BEC Test 2
9. Bonds Payable, which mature in 10 years, would be included as part of a firm's
a. Financial Structure: Yes, Capital Structure: Yes b. Financial Structure: Yes, Capital Structure: No c. Financial Structure: No, Capital Structure: Yes d. Financial Structure: No, Capital Structure: No
9. Which one of the following would not be considered a means of long-term financing?
a. Financial lease b. Common Stock c. Trade accounts payable d. Bonds payable
9. Nexco, Inc. is considering factoring its accounts receivable. Factorco, Inc. has offered the following terms for accounts receivable due in 30 days: Value of receivables to be held in reserve for contingencies 10% Following costs are deducted at time accounts are factored: Interest rate on amounts provided 12% Factor fee on total receivables factored 2% If Nexco factors $200,000 of its accounts receivable due in 30 days with Factorco and, during that 30 days, $10,000 of those accounts receivable are reversed because the related goods were return or allowances were granted, which one of the following is the amount that Nexco will receive from Factorco at the end of the 30 day period?
a. $-0- (no amount) b. $9,800 c. $10,000 d. $19,600
9. A company has $1,500,000 of outstanding debt and $1,000,000 of outstanding common equity. Management plans to maintain the same proportions of financing from each source if additional projects are undertaken. If the company expects to have $60,000 of retained earnings available for reinvestment in new projects in the coming year, what dollar amount of new investments can be undertaken without issuing new equity?
a. $0 b. $24,000 c. $90,000 d. $150,000
9. Assume a company has gone bankrupt and will be liquidated. After liquidating the assets and covering tax liabilities, administration fees, and wage expenses, the following claims remain Notes payable $10,000,000 Unsecured bank loans 4,000,000 Subordinated debentures 6,000,000 There is only $10,000,000 available to pay these claims. How much will be allocated to subordinated debentures?
a. $0 b. $3,000,000 c. $4,000,000 d. $6,000,000
9. Nexco, Inc. is considering factoring its accounts receivable. Factorco, Inc. has offered the following terms for accounts receivable due in 30 days: Value of receivables to be held in reserve for contingencies 10% Following costs are deducted at time accounts are factored: Interest rate on amounts provided before deducting interest (annual rate) 12% Factor fee on total receivables factored 2% If Nexco plans to factor $200,000 of accounts receivable due in 30 days, which one of the following is the amount it will receive from Factorco at the time the accounts are factored?
a. $154,880 b. $174,240 c. $176,000 d. $196,000
9. Which of the following formulas should be used to calculate the historic economic rate of return on common stock?
a. (Dividends + change in price) divided by beginning price. b. (Net income - preferred dividend) divided by common shares outstanding. c. Market price per share divided by earnings per share. d. Dividends per share divided by market price per share.
9. Which one of the following bond issues, with different terms and stated rates of interest, would have the highest interest rate risk, all other things being equal?
a. 10-year, 4% bonds. b. 10-year, 6% bonds. c. 30-year, 4% bonds. d. 20-year, 4% bonds.
9. DQZ Telecom is considering a project for the coming year that will cost $50,000,000. DQZ plans to use the following combination of debt and equity to finance the investment: • Issue $15,000,000 of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 1.5% of par. The after-flotation cost yield is 8.08%. • Use $35,000,000 of funds generated from earnings. • The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%. Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the weighted-average cost of capital.
a. 10.5% b. 8.5% c. 9.5% d. 6.3%
9. Whipco has determined that its pre-tax cost of preferred stock is 12%. If its tax rate is 30%, which one of the following is its after-tax cost of preferred stock?
a. 15.6% b. 12.0% c. 8.4% d. 3.6%
9. If a firm purchases raw materials from its supplier on a 2/10, net 40, cash discount basis, the equivalent annual interest rate (using a 360-day year) of forgoing the cash discount and making payment on the 40th day is
a. 2% b. 18.36% c. 24.49% d. 36.72%
9. Alpha Company borrowed $20,000 from High Bank, giving a one-year note. The terms of the note provided for 6% interest and required a 10% compensating balance. Which one of the following is the effective rate of interest on the loan?
