal to the firmʹs total variable cost of annual sales divided by its average collection period.

FALSE

The basic difficulty in applying the capital budgeting approach to the acquisition of a going concern is the estimation of initial cash flows and certain risk consideration.

FALSE

The cash conversion cycle is the amount of time that elapses from the point when the firm inputs materials and labor into the production process to the point when cash is collected from the sale of the resulting finished product.

FALSE

The conservative financing strategy is a strategy by which the firm finances at least its seasonal requirements, and possibly some of its permanent requirements, with short-term funds and the balance of its permanent requirements with long-term funds.

FALSE

The conversion feature, which can be part of either a bond or preferred stock, permits the firm to raise additional funds at some point in the future by selling common stock, thereby shifting the companyʹs capital structure to a less highly levered position.

FALSE

The conversion price is the value of a convertible security as measured by the market price of the common stock into which it can be converted.

FALSE

The conversion ratio is the ratio at which a convertible security can be exchanged for a nonconvertible security.

FALSE

The conversion value of a bond is the minimum price at which a convertible bond would be traded.

FALSE

The cost of marginal bad debts is found by multiplying the firmʹs opportunity cost by the difference between the level of bad debts before and after the relaxation of credit standards.

FALSE

The cost of marginal investment in accounts receivable can be calculated by finding the difference between the average investment in accounts receivable before and after the introduction of the changes in credit standards.

FALSE

The creditor in possession in a Chapter 12 bankruptcy proceeding is responsible for valuing the firm both in terms of its liquidation value and as a going concern.

FALSE

The discount rate is the lowest rate of interest charged by the nationʹs leading banks on business loans to their most important and reliable business borrowers.

FALSE

The economic order quantity (EOQ) is the order quantity which minimizes the carrying costs per unit per period.

FALSE

The exercise price or option price of a warrant is normally set below the market price of the firmʹs stock at the time of issuance.

FALSE

The firmʹs operating cycle (OC) is simply the sum of the average age of inventory (AAI) and the average payment period (APP).

FALSE

The foreign direct investment (FDI) is a multi-national corporationʹs transfer of capital, managerial, and technical assets from a host country to its home country.

FALSE

The forward exchange rate is the rate of exchange between two currencies on any given day.

FALSE

The higher cost of unsecured as opposed to secured borrowing is due to the greater risk of default.

FALSE

The increase in bad debts associated with tightening credit standards raises bad debt expenses and has a negative impact on profits.

FALSE

The interest rate on a line of credit is normally stated as a fixed rate-the prime rate plus a percent.

FALSE

The lease arrangement has many more restrictive covenants than those normally included as part of a long-term loan.

FALSE

The lessor is the receiver of the services of the assets under a lease whereas a lessee is the owner of the assets that are being leased.

FALSE

The market premium may be defined as the amount by which the conversion value exceeds its straight value.

FALSE

The market value of a warrant is generally below the theoretical value of the warrant.

FALSE

The more predictable a firmʹs cash inflows, the more net working capital it will need.

FALSE

The operating cycle is the amount of time the firmʹs cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product.

FALSE

The outright sale of accounts receivable at a discount in order to obtain funds is called pledging accounts receivable.

FALSE

The primary causes of business failure are inventory mismanagement, poor marketing campaigns, and corporate theft.

FALSE

The prime rate of interest fluctuates with changing supply-and-demand relationships for short-term funds as well as the risk of the bankʹs business borrowers.

FALSE

The reorder point is an inventory management system that compares production needs to available inventory balances and determines when orders should be placed for various items on the firmʹs bill of materials.

FALSE

The reorder point is the point at which the firm receives orders.

FALSE

The security agreement is the security offered the lender by the borrower, usually in the form of an asset such as accounts receivable or inventory.

FALSE

The spot exchange rate is the rate of exchange between two currencies at some specified future date.

FALSE

The value of a firm measured as the sum of the values of its operating units if each were sold separately is known as a firmʹs part and parcel value.

FALSE

The yields on Treasury bills are generally higher than those on any other marketable securities due to their virtually risk-free nature.

FALSE

To be truly marketable, a security must have three basic characteristics: a ready market, risk-free, and safety of principal.

FALSE

Under a line of credit agreement, a bank may require an annual cleanup, which means that the borrower must pay off all its outstanding debts to all lenders for a certain number of days during the year.

