FIN 401 Final

Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense of: 14) ______ A) higher total combined market value. B) increased free cash flow. C) a higher price-earnings ratio. D) reduced future growth prospects.

D) reduced future growth prospects.

Which one of the following is correct concerning a spin-off? 16) ______ A) A division of a firm is reconstituted as a new firm. B) An unprofitable division is divested. C) The spin-off generates no free cash flow. D) A division of a firm is bought by its managers.

A) A division of a firm is reconstituted as a new firm.

If an automobile manufacturer were to acquire one of the firms listed below, which acquisition would be called a horizontal merger? 3) _______ A) A rival manufacturer B) A bank C) A tire producer D) A steel mill

A) A rival manufacturer

The consent of a corporation's stockholders must be received prior to any: 8) _______ A) increase in authorized capital. B) issue of new securities. C) private placement of securities. D) selection of an underwriter.

A) increase in authorized capital.

Stock that is sold through a rights issue: 13) ______ A) is limited to sales to existing shareholders. B) must be sold on a firm commitment basis. C) will not affect the market price of the shares. D) is offered for cash to the general investing public.

A) is limited to sales to existing shareholders.

When an outside group acquires a firm, primarily through the use of borrowed funds, the acquisition is known as a: 2) _______ A) leveraged buyout. B) successful proxy fight. C) tender offer. D) management buyout.

A) leveraged buyout.

A tender offer is one in which the firm's: 1) _______ A) shareholders are propositioned to sell their shares to outsiders. B) management offers to buy all outstanding shares of the corporation. C) management offers to sell the company to an acquirer. D) board of directors offers to sell the company to the public

A) shareholders are propositioned to sell their shares to outsiders.

Which one of the following is not a carrying cost to holding inventory? A. Risk of being short of inventory and unable to satisfy orders B. Lost interest on funds tied up in inventory C. Spoilage D. Possible obsolescence

A. Risk of being short of inventory and unable to satisfy orders

Assume a firm can either hold cash paying no interest or invest in marketable securities. Which one of the following might induce the manager to hold higher cash balances today? A. The cost of borrowing is high relative to interest rates on marketable securities. B. Future cash flows are relatively predictable. C. The cost of cash balances is relatively high. D. Bank interest rates are expected to decrease.

A. The cost of borrowing is high relative to interest rates on marketable securities.

Commercial paper is unsecured. Therefore, the companies that issue this short-term security: A. are typically large firms with top credit quality. B. frequently default. C. are typically small firms with top credit quality. D. are firms that have government-sponsored guarantees for the debt.

A. are typically large firms with top credit quality.

Under the terms of a sight draft, the buyer's bank: A. is instructed to make immediate payment. B. treats the invoice like a postdated check. C. forwards the acceptance to the seller until due. D. enters into a factoring arrangement.

A. is instructed to make immediate payment.

A merger adds value by creating synergies. Which one of these is not a possible source of synergy? 18) ______ A) Economies of vertical integration B) Diversification C) Economies of scale D) Combined complementary resources

B) Diversification

Shelf registration was enacted to allow: 9) _______ A) the Department of Justice to prosecute those guilty of insider trading. B) a joint filing for multiple issues of a single security. C) the prospectus to be distributed after the sale of securities begins. D) underwriters to join together in syndication.

B) a joint filing for multiple issues of a single security.

The enactment of shelf registration is likely to have increased: 10) ______ A) the underpricing of securities. B) competition among underwriters. C) the interests of venture capitalists .D) the cost of issuing new securities

B) competition among underwriters.

An increase in earnings per share after a merger may not indicate increased value if the: 7) _______ A) firm's additional earnings are spent on legal expenses of the merger. B) price-earnings ratios were different in the premerger firms. C) number of shares has increased. D) price of the acquirer's stock increases.

B) price-earnings ratios were different in the premerger firms.

Firms with substantial amounts of free cash flow often discover that: 12) ______ A) accounting profits are what truly matter. B) they have become takeover targets. C) their capital budgets have been too low. D) conglomerate mergers are the best use for the funds.

B) they have become takeover targets.

Money that is offered to finance a new business is known as: 1) _______ A) a private placement. B) venture capital. C) a general cash offer. D) a rights issue.

B) venture capital.

If Snapper Lawnmowers were to acquire Briggs and Stratton (gasoline-powered engines), the merger would be classified as a: 4) _______ A) horizontal merger. B) vertical merger. C) leveraged buyout. D) conglomerate.

B) vertical merger.

Which one of these is not a characteristic of a concentration system of collections? A. All surplus funds are electronically transferred to a centralized account. B. Check clearing times are increased. C. Customer payments are directed to a local collection center. D. Collection time is reduced.

B. Check clearing times are increased.

Which one of the following statements typically describes the break-even probability of collection for repeat sale customers? A. The break-even probability is higher than for single sale customers. B. The break-even probability is lower than for single sale customers. C. The break-even probability does not change between single sale and repeat sale customers. D. Sales should never be refused for customers offering the potential of repeat sales.

B. The break-even probability is lower than for single sale customers.

What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased? A. The rate declines. B. The rate increases. C. The rate remains constant. D. It is impossible to predict without knowing the actual length of discount period.

