Finance FNCE 3007
8. When the manufacturer of a product creates a wholly owned subsidiary to lease that product, the subsidiary is called a(n): A. Independent lessee. B. Independent lessor. C. Captive lessee. D. Captive finance company. E. Captive direct lessor.
B
8. The costs of setting up a production run or placing an order are called: A. Carrying costs. B. Restocking costs. C. JIT costs. D. EOQ costs. E. Derived demand costs.
B
1. The length of time for which credit is granted to a firm's customers is called the ____________. A. cash cycle B. operating cycle C. transactions period D. credit period E. disbursement period
1. D
2. A wholly-owned subsidiary that handles the credit function for the parent firm is called a(n): A. Controlled disbursements company. B. Junior subsidiary firm. C. Parallel payments firm. D. Captive finance company. E. Operating division.
2. D.
1. A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n): A. Option contract. B. Futures contract. C. Forward contract. D. Swap contract. E. Straddle contract.
A
1. The complete absorption of one company by another, where the acquiring firm retains its identity and the acquired firm ceases to exist, is called a __________. A. merger B. consolidation C. tender offer D. spinoff E. divestiture
A
1. The use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed is called: A. Homemade leverage. B. Dividend recapture. C. The weighted average cost of capital. D. Private debt placement. E. A privileged subscription offer.
A
10. The absolute priority rule establishes the order in which: A. Claims are paid in a bankruptcy proceeding. B. Firms are liquidated by the bankruptcy courts. C. Reorganization events must occur. D. Bankruptcy cases are heard by the courts. E. Judges are assigned to bankruptcy cases.
A
14. Suppose Ford acquires K-Mart. This would be an example of a _____________ acquisition. A. conglomerate B. vertical C. horizontal D. tender offer E. pooling of interests
A
15. The time value of an option is equal to: A. The difference between the option's market price and its intrinsic value. B. The difference between the option's intrinsic value and its market price. C. The risk-free interest rate in the economy. D. The net present value of the option's cash flows. E. The net present value of the option's cash flows, discounted at the risk-free interest rate.
A
16. The reason for "hiding" a financial lease is the hope that the lease: A. Will go unnoticed by analysts and investors. B. Payments can be hidden from the CRA. C. Can be resold without the lessor knowing. D. Term can be extended if the lessee continues to make payments such that the lessor does not realize the lease term has expired. E. Can be treated as an operating lease for tax purposes without the CRA realizing it is a financial lease.
A
17. According to _________, the value of the firm is independent of its capital structure. A. M&M Proposition I without taxes B. M&M Proposition I with taxes C. the static theory of capital structure D. M&M Proposition II without taxes E. M&M Proposition II with taxes
A
17. McCaw Zill Co., a wholesaler of college textbooks, is concerned about your college bookstore having sufficient operating cash flow to meet its credit obligations in a timely fashion. McCaw is concerned about the bookstore's _________________. A. capacity B. character C. capital D. collateral E. economic condition
A
20. The equity beta of a firm depends on which of the following? I. The firm's business risk. II. The firm's financial policy. III. The firm's advertising policy. A. I and II only B. III only C. I and III only D. II and III only E. I, II, and III
A
21. A firm's systematic risk will ____________ as its debt/equity ratio __________. A. increase; increases B. decrease; increases C. remain unchanged; decreases D. remain unchanged; increases E. first increase, and then decrease; increases
A
22. Omni Leasing borrows money from Delta Financial on a nonrecourse basis to buy $250,000 of equipment from Alpha Equipment Sales. Omni then leases that equipment to Ajax Industrial Products. After six months, Ajax defaults on the lease. As a result,: A. Delta Financial must collect the loan payments it is due from Ajax instead of from Omni. B. Omni will repossess the equipment which it can then sell to meet its debt obligation to Delta. C. Omni is forced to make loan payments on equipment which is no longer producing income for the firm. D. Ajax will return the equipment to Alpha and Alpha will pay the remaining lease payments to Omni. E. Ajax keeps the equipment, Omni is freed from its debt, and Delta bears the entire loss with no option for recovery.
A
25. When the value of a firm's assets exactly equals the value of its debt, the firm: A. Is economically bankrupt. B. Is technically insolvent. C. Is legally bankrupt. D. Is in liquidation. E. Is in default.
A
6. A change in the corporate charter making it more difficult for the firm to be acquired by increasing the percentage of shareholders that must approve a merger offer is called a: A. Supermajority amendment. B. Standstill agreement. C. Greenmail provision. D. Poison pill amendment. E. White knight provision.