FALSE

Under conservative financing strategy, short-term financing is used only to finance an emergency, an unexpected outflow of funds, and the variable portion of the firmʹs current assets.

FALSE

Under the floating inventory lien, the borrower is free to sell the merchandise and is expected to remit the amount lent against each item, along with accrued interest, to the lender immediately after the sale. The lender then releases the lien on the appropriate item.

FALSE

When implementing the cash management strategies, a firm should take care to avoid having a large number of inventory stockouts, to avoid losing the use of its cash by collecting its accounts receivable using high-pressure collection techniques, and to avoid damaging the firmʹs credit rating by overstretching accounts payable.

FALSE

When more units of a foreign currency are required to buy one dollar, the currency is said to have appreciated with respect to the dollar.

FALSE

Working capital represents refers to a firmʹs long term capital.

FALSE

Zero-balance accounts are checking accounts in which a zero balance is maintained and the bank automatically covers all checks presented against the accounts.

FALSE

.2.6) If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is reduced.

TRUE

1.28) Primary motives for merging include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and defense against takeovers.

TRUE

A bankerʹs acceptance is a low-risk security because at least two, and sometimes three, parties may be liable for its payment at maturity.

TRUE

A capitalized lease is a financial lease that has the present value of all its payments included as an asset and corresponding liability on the firmʹs balance sheet.

TRUE

A compensating balance, which is a required checking account balance equal to a certain percentage of the borrowerʹs short-term unsecured loan, may not only forces the borrower to be a good customer of the bank but may also raise the interest cost to the borrower, thereby increasing the bankʹs earnings.

TRUE

A conglomerate merger is a merger combining firms in unrelated businesses.

TRUE

A decrease in collection efforts will result in an increase in sales volume, an increase in the investment in accounts receivable, an increase in bad debt expenses, and a decrease in collection expenditures.

TRUE

A derivative security is neither debt nor equity but instead derives its value from an underlying asset.

TRUE

A discount loan is a loan on which interest is paid in advance by deducting it from the loan so that the borrower actually receives less money than is requested.

TRUE

A financial lease is often also referred to as a capital lease.

TRUE

A firm can raise capital by issuing securities such as convertibles and warrants but a firm has nothing to do with the creation of options to raise capital.

TRUE

A firm that is unable to pay its bills as they come due is technically insolvent.

TRUE

A firm that wants to expand or extend its operations in existing or new product areas may avoid many of the risks associated with the design, manufacture, and sale of additional or new product and remove a potential competitor by acquiring a suitable going concern.

TRUE

A floating inventory lien is a lenderʹs claim on the borrowerʹs general inventory as collateral for a secured loan.

TRUE

A floating inventory lien is most attractive when the firm has a stable level of inventory that consists of a diversified group of relatively inexpensive merchandise.

TRUE

A functional currency is the currency of the host country in which a subsidiary primarily generates and expends cash and in which its accounts are maintained.

TRUE

A hybrid security is a form of debt or equity financing that possesses characteristics of both debt and equity.

TRUE

A joint venture is a partnership under which the participants have contractually agreed to contribute specified amounts of money and expertise in exchange for stated proportions of ownership and profit.

TRUE

A line of credit is an agreement between a commercial bank and a business specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time.

TRUE

A lockbox system is used to reduce collection float by shortening all three basic float components (i.e., mail, processing, and clearing).

TRUE

A major decision confronting the business firm when purchasing marketable securities involves a trade-off between the opportunity to earn a return on idle funds during the holding period and the brokerage costs associated with the purchase and sale of marketable securities.

TRUE

A major disadvantage of holding companies is the increased risk resulting from the leverage effect.

TRUE

A method of acquisition in which the acquiring firm exchanges its shares of stock for shares of the target company according to a predetermined ratio is called a stock swap transaction.

TRUE

A multi-national corporation (MNC) can give some protection to international cash flows by reducing its liabilities if the currency is appreciating, or by reducing its financial assets if the currency is depreciating.

TRUE

A negative cash conversion cycle (CCC) means the average payment period (APP) exceeds the operating cycle (OC).

TRUE

A popular extension of materials requirement planning is manufacturing resource planning II, which integrates data from numerous areas such as finance, accounting, marketing, engineering, and manufacturing using a sophisticated computer system.