B. The rate increases.

Money market securities usually have a maturity of: A. more than 1 year. B. less than 1 year. C. 1 to 3 years. D. less than a week.

B. less than 1 year.

In general, a firm's credit policy should grant credit whenever the expected: A. loss from default is less than the cost of the product. B. profit from granting credit exceeds the profit from refusing. C. profit exceeds the price of the product. D. probability of a loss is less than 50%.

B. profit from granting credit exceeds the profit from refusing.

In which one of the following ways can the management teams of many corporations influence the board of directors? 10) ______ A) Through appointment of shareholders to replace current board members B) By merging with another firm C) Through management's nomination of board candidates D) By declaring a liquidating cash dividend

C) Through management's nomination of board candidates

A private placement of securities involves: 14) ______ A) selling only to the firm's current investors. B) the exchange of convertible bonds for equity. C) a nonpublic sale of securities to a limited number of investors. D) nondisclosure of the issuing firm's name until after the sale.

C) a nonpublic sale of securities to a limited number of investors.

Mergers may provide reductions in average production cost as a result of: 5) _______ A) increased financing. B) increased market price. C) economies of scale. D) diversification.

C) economies of scale.

One of the reasons why proxy fights are rarely successful is that: 11) ______ A) shareholders are unconcerned with corporate management. B) management is always viewed as performing its job well. C) management can use corporate resources to defend against the fight. D) mergers are a cheaper form of changing management.

C) management can use corporate resources to defend against the fight.

8) The cost of a merger equals the:_______ A) increase in total earnings minus the price paid. B) cash paid for the target firm. C) premium paid over the target's value as a separate entity. D) sum of cash and stock paid for the target firm

C) premium paid over the target's value as a separate entity.

One indication that investors expect no synergy from a merger would be that the: 6) _______ A) acquiring firm financed the merger with cash. B) merged firms are from different industries. C) total market value of the merged firms does not change. D) P/E ratio of the merged firms' changes.

C) total market value of the merged firms does not change.

Conglomerate mergers involve companies in: 17) ______ A) different stages of the corporate life cycle. B) different countries. C) unrelated lines of business. D) similar lines of business.

C) unrelated lines of business.

Which one of the following credit agreements provides the least protection to the seller? A. Banker's acceptance B. Time draft C. Open account D. Commercial draft

C. Open account

Firms should be more prepared to sell on credit to high-risk customers if: A. the profit margin is low. B. the probability of repeat orders is low. C. the profit margin is high. D. the firm's sales representative is paid on commission.

C. the profit margin is high.

Which one of the following statements is correct for a firm that has undergone a leveraged buyout? 19) ______ A) Its capital is mostly equity financed. B) Its shares are traded publicly. C) It has a larger shareholder base. D) Its shares are not traded publicly.

D) Its shares are not traded publicly.

A major purpose of the prospectus is to: 6) _______ A) inform investors of the security's rate of return. B) list the security's dividend payment dates. C) distribute stock warrants to prospective investors. D) advise investors of the security's potential risks.

D) advise investors of the security's potential risks.

The "Bootstrap Game" is played somewhat in defiance of traditional merger logic in that it: 13) ______ A) does not require the approval of a majority of shareholders. B) provides immediate benefit through improved management. C) stays in effect only until EPS are increased. D) does not offer a positive NPV from the merger.

D) does not offer a positive NPV from the merger.

The primary reason for an underwriters' syndication is to: 7) _______ A) monitor the actions of the different underwriters. B) increase the size of the spread. C) avoid the scrutiny of the Securities and Exchange Commission. D) reduce the risk of selling a large issue.

D) reduce the risk of selling a large issue.

When underwriters issue securities on a best efforts basis, they: 3) _______ A) submit a bid for purchase, which the issuer compares to other bids. B) guarantee that the issuer will be charged the minimum spread. C) buy the entire issue from the firm. D) sell as much of the stock as possible, but with no guarantee.

D) sell as much of the stock as possible, but with no guarantee.

A secondary offering IPO occurs when: 2) _______ A) new shares are sold to provide the company with additional funds. B) the second public issue of equity becomes available. C) not all of the shares in a primary IPO were sold. D) the company's founders or venture capitalists market a portion of their shares.

D) the company's founders or venture capitalists market a portion of their shares.

When underwriters are unsure of the demand for a new offering, they: 5) _______ A) undertake the issue on a firm commitment basis. B) reduce their spread. C) provide shelf registration for the issue. D) undertake the issue on a best efforts basis

D) undertake the issue on a best efforts basis

Which one of the following is most likely to discourage purchasers from taking a discount? A. A higher discount percentage B. A shorter payment period C. A longer discount period D. A longer payment period

D. A longer payment period

Which statement is true about terms of trade credit of 2/10, net 30? A. A 10% cash discount is offered for payment before 30 days. B. A 2% cash discount can be taken for payment before the 10th of the following month. C. A 10% cash discount can be taken if paid by the second day after invoicing. D. No cash discount is offered after the tenth day.

D. No cash discount is offered after the tenth day.

Credit scoring systems can be used to: A. reduce the effective cost of trade. B. determine the cost of goods sold. C. evaluate Dun and Bradstreet reports. D. evaluate credit risk based on the borrower's characteristics.

D. evaluate credit risk based on the borrower's characteristics.