a. 4.0% b. 6.0% c. 6.7% d. 10.0%
9. A company has an outstanding one-year bank loan of $500,000 at a stated interest rate of 8%. The company is required to maintain a 20% compensating balance in its checking account. The company would maintain a zero balance in this account if the requirement did not exist. What is the effective interest rate of the loan?
a. 8% b. 10% c. 20% d. 28%
9. DQZ Telecom is considering a project for the coming year that will cost $50,000,000. DQZ plans to use the following combination of debt and equity to finance the investment: • Issue $15,000,000 of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 1.5% of par. The after-flotation cost yield is 8.08%. • Use $35,000,000 of funds generated from earnings. • The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%. The before-tax cost of DQZ's planned debt financing, net of flotation costs, in the first year is
a. 8.08% b. 10% c. 7.92% d. 8%
9. The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate is 14%. The corporate tax rate is 30%. What is the firm's net cost of debt?
a. 8.4% b. 9.8% c. 12% d. 14%
9. Which one of the following statements correctly compares bond financing alternatives?
a. A bond with a call provision typically has a lower yield to maturity than a similar bond without a call provision. b. A convertible bond must be converted to common stock prior to its maturity. c. A call provision is usually considered detrimental to the investor. d. A sinking fund prohibits the firm from redeeming a bond issue prior to its final maturity
9. Which of the following corporate characteristics would favor debt financing versus equity financing?
a. A high tax rate b. A high debt-to-equity ratio c. Low aversion to risk d. Below-average stock issuing costs
7. Regarding financial resources, financial management is concerned with the efficiency and effectiveness of which of the following?
a. Acquisition of financial resources (Yes), use of financial resources (Yes) b. Acquisition of financial resources (Yes), use of financial resources (No) c. Acquisition of financial resources (No), use of financial resources (Yes) d. Acquisition of financial resources (No), use of financial resources (No)
9. The cost of debt most frequently is measured as
a. Actual interest rate b. Actual interest rate adjusted for inflation c. Actual interest rate plus a risk premium d. Actual interest rate minus tax savings
9. Serial bonds are attractive to investors because
a. All bonds in the issue mature on the same date. b. The yield to maturity is the same for all bonds in the issue. c. Investors can choose the maturity that suits their financial needs. d. The coupon rate on these bonds is adjusted to the maturity date.
9. The term "financial structure" refers to which one of the following?
a. All debt b. All equity c. All debt and equity d. All long-term debt and equity
9. Which one of the following factors might cause a firm to increase the debt in its financial structure?
a. An increase in the corporate income tax rate. b. Increased economic uncertainty. c. An increase in the federal funds rate. d. An increase in the price-earnings ratio.
9. Bander Co. is determining how to finance some long-term projects. Bander has decided it prefers the benefits of no fixed charges, no fixed maturity date, and an increase in the credit-worthiness of the company. Which of the following would best meet Bander's financing requirements?
a. Bonds b. Common Stock c. Long-Term Debt d. Short-Term Debt
9. Bander Co. is determining how to finance some long-term projects. Bander has decided it prefers the benefits of no fixed charges, no fixed maturity date, and an increase in the creditworthiness of the company. Which of the following would best meet Bander's financing requirements?
a. Bonds b. Common Stock c. Long-term debt d. Short-term debt
9. Components of long-term financing would be part of
a. Capital Structure: Yes; Financial Structure: Yes b. Capital Structure: Yes; Financial Structure: No c. Capital Structure: No; Financial Structure: Yes d. Capital Structure: No; Financial Structure: No
9. Which one of the following statements concerning the relationship between the concepts and measurement of capital structure and financial structure of a firm is correct?
a. Capital structure and financial structure are the same concepts and measurements b. The concept and measurement of capital structure includes the concept and measurement of financial structure. c. The concept and measurement of financial structure includes the concept and measurement of capital structure. d. The concept and measurement of capital structure are not related to the concept and measurement of financial structure.
7. Which one of the following would be considered a long‐term financial management activity or concern?
a. Cash management. b. Dividend policy management. c. Inventories management. d. Accounts payable management.