TRUE

A positive cash conversion cycle means that the firm must obtain financing to support the cash conversion cycle.

TRUE

A spin-off is a form of divestiture in which an operating unit becomes an independent company by issuing shares in it on a pro rata basis to the parent companyʹs shareholders.

TRUE

A stock swap transaction is an acquisition method in which the acquiring firm exchanges its shares for shares of the target company according to a predetermined ratio.

TRUE

A stock-purchase warrant gives the holder the right to purchase a certain number of shares of common stock at a specified price over a certain period of time.

TRUE

A tender offer is a formal offer to purchase a given number of shares of a firmʹs stock at a specified price.

TRUE

A two-tier offer is a tender offer in which the terms offered are more attractive to those who tender shares early.

TRUE

Accounting exposure is the risk resulting from the effects of changes in foreign exchange rates on the translated value of a firmʹs financial statement accounts denominated in a given foreign currency.

TRUE

Accounts payable result from transactions in which merchandise is purchased but no formal note is signed to show the purchaserʹs liability to the seller.

TRUE

Accruals are liabilities for services received for which payment has yet to be made.

TRUE

Acquisitions are especially attractive when the acquiring firmʹs stock price is high, because fewer shares must be exchanged to acquire the firm.

TRUE

Although more expensive than a line of credit, a revolving credit agreement can be less risky from the borrowerʹs viewpoint.

TRUE

An attractive candidate for acquisition through leveraged buyout must have a good position in its industry with a solid profit history and reasonable expectation for growth.

TRUE

An increase in accounts receivable turnover due to an increase in collection efforts will decrease the firmʹs marginal investment in accounts receivable.

TRUE

An increase in current assets increases net working capital, thereby reducing the risk of technical insolvency.

TRUE

An operating lease need not be capitalized, but its basic features must be disclosed in a footnote to the financial statements.

TRUE

An option is a security that is neither debt nor equity but derives its value from an underlying asset that is often another security.

TRUE

An overhanging issue is a convertible security that cannot be forced into conversion by using the call feature.

TRUE

Assuming that the firm has done all it can to stimulate customers to pay promptly and to select vendors offering the most attractive and flexible credit terms, it can further speed collections and slow disbursements by taking advantage of the ʺfloatʺ existing in the collection and payment systems.

TRUE

Because a security is first sold with a conversion price above the current market price of the firmʹs stock, conversion is initially not attractive.

TRUE

Because of their access to the international bond and equity markets, MNCs may have lower costs of various sources of long-term financing, thus resulting in differences between the capital structures of these firms and those of purely domestic companies.

TRUE

Both theory and empirical evidence indicate that the capital structures of MNCs differ from those of purely domestic firms.

TRUE

By increasing collection expenditures, the firm can decrease bad debt losses up to a point, beyond which bad debts can not be economically reduced. These inescapable bad debts are attributed to the firmʹs credit policy.

TRUE

By using convertible bonds, the issuing firm can temporarily raise debt, which is typically less expensive than common stock, to finance projects.

TRUE

Call options are purchased with the expectation that the market price of the underlying security will rise while put options are purchased with the expectation that the market price of the underlying security will fall.

TRUE

Cash management techniques are aimed at minimizing the firmʹs financing requirements by taking advantage of certain imperfections in the collection and payment system.

TRUE

Commercial banks and other institutions do not normally consider secured loans less risky than unsecured loans, and therefore require higher interest rates on them.

TRUE

Commercial finance companies usually charge a higher interest on secured short-term loans than commercial banks because the finance companies generally end up with higher-risk borrowers.

TRUE

Common stock equivalents are all contingent securities that derive a major portion of their value from their conversion privileges or common stock characteristics.

TRUE

Contingent securities such as convertibles, warrants, and stock options affect the reporting of a firmʹs earnings per share (EPS).

TRUE

Controlled disbursing involves the strategic use of mailing points and bank accounts to lengthen mail float and clearing float, respectively.

TRUE

Convertibles can be used as a form of deferred common stock financing.

TRUE

Convertibles can normally be sold with lower interest rates than non-convertibles.

TRUE

Converting a convertible security is beneficial when the market price of the common stock into which it can be converted is greater than its conversion price.

