FIN300 CSU Exam 4 Study Guide

Maximizing shareholder value may create what ethical issue for corporations with plants in developing countries:

The low wages paid to workers, often children, plus the environmental costs to the local country where environmental laws may be nonexistent

The amount of financing sought is least influenced by which of the following?

The federal reserve district where the firm is located?

Problems associating with repatriating profits earned in another country include which of the following?

The home currency strengthens

Working capital includes all but the following

Accounts payable

The greater the degree of operating leverage

the higher the business risk.

With credit terms of 2/10, n30, the day a business must make a decision about finding the funds to pay the account or waiting until the end of the net period is the:

10th day

A short term loan $100,000, financed at an 8% standard rate, interest and principal paid at the maturity of one year, has an effective annual rate or cost of:

8%

Which of the following statements about net working capital is true?

A high level of net working capital is associated with relatively low levels of short term financing

An aggressive working capital policy would have which of the following ratios (assuming a profitable company)?

A low current ratio and high average ROE

A corporation with operations in more than one country is called

A multinational corporation

The common stock of major foreign companies is put into a trust and traded on US stock exchanges, denominated in dollars. These units, representing claims on common stock, are called:

American depository receipts

If the value of one currency goes down in value relative to that of a second currency, the second currency is:

Appreciating

For short-term funding (less than a year), firms usually use all but which of the following?

Bonds

If a given country's currency is weakening; importers from other countries will ____________of that country's goods.

Buy more

Financing an automated plant with debt adds financial leverage to operating leverage and increases the ____ leverage by a multiplier effect

Combined

Which of the following statements about commercial paper is false?

Commercial paper is secured by collateral

Each country should concentrate on producing that product which it does well. This is called the law of:

Comparative advantage

An exchange rate between two currencies which is calculated by using a common third currency is known as a

Cross rate

Degree of operating leverage can best be defined as

DOL= (%change EBIT)/(&%change in sales)

Which of the following types of loans will require you to borrow the highest mount in order to obtain the use of $4000?

Discount interest with a 5% compensating balance

Financing permanent working capital needs with long-term financing tends to "match" financing with uses of funds and reduces the chance of illiquidity, but long-term financing has two disadvantages. They are:

Equity financing has a higher cost than debt financing and long term debt usually has higher interest rates than short term debt

Which of the following financing approaches is the most aggressive financing approach?

Financing temporary current assets, permanent current assets, and some long term fixed assets with short term debt

Leverage in a business is caused by the presence of:

Fixed costs

Financial leverage is caused by the presence of _________ and ________ the variability of __________ for any change in operating income

Fixed financing costs; increases; net income

Whenever fixed costs are greater than zero, DOL is:

Greater than 1

Firms with relatively low fixed operating costs and high variable operating costs can best be described as:

Having a low degree of operating leverage

If a Big Mac from McDonald's costs $3 in the United States and 360 yen in Japan, what theory of exchange rate pricing explains this pricing if the yen/dollar exchange rate is 120 yen per U.S. dollar?

Purchasing power parity theory

A leveraged buyout (LBO) has the immediate effect of:

Increasing financial leverage

Two advantages of using debt in the capital structure of a corporation from the shareholders' perspective are:

Interest is tax deductible and the firm has the opportunity to leverage income to a higher level through the use of fixed cost debt

The trade off of holding cash versus a high returning fixed asset is called:

Liquidity versus probability trade off

Which of the following statements about long term financing versus short term financing false?

Long term financing is generally less expensive than short term financing

Which of the following best defines the maturity matching principle associated with financing working capital needs?

Match the maturity of sources of funds with that of uses of funds

As businesses increase the proportion of debt in the capital structure from zero to nearly one hundred percent debt, the WACC first declines through moderate uses of debt then increases after some minimum point. The minimum point of the WACC points to the debt/firm value ratio that:

Maximizes the market value of a firm

The business should select the level of working capital or current assets that:

Maximizes the value of the firm

The financial manager's major financing decision is selecting the debt/equity mix that

Maximizes the value of the firm

The Greek drachma has strengthened against the U.S.$. Other things equal, Greek people will buy:

More US goods

An optimal level of current assets is reached when:

Optimal levels of cash, inventory, and accounts receivable are achieved

A base level of inventory, cash, marketable securities, prepaid expenses, and accounts receivable is best described as:

Permanent current assets

The sales break-even point is defined as:

the level of sales that a firm must reach to cover total operating costs

The level of net working capital is affected by all but which of the following:

Retained earnings

Which of the following is the type of short term loan most like to make a borrower with seasonal financing needs

Self liquidating

Working capital assets are generally

Short term

Short term financing is favored because it is cheaper than long term and readily available. However, there are two disadvantages to short term debt. They are

Short term financing must be paid or rolled over quire often and the rates may vary suddenly

With respect to debt financing, which of the following statements is most accurate from the perspective of the firm seeking funds:

Short term loans are more risky and usually less expensive than long term loans

If, in the last month, the foreign currency/$ exchange rate has increased from 115 yen per dollar to 120 yen per dollar, the dollar has:

Strengthened

Which of the following statements about temporary current assets is true?

Temporary current assets reflect a seasonal increase in inventories, accounts, receivables, and other current asset accounts

Firms with high fixed operating costs:

Tend to have low variable costs

You purchased a stock with marks in Germany. You will be hurt if:

The US $ strengthens relative to the euro

Which of the following statements is false?

The breakeven point (units sold) is inversely related to the level of fixed costs

When a borrowing pledges accounts receivable or inventory for a loan, which of following best describes the purpose of the collateral?

The collateral pledged as security for the loan by the borrower, will be used to pay off the loan if the borrower fails to pay the loan as agreed

If an American investor has earned an annual 10% on his European portfolio denominated in euros but the euro/dollar rate has changed from .8 to .9, what impact has foreign exchange risk had on the investors portfolio return?

The dollar has strengthened, lowering the rate of return below 10%

If the foreign currency/dollar exchange rate has moved from 10 Mexican pesos to 7, which of the following is likely to be true

The quarterly earnings of American companies with extensive Mexican operations have been increased

The primary difficulty of relying on short term credit for financing needs is:

The risk of increasing interest rates

Some level of gross working capital is "permanent" in that:

There is a minimum level of current assets at any given point in time

A firm that uses short term financing to finance most of its assets, all else equals:

Using an aggressive approach

Short term financing is normally cheaper than long term financing because it:

Usually has lower interest rates

Which of the following is a major problem with using inventory for collateral for short term loans?

Valuing the inventory

The assets associated with short-term operating activities, such as cash, accounts receivables, and inventory, are also called:

Working capital

Working capital is the amount of

cash and near-cash assets

Net working capital equals:

current assets minus current liabilities

Discount interest ______ the effective annual interest rate on a loan while compensating balances ________ it

increases; increases

The effective annual interest rate of a loan

is greater than the nominal annual rate if there is compounding more than one time per year

A _______ is an informal agreement between a bank and a borrower listing the limit of lending during the next year, where a ______ is a formal agreement to lend up to a specified level with a fee paid for this service

line of credit; revolving credit agreement

An exchange rate:

specifies how many units of one country's currency can be exchanged for one unit of the other country's currency