9. The degree of operating leverage (DOL) is
a. Constant at all levels of sales. b. A measure of the change in earnings available to common stockholders associated with a given change in operating earnings. c. A measure of the change in operating income resulting from a given change in sales. d. Lower if the degree of total leverage is higher, other things held constant.
9. Preferred and common stock differ in that
a. Failure to pay dividends on common stock will not force the firm into bankruptcy, while failure to pay dividends on preferred stock will force the firm into bankruptcy. b. Common stock dividends are a fixed amount, while preferred stock dividends are not. c. Preferred stock has a higher priority than common stock with regard to earnings and assets in the event of bankruptcy. d. Preferred stock dividends are deductible as an expense for tax purposes while common stock dividends are not.
9. On January 23, Inco Company received from one of its suppliers a statement with terms of "2/10, n/30." Because the statement was misfiled, it was not located for payment until February 5. On which one of the following dates should the bill be paid?
a. February 5. b. February 6. c. February 22. d. February 28.
9. Po Co. plans to use its inventory as collateral for a short-term loan. Which one of the following types of loan agreements with its lender would provide Po Co. the most flexibility in the use of the inventory it pledges as collateral?
a. Field warehouse agreement b. Floating lien agreement c. Chattel mortgage agreement d. Terminal warehouse agreement
9. Which one of the following is a form of inventory secured loan in which the inventory is placed under the control of an independent third party?
a. Floating lien agreement. b. Chattel mortgage agreement. c. Field warehouse agreement. d. Recourse loan agreement.
9. According to the hedging principle (or the principle of self-liquidating debt), in making decisions concerning the maturity structure of an entity's financing, which one of the following guidelines would be most appropriate?
a. Fund a project with short-term benefits by issuing common stock b. Fund a seasonal expansion in inventory by issuing bonds c. Fund a project that will benefit eight years with short-term note d. Fund a permanent expansion in accounts receivable by issuing long-term bones
9. The benefits of debt financing over equity financing are likely to be highest in which of the following situations?
a. High marginal tax rates and few noninterest tax benefits. b. Low marginal tax rates and few noninterest tax benefits. c. High marginal tax rates and many noninterest tax benefits. d. Low marginal tax rates and many noninterest tax benefits.
9. Which of the following statements concerning the use of short-term financing by an entity is/are correct? I. Short-term financing generally offers greater financial flexibility than long-term financing. II. Short-term financing generally has a lower interest rate than long-term financing. III. Short-term financing generally has a lower risk of illiquidity than long-term financing
a. I is only correct b. I and II are correct c. II and III are correct d. I, II, III are correct
9. Which of the following statements concerning short-term financing is/are correct? I. Accounts payable can provide short-term financing. II. Accounts receivable can provide short-term financing. III. Inventory can provide short-term financing.
a. I only b. I and II, only c. I and III, only d. I, II, III
9. Which of the following statements concerning preferred stock is/are generally correct? I. Requires dividends be paid. II. Grants ownership interest. III. Grants voting rights.
a. I only b. II only c. I and II only d. I, II, and III
9. • Which of the following statements concerning common stock is/are generally correct? I.Requires dividends be paid. II. Grants ownership interest. III. Grants voting rights.
a. I only b. II only c. II and III only d. I, II, and III
9. Which of the following statements concerning debenture bonds and secured bonds is/are correct? I. Debenture bonds are likely to have a greater par value than comparable secured bonds. II. Debenture bonds are likely to be of longer duration than comparable secured bonds. III. Debenture bonds are more likely to have a higher coupon rate than comparable secured bonds.
a. I only b. II only c. III only d. I, II, III
9. A bond backed by fixed assets is a(n)
a. Income bond b. Subordinated debenture c. Debenture d. Mortgage bond
9. The market value of a firm's outstanding common shares will be higher, everything else equal, if
a. Investors have a lower required return on equity. b. Investors expect lower dividend growth. c. Investors have longer expected holding periods. d. Investors have shorter expected holding periods.
9. Short-term financing is normally concerned with financing for which one of the following lengths of time?
a. Length of the operating cycle. b. Length of the collection cycle. c. One year or less in length. d. Up to 10 years in length.