TRUE

Countries that experience high inflation rates will see their currencies decline in value relative to the currencies of countries with lower inflation rates.

TRUE

Credit analysts usually analyze an applicantʹs creditworthiness by using the dimensions of credit such as character, capacity, capital, collateral, and conditions.

TRUE

Current U.S. tax laws require the consolidation of financial statements of subsidiaries according to the percentage of ownership by the parent company.

TRUE

Derivatives are used by corporations as a useful tool for managing certain aspects of the firmʹs risk.

TRUE

Diluted earnings per share (EPS) are found by adjusting basic EPS for the impact of converting all convertibles and exercising all warrants and options that would have diluting effects on the firmʹs earnings.

TRUE

Economic exposure is the risk resulting from the effects of changes in foreign exchange rates on the firmʹs value.

TRUE

Eurodollar deposits are deposits of currency that are not native to the country in which the bank is located.

TRUE

Exchange rate risk hedging tools include forward contracts, options, interest rate swaps, currency swaps, and hybrid securities.

TRUE

FASB No. 52 requires U.S. multinationals first to convert the financial statement accounts of foreign subsidiaries into their functional currency and then to translate the accounts into the parent firmʹs currency using the all-current-rate method.

TRUE

Factoring accounts receivable is a relatively expensive source of secured short-term funds that allows firms to turn accounts receivable immediately into cash.

TRUE

Factoring accounts receivable is not a form of secured short-term borrowing. It entails the sale of accounts receivable at a discount to obtain needed short-term funds.

TRUE

Federal agency issues are low-risk securities issued by government agencies but not guaranteed by the U.S. Treasury.

TRUE

Firmsʹ motives to merge include growth or diversification, synergy, fundraising, tax considerations, and defense against takeover.

TRUE

Float exists when a payee has received funds in a spendable form but these funds have not been withdrawn from the account of the payer.

TRUE

For firms that are able to raise funds through the sale of commercial, it is generally cheaper than if the same firm were to borrow from a commercial bank.

TRUE

For firms that are in a financial position to take a cash discount, it is generally a more financially sound decision to take the discount if the terms offered are 2/10 net 30.

TRUE

Generally, lenders recognize that holding collateral can reduce losses if the borrower defaults, but the presence of collateral has no impact on the risk of default.

TRUE

Greenmail is a takeover defense under which the target firm repurchases a large block of stock at a premium from one or more shareholders in order to end a hostile takeover attempt by those shareholders.

TRUE

Hedging strategies are techniques used to offset or protect against risk; in the international context these include borrowing or lending in different currencies, undertaking contracts in the forward, futures, and/or options markets, and also swapping assets/liabilities with other parties.

TRUE

Holding companies simply are corporations that have voting control of one or more other corporations and the companies they control are often referred to as subsidiaries.

TRUE

If a lease meets any of the FASB Standard No. 13 criteria, it should be shown as a capitalized lease, meaning the present value of all its payments should be included as an asset and corresponding liability on the firmʹs balance sheet.

TRUE

If one borrows $1,000 at 8 percent interest on a discount basis, the effective rate of interest is about 8.7 percent.

TRUE

If possible, it would be a more financially sound decision to pay employees once a month rather than once every two weeks.

TRUE

If the P/E paid is greater than the P/E of the acquiring company, on a postmerger basis the target firmʹs EPS increases and the acquiring firmʹs EPS decreases.

TRUE

If the cash discount period is increased, the firmʹs investment in accounts receivable due to discount takers still getting cash discounts but paying later is expected to increase.

TRUE

If the cash discount period is increased, the firmʹs investment in accounts receivable due to non-discount takers now paying earlier is expected to decrease.

TRUE

If the firm relaxes its credit standards, the volume of accounts receivable increases and so does the firmʹs carrying cost.

TRUE

If the level of bad debt attributable to credit policy is relatively constant, increasing collection expenditures can be expected to reduce bad debts.

TRUE

In 2003-2004, the United States signed a regional trade pact with the Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua called the Central American Free Trade Agreement or CAFTA.

TRUE

In EOQ model, the average inventory is defined as the order quantity divided by 2.

TRUE

In a Chapter 7 liquidation bankruptcy proceeding, the order of priority of satisfying claims is secured creditors, unsecured creditors, and then equity holders.

TRUE

In a financial lease, the lessor must receive more than the assetʹs purchase price in order to earn its required return. However, in an operating lease, the total payments made by the lessee to the lessor are generally less than the lessorʹs initial cost of the leased asset.

TRUE

In case of an overhanging issue, if the firm were to call the issue, the bondholders would accept the call price rather than convert the bonds.

TRUE

In comparison to convertibles, the exercise of a warrant shifts the firmʹs capital structure to a less highly levered position.

TRUE

In doing business in foreign countries, financing operations in the local market not only improves the companyʹs business ties to the host community but also minimizes exchange rate risk.

TRUE

In exchange for the tailor-made maturity date provided by the repurchase agreement, the bank or security dealer provides a return slightly below that obtainable through outright purchase of similar marketable securities.

TRUE

In general, the greater a firmʹs current assets relative to its short-term obligations, the better able it will be to pay its bills as they come due.

TRUE

In general, the market value of a convertible security is likely to be greater than its straight value or conversion value.

TRUE

In giving up a cash discount, the amount of the discount that is given up is the interest being paid by the firm to keep its money by delaying payment for a number of days.

TRUE

In the ABC system of inventory management, the red-line method or system could be utilized to control C items.

TRUE

In the EOQ model, if carrying costs increase while all other costs remain unchanged, the number of orders placed would be expected to increase.

TRUE

In the EOQ model, the total cost is minimized at the point where the order costs and carrying costs are equal.

TRUE

In the broadest sense, activities involving expansion or contraction of a firmʹs operations or changes in its assets or ownership structure are called corporate restructuring.

TRUE

In the case of short-term financing, the forces of supply and demand are among the main factors determining exchange rates in Eurocurrency markets.

TRUE

In the international context, the effective interest rate equals to the nominal rate plus (or minus) any forecast appreciation (or depreciation) of a foreign currency relative to the currency of the MNC parent.

TRUE

In the international context, the nominal interest rate is the stated interest rate charged on financing when only the MNC parentʹs currency is involved.

TRUE

Increased collection expenditures should reduce the investment in accounts receivable and bad debt expenses, increasing profits.

TRUE

Increasing the length of the credit period should increase sales, but both the investment in accounts receivable and bad debt expenses are likely to increase as well.

TRUE

It is not unusual for acquirers in LBOs to be members of the firmʹs existing management team.

TRUE

LBOs are an example of a financial merger undertaken to create a high-debt private corporation with improved cash flow and value.

TRUE

Leasing allows the lessee, in effect, to depreciate land, which is prohibited if the land were purchased.

TRUE

Lines of credit are non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

TRUE

Macro political risk is the risk faced by all foreign firms in a host country related to political change, revolution, and the adoption of new policies of a government that may result in changes in ownership structure, closure or expropriation.

TRUE

Maintenance clauses are provisions normally included in an operating lease that require the lessor to maintain the assets and to make insurance and tax payments.

TRUE

Methods of divestiture include the sale of a product line to another firm, the sale of a unit to existing management, spin-offs, and the liquidation of assets.

TRUE

Most federal agency issues have short maturities and offer slightly higher yields than U.S. Treasury issues having similar maturities.

TRUE

Most stock purchase warrants are detachable, which means that the bondholders may sell the warrant without selling the security to which it is attached.

TRUE

National entry control systems are comprehensive rules, regulations, and incentives introduced by host governments to regulate inflows of foreign direct investment from MNCs and at the same time extract more benefits from their presence.

TRUE

Net working capital can be defined as the portion of the firmʹs current assets financed with long-term funds.

TRUE

Nonrecourse basis is the basis on which accounts receivable are sold to a factor with the understanding that the factor accepts all credit risks on the purchased accounts.

TRUE

Offshore Centers are cities or states that have achieved prominence as major centers for Euromarket business.

TRUE

One advantage of factoring accounts receivable is the ability it gives the firm to turn accounts receivable immediately into cash without having to worry about repayment.

TRUE

One aspect of risk associated with the aggressive strategyʹs maximum use of short-term financing is the fact that changing short-term interest rates can result in significantly higher borrowing costs as the short-term debt is refinanced.

TRUE

One disadvantage of leasing is that in many cases, the return to the lessor is quite high so the firm in need of the asset might be better off borrowing to purchase it.