9. Which one of the following is a formal legal commitment to extend credit up to some maximum amount to a borrower over a stated period?
a. Letter of credit. b. Revolving credit agreement. c. Line of credit. d. Trade credit.
9. Which one of the following would an importer of goods from a new foreign supplier most likely use to assure the supplier of payment?
a. Line of credit. b. Letter of credit. c. Trade account application. d. Commercial paper.
9. A company has $650,000 of 10% debt outstanding and $500,000 of equity financing. The required return of the equity holders is 15% and there are no retained earnings currently available for investment purposes. If new outside equity is raised, it will cost the firm 16%. New debt would have before-tax cost of 9%, and the corporate tax rate is 50%. When calculating the marginal cost of capital, the company should assign a cost of [List A] to equity capital and [List B] to the after-tax cost of debt financing.
a. List A: 15%; List B: 4.5% b. List A: 15%; List B: 5% c. List A: 16%; List B: 4.5% d. List A: 16%; List B: 5%
9. What impact will the issuing of new preferred stock have on the following for the issuing entity?
a. Long-Term Debt: Increase, Debt- to-Equity Ratio: Increase b. Long-Term Debt: Increase, Debt- to-Equity Ratio: Decrease c. Long-Term Debt: No Change, Debt- to-Equity Ratio: Increase d. Long-Term Debt: No Change, Debt- to-Equity Ratio: Decrease
9. The theory underlying the cost of capital is primarily concerned with the cost of
a. Long-term funds and old funds. b. Short-term funds and new funds. c. Long-term funds and new funds. d. Any combination of old or new, short-term or long-term funds.
9. A firm's target or optimal capital structure is consistent with which one of the following?
a. Maximum earnings per share b. Minimum cost of debt c. Minimum cost of equity d. Minimum weighted-average cost of capital
9. Under which of the following described lease terms would the lessee be responsible during the term of the lease for executory costs associated with the leased asset?
a. Net Lease: Yes, Net-Net Lease: Yes b. Net Lease: Yes, Net-Net Lease: No c. Net Lease: No, Net-Net Lease: Yes d. Net Lease: No, Net-Net Lease: No
9. Long-term financing is normally concerned with financing for which one of the following lengths of time?
a. One-year or less in length. b. One year to 10 years in length. c. One-year or greater in length. d. Ten-years or greater in length.
9. Capital and operating leases differ in that the lessor
a. Only obtains use of the asset under a capital lease. b. Is using the lease as a source of financing only under an operating lease. c. Makes rent payments which are actually installment payments constituting a payment of both principal and interest only under a capital lease. d. Finances the transaction through the leased asset only under a capital lease
9. The market price of a bond issued at a premium is equal to the present value of its principal amount
a. Only, at the stated interest rate. b. And the present value of all future interest payments, at the stated interest rate. c. Only, at the market (effective) interest rate. d. And the present value of all future interest payments, at the market (effective) interest rate.
9. In which one of the following areas is preferred stock most likely to differ from common stock?
a. Ownership status. b. Maturity date. c. Tax deductibility of dividends paid. d. Voting rights.
9. Which of the following uses of accounts receivable, if either, would be considered short-term financing?
a. Pledging Accounts Receivable: Yes, Factoring Accounts Receivable: Yes b. Pledging Accounts Receivable: Yes, Factoring Accounts Receivable: No c. Pledging Accounts Receivable: No, Factoring Accounts Receivable: Yes d. Pledging Accounts Receivable: No, Factoring Accounts Receivable: No
7. Business forecasting can use
a. Quantitative Techniques (Yes), Qualitative Techniques (Yes) b. Quantitative Techniques (Yes), Qualitative Techniques (No) c. Quantitative Techniques (No), Qualitative Techniques (Yes) d. Quantitative Techniques (No), Qualitative Techniques (No)
9. Zero-Coupon bonds...
a. Sell for a small fraction of their face value because their yield is much lower than the market rate. b. Increase in value each year as they approach maturity, providing the owner with the total payoff at maturity. c. Are redeemable in measures of a commodity such as barrels of oil, tons of coal, or ounces of rare metal (e.g., silver). d. Are high-interest-rate, high-risk, unsecured bonds which have been used extensively to finance leveraged buyouts.
9. Bonds payable issued with scheduled maturities at various dates are called
a. Serial bonds: No; Term bonds: Yes b. Serial bonds: No; Term bonds: No c. Serial bonds: Yes; Term bonds: No d. Serial bonds: Yes; Term bonds: Yes
7. Financial management involves decisions and activities that deal with
a. Short term matters (Yes), long term matters (Yes) b. Short term matters (Yes), long term matters (No) c. Short term matters (No), long term matters (Yes) d. Short term matters (No), long term matters (No)
9. Which one of the following most likely would not be considered when computing the weighted average cost of capital?
a. Short-term debt. b. Long-term debt. c. Common stock. d. Preferred stock.
9. The weighted average cost of capital for a firm is determined by its cost of
a. Short-term financing: Yes, Long-term financing: Yes b. Short-term financing: Yes, Long-term financing: No c. Short-term financing: No, Long-term financing: Yes d. Short-term financing: No, Long-term financing: No
9. Larson Corp. issued $20 million of long-term debt in the current year. What is a major advantage to Larson with the debt issuance?
a. The reduced earnings per share possible through financial leverage. b. The relatively low after-tax cost due to the interest deduction. c. The increased financial risk resulting from the use of the debt. d. The reduction of Larson's control over the company.
9. The best reason corporations issue Eurobonds rather than domestic bonds is that
a. These bonds are denominated in the currency of the country in which they are issued. b. These bonds are normally a less expensive form of financing because of the absence of government regulation. c. Foreign buyers more readily accept the issues of both large and small US corporations than do domestic investors. d. Eurobonds carry no foreign exchange risk.
9. Which one of the following responses is not an advantage to a corporation that uses the commercial paper market for short-term financing?
a. This market provides more funds at lower rates than other methods provide. b. The borrower avoids the expense of maintaining a compensating balance with a commercial bank. c. There are no restrictions as to the type of corporation that can enter into this market. d. This market provides a broad distribution for borrowing.
7. Which of the following "tools" are likely to be used in financial management?
a. Time value of money (Yes), interest rate concepts (Yes), balance of payment accounts (yes) b. Time value of money (Yes), interest rate concepts (Yes), balance of payment accounts (No) c. Time value of money (Yes), interest rate concepts (No), balance of payment accounts (No) d. Time value of money (No), interest rate concepts (Yes), balance of payment accounts (No)
9. What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?
a. To cause the price of the company's stock to rise. b. To lower the company's bond rating. c. To reduce the risk for existing bondholders. d. To reduce the interest rate on the bonds being sold.
9. What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?
a. To cause the price of the company's stock to rise. b. To lower the company's credit rating. c. To reduce the risk of existing debt holders. d. To reduce the interest rate on the debt being issued.
7. Which of the following financial management‐related areas are considered long‐term issues?
a. Trade Accounts Payable (Yes), Inventories (Yes), Capital Budgeting (Yes) b. Trade Accounts Payable (No), Inventories (Yes), Capital Budgeting (Yes) c. Trade Accounts Payable (No), Inventories (No), Capital Budgeting (Yes) d. Trade Accounts Payable (Yes), Inventories (No), Capital Budgeting (Yes)
9. Which one of the following forms of short-term financing is least likely to be restricted as to use of proceeds?
a. Trade accounts payable b. Accrued taxes payable c. Accrued salaries payable d. Short-term notes payable
9. Which of the following long‐term notes would best facilitate financial leverage for the borrowing firm?
a. Variable Rate Long-Term Note: Yes; Fixed Rate Long-term Note: Yes b. Variable Rate Long-Term Note: Yes; Fixed Rate Long-term Note: No c. Variable Rate Long-Term Note: No; Fixed Rate Long-term Note: Yes d. Variable Rate Long-Term Note: No; Fixed Rate Long-term Note: No
9. Which of the following types of bonds is most likely to maintain a constant market value?
a. Zero-coupon b. Floating-rate c. Callable d. Convertible
9. When calculating the cost of capital, the cost assigned to retained earnings should be
a. Zero. b. Lower than the cost of external common equity. c. Equal to the cost of external common equity. d. Higher than the cost of external common equity.