TRUE

One motive for issuing convertibles is that convertible securities can be issued with far fewer restrictive covenants than nonconvertibles.

TRUE

One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively low level of debt and a high level of relatively liquid assets that could be used as loan collateral.

TRUE

One of the key attributes that makes a firm a good candidate for an LBO is that it has a solid position in the industry with reasonable expectations for future growth.

TRUE

One of the key attributes that makes a firm a good candidate for an LBO is that it has stable and predictable cash flows that are adequate to meet interest and principal payments on the debt and provide adequate working capital.

TRUE

One of the major reasons for attaching a stock purchase warrant is that investors do not require the issuing firm to pay an interest rate as high as on a security that does not have an attached warrant.

TRUE

Operating change restrictions are contractual restrictions that a bank may impose on a firm as part of a line of credit agreement.

TRUE

Options are a special type of security that provides the holder with the right to purchase or sell specified assets at a stated price on or before a set expiration date.

TRUE

Popular takeover defense methods include white knights, poison pills, greenmail, golden parachutes, and shark repellents.

TRUE

Preferred stock is considered a hybrid security because it blends the characteristics of both bond and equity.

TRUE

Processing float is the delay between the receipt of a check by the payee and its deposit in the firmʹs account.

TRUE

Purchase options are provisions frequently included in both operating and financial leases that allow the lessee to purchase the leased asset at maturity.

TRUE

Pyramiding is an arrangement among holding companies wherein one company controls others, thereby causing an even greater magnification of earnings and losses.

TRUE

Renewal options are provisions normally included in an operating lease that grant the lessee the right to re-lease assets at the expiration of the lease.

TRUE

Revolving credit agreements are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

TRUE

Safety stocks are extra inventories that can be drawn down when actual lead times and/or usage rates are greater than expected.

TRUE

Secured short-term financing has specific assets pledged as collateral and appears on the balance sheet as current liabilities.

TRUE

Self-liquidating loans are intended merely to carry the firm through seasonal peaks in financing needs, mainly buildups of accounts receivable and inventory.

TRUE

Short-term financial management is concerned with management of the firmʹs current assets and current liabilities.

TRUE

Since its objective is to minimize inventory investment, a Just-in-Time (JIT) system uses no, or very little, safety stocks.

TRUE

Since operating leases result in the receipt of services from an asset without increasing the assets or liabilities on the firmʹs balance sheet, leasing may result in misleading financial ratios.

TRUE

Since the conversion feature provides the purchaser of a convertible bond with the possibility of becoming a stockholder, convertible bonds are generally a less expensive form of financing than similar-risk nonconvertible or straight bonds.

TRUE

Spontaneous liabilities such as accounts payable and accruals represent a source of financing that arise from the normal course of business.

TRUE

Strategic mergers seek to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.

TRUE

Tangshan Mining borrowed $10,000 for one year under a line of credit with a stated interest rate of 8 percent and a 10 percent compensating balance. Normally, the firm keeps almost no money in its checking account. Based on this information, the effective annual interest rate on the loan was 8.89 percent.

TRUE

Tangshan Mining issued $10,000 of commercial paper for $9,925 for 60 days. Based on this information, the effective annual rate of interest on the commercial paper would be about 4.69 percent.

TRUE

The ACH (automated clearing house) debits are preauthorized electronic withdrawals from the payerʹs account.

TRUE

The Mercosur Group is a major South American trading bloc that includes countries that account for more than half of the total of Latin Americaʹs GDP.

TRUE

The U.S. approaches used in hostile takeovers is practically nonexistent in most other countries throughout the world including continental Europe and Asia.

TRUE

The World Trade Organization has in recent years admitted current and former communist countries as members including the Russian Federation and the Peoples Republic of China.

TRUE

The ability to purchase production inputs on credit allows the firm to partially (or may be even totally) offset the length of time resources are tied up in the operating cycle.

TRUE

The actual ratio of exchange in a stock-exchange acquisition is the ratio of the amount paid per share of the target company to the per-share market price of the acquiring firm.

TRUE

The aggressive financing strategy is risky due to its minimum level of net working capital, high dependency on short-term sources of funds, and the changing short-term interest.

TRUE

The aggressive strategy operates with minimum net working capital since only the permanent portion of the firmʹs current assets is being financed with long-term funds.

TRUE

The all-current-rate method is the method by which the functional currency-denominated financial statements of an MNCʹs subsidiary are translated into the parent companyʹs currency.

TRUE

The cash conversion cycle is the difference between the number of days resources are tied up in the operating cycle and the average number of days the firm can delay making payment on the production inputs purchased on credit.

TRUE

The cash conversion cycle is the total number of days in the operating cycle less the average payment period for inputs to production.

TRUE

The companies controlled by a holding company are normally referred to as its subsidiaries.

TRUE

The conservative strategy is less profitable than the aggressive approach because it requires the firm to pay interest on unneeded funds.

TRUE

The conversion feature permits the firmʹs capital structure to be changed without increasing the total financing.

TRUE

The conversion ratio can be obtained by dividing the par value of the convertible by the conversion price.

TRUE

The cost of giving up a cash discount is the implied rate of interest paid in order to delay payment of an account payable for an additional number of days.

TRUE

The creation of international joint ventures has increased substantially during the past two decades.

TRUE

The debtor in possession in a Chapter 11 bankruptcy proceeding is responsible for valuing the firm both in terms of its liquidation value and as a going concern.

TRUE

The dominant organized options exchange in which options are traded is the Chicago Board Options Exchange (CBOE).

TRUE

The earnings per share of the merged firm are generally above the premerger earnings per share of one firm and below the premerger earnings per share of the other, after making the necessary adjustment for the ratio of exchange.

TRUE

The effect of a decrease in the ratio of current assets to total assets and the effect of an increase in the ratio of current liabilities to total assets are increases in the firmʹs profits and, correspondingly, its risk.

TRUE

The effective interest rate for a discount loan is greater than the loanʹs stated interest rate.

TRUE

The effective interest rate on a bank loan depends on whether interest is paid when the loan matures or in advance.

TRUE

The entire process resulting from a check issue and mail by the payer company to the payee company (i.e., mail float, processing float, and clearing float) is disbursement float to the payer company and is collection float to the payee company.

TRUE

The existence of specific regulations and controls on dollar deposits in the United States, including interest rate ceiling imposed by the government, have contributed to the growth of the Euromarket.

TRUE

The firmʹs credit selection procedures must be established on a sound economic basis that considers the costs of investigating the creditworthiness of a customer and the expected size of its credit purchases.

TRUE

The firmʹs credit standards are the minimum requirements for extending credit to a customer.

TRUE

The functional currency is the currency of the economic environment in which a business entity primarily generates and expends cash, and in which its accounts are maintained.

TRUE

The goal of short-term financial management is to manage each of the firmʹs current assets and current liabilities in order to achieve a balance between profitability and risk that contributes to the firmʹs value.

TRUE

The higher yields on Eurodollar deposits compared with nearly all other marketable securities, governmental or nongovernmental, with similar maturities are attributable to (1) the fact that the depository banks are generally less closely regulated than U.S. banks and are therefore more risky, and (2) some foreign exchange risk may be present.

TRUE

The interest paid by the issuer of commercial paper is determined by the size of the discount and the length of time to maturity.

TRUE

The interest rate charged on secured short-term loans is typically higher than the rate on unsecured short-term loans.

TRUE

The interest rates offered in the Euromarket on the U.S. dollar are greatly affected by the prime rate inside the United States.

TRUE

The lessee is the receiver of the services of the assets under a lease whereas a lessor is the owner of the assets that are being leased.

TRUE

The major attraction of a line of credit from the bankʹs point of view is that it eliminates the need to examine the credit worthiness of a customer each time it borrows money.

TRUE

The market for a security should have both breadth and depth in order to minimize the amount of time required to convert it into cash.

TRUE

The motive for divestiture is often to get rid of a product line in order to generate cash for expansion of other product lines.

TRUE

The net effect of changes in the cash discount period is quite difficult to analyze because they are directly attributable to the three forces affecting the firmʹs investment in accounts receivable.

TRUE

The official melding of the national currencies of the European Union into one currency, the Euro, created the European Monetary Union in 2002.

TRUE

The operating cycle is the recurring transition of a firmʹs working capital from cash to inventories and inventories to receivables and back to cash.

TRUE

The option buyer who expects a stock price to decline will purchase a put option.

TRUE

The overriding goal for merging is the maximization of the ownersʹ wealth as reflected in the acquirerʹs share price.

TRUE

The owners of a holding company can control significantly larger amounts of assets than they could acquire through mergers.

TRUE

The percentage advance constitutes the principal of the secured loan and varies not only according to the type and liquidity of collateral but also according to the type of security interest being taken.

TRUE

The permanent financial need of a firm is the financing requirements for the firmʹs fixed assets plus the permanent portion of the firmʹs current assets.

TRUE

The presence of contingent securities such as warrants and stock options affects the reporting of the firmʹs earnings per share.

TRUE

The primary causes of business failure are mismanagement, poor economic conditions, and corporate maturity.

TRUE

The ratio of exchange in market price indicates the market price per share of the acquiring firm paid for each dollar of market price per share of the target firm.

TRUE

The risk of the conservative financing requirements is low because of its high level of net working capital, and the fact that the strategy does not require the firm to use any of its limited short-term borrowing capacity.

TRUE

The risk to a U.S. importer with foreign-currency-denominated accounts payable is that the dollar will depreciate.

TRUE

The sale of a unit of a firm to existing management is often achieved through a leveraged buyout.

TRUE

The selling of some of a firmʹs assets for various strategic motives is called divestiture.

TRUE

The stock-purchase warrant permits the firm to raise additional funds at some point in the future by selling common stock and thereby shifting the firmʹs capital structure to a less highly levered position.

TRUE

The striking price is the price at which the holder of a call option can buy a specified amount of stock at any time prior to the optionʹs expiration date.

TRUE

The synergy of mergers is the economies of scale resulting from the merged firmsʹ lower overhead.

TRUE

The tax loss carryforward benefits can be used in mergers but cannot be used in the formation of holding companies.

TRUE

The three basic types of risk associated with international cash flows are 1) business and financial risks, 2) inflation and foreign exchange risks, and 3) political risks.

TRUE

The turnover of accounts receivable can be calculated by dividing annual sales by accounts receivable.

TRUE

The value of a firm measured as the sum of the values of its operating units if each were sold separately is known as a firmʹs breakup value.

TRUE

The warrant premium depends largely on investor expectations and the ability of investors to get more leverage from the warrants than from the underlying stock.

TRUE

The yields on negotiable certificates of deposit are typically above those on U.S. Treasury issues and comparable to the yields on commercial paper with similar maturities.

TRUE

Too much investment in current assets reduces firm profitability, whereas too little investment in current assets increases the risk of not being able to pay debts as they come due.

TRUE

Under a line of credit agreement, a bank may retain the right to revoke the line if any major changes occur in the firmʹs financial condition or operations.

TRUE

Under recapitalization, debts are generally exchanged for equity or the maturities of existing debts are extended.

TRUE

Unlike business bankruptcy and business failure, divestiture is often undertaken for positive motives such as to generate cash for the expansion of product lines, to get rid of poorly performing operations, to streamline the company, or to restructure the business that is consistent with the firmʹs strategic goals.

TRUE

Unlike the spontaneous sources of unsecured short-term financing, bank loans are negotiated and result from deliberate actions taken by the financial manager.

TRUE

When a firm becomes bankrupt or is reorganized, the maximum claim of lessors against the corporation is three years of lease payments.

TRUE

When a firm initiates or increases a cash discount, the net effect on the accounts receivable investment is difficult to determine because the nondiscount takers paying earlier will reduce the accounts receivable investment, while the new customer accounts will increase this investment.

TRUE

When a firmʹs cash conversion cycle is negative, the firm should benefit by being able to use the financing provided by the suppliers of its production inputs to help support aspects of the business other than just the operating cycle.

TRUE

When the market price of the common stock exceeds the conversion price, the conversion (or stock) value exceeds the par value of the convertible security.

TRUE

While, unlike convertible securities, warrants cannot be called, their limited life stimulates holders to exercise them when the exercise price is below the market price of the firmʹs stock.

TRUE

With the ACH (automated clearing house) credits, disbursement float is sacrificed because ACH transactions immediately draw down the companyʹs payroll account on pay day.

TRUE

The Euromarket is the international financial market that provides for borrowing and lending currencies outside their country of origin.

TRUE Topic: The Euromarket

The World Trade Organization is a new international body established to police world trading practices and to mediate disputes between member countries.

Exam 4

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