A
6. The ________ establishes the credit period, the cash discount amount, and the discount period. A. Terms of sale B. Collection policy C. Credit analysis report D. Invoice E. Credit report
A
6. The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called the: A. Static Theory of Capital Structure. B. M&M Proposition I. C. M&M Proposition II. D. Capital Asset Pricing Model. E. Open Markets Theorem
A
1. The owner of an asset in a leasing arrangement is called the _____________. A. lessee B. lessor C. guarantor D. trustee E. manager
B
11. Suppose your firm is offered terms of 2/10 net 30 on its purchases. Assuming that your firm intends to buy on credit, good cash management practice suggests that a rational purchaser should pay only on which of the following days? I. Day 2 II. Day 9 III. Day 10 IV. Day 20 V. Day 30 A. I, II, or V only B. III or V only C. II only D. V only E. I or II only
B
13. The upper bound on the market value of a call option is the __________ and the lower bound is the ___________________. A. exercise price; intrinsic value B. value of the underlying asset; intrinsic value C. exercise price; value of the underlying asset D. value of the underlying asset; exercise price E. value of the risk-free asset; exercise price
B
13. _____________ is a type of transaction which must be approved by a formal vote of the shareholders of the selling firm and which, when completed, leaves the selling firm as a corporate shell. A. A merger B. An acquisition of assets C. A hostile takeover D. An acquisition of stock E. A tender offer
B
16. Which of the following statements regarding leverage is false? A. The ultimate effect of leverage depends on the firm's EBIT. B. If things go poorly for the firm, increased leverage provides greater returns to shareholders (as measured by ROE and EPS). C. As a firm levers up, shareholders are exposed to greater risk. D. The benefits of leverage will not be as great in a firm with substantial accumulated losses or other types of tax shields compared to a firm without many tax shields. E. Beyond a certain point, the costs of financial distress outweigh the benefits of leverage.
B
18. The point where a lessee is indifferent between leasing and buying is the point where the: A. Total cash outlays for lease payments are equivalent to the purchase cost of the asset. B. Net present value from leasing is equal to zero. C. Total cash flows minus the depreciation tax shield are equal to zero. D. Tax savings from leasing equal the tax savings from buying. E. Net present value from leasing is positive.
B
19. Which one of these statements is correct concerning the lease versus buy decision? A. The lessor is primarily concerned with returning the asset at the end of the lease term without incurring any additional charges. B. The lessee is primarily concerned about the use of the asset. C. If Dell Computer became a lessor of its own computers it would be doing direct leasing. D. A firm should always purchase an asset rather than lease it if the asset has a positive salvage value. E. Dell Computer would be a captive finance company if it became a lessor of its own computers.
B
22. The sale of stock in a wholly owned subsidiary via an initial public offering is referred to as a(n): A. split-up. B. equity carve-out. C. Counter-tender offer. D. white knight transaction. E. lockup transaction
B
22. __________ arises from decisions that affect the left-hand side of the balance sheet, while ________________ arises from decisions that affect the right-hand side of the balance sheet. A. Systematic risk; financial risk B. Business risk; financial risk C. Unsystematic risk; systematic risk D. Business risk; diversifiable risk E. Systematic risk; unsystematic risk
B
24. The optimal amount of credit to be granted can be located graphically at the point where the: A. Opportunity costs of credit are minimized. B. Sum of the opportunity cost and the carrying cost is minimized. C. Difference between the opportunity cost and the carrying costs of credit are maximized. D. Sum of the opportunity cost and the carrying costs is maximized. E. Carrying costs of credit are equal to zero.
B
3. A financial lease in which the lessee sells an asset to the lessor and then leases it back is called a(n) ______________. A. leveraged lease B. sale and leaseback C. operating lease D. tax-oriented lease E. straight lease
B
4. A ____________ is a derivative security that gives the owner the right, but not the obligation, to buy an asset at a fixed price for a specified period of time. A. futures contract B. call option C. put option D. swap E. forward contract
B
4. A compilation of the firm's accounts receivable ordered by the length of time each account has remained unpaid is called a(n): A. Credit report. B. Aging schedule. C. Risk assessment report. D. Turnover delineation. E. Cost consolidation and consistency report.e
B
4. An attempt to gain control of a firm by soliciting a sufficient number of shareholder votes to replace the current board of directors is called a: A. Tender offer. B. Proxy contest. C. Going-private transaction. D. Leveraged buyout. E. Consolidation.
B
4. The unlevered cost of capital is _________________. A. the cost of capital for a firm with no equity in its capital structure B. the cost of capital for a firm with no debt in its capital structure C. the interest tax shield times pretax net income D. the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure E. equal to the profit margin for a firm with some debt in its capital structure
B
5. An operating lease is defined as a ______ lease under which the _____ is usually responsible for the maintenance, insurance, and taxes. A. Short-term; lessee B. Short-term; lessor C. Long-term; lessee D. Long-term; lessor E. Long-term; guarantor
B
6. An option that can only be exercised on the expiration date is called a(n): A. Implied option. B. European-style option. C. Parity call option. D. American-style option. E. Put option.
B
7. A leveraged lease is defined as a: A. Long-term lease in which the lessor borrows funds on a recourse basis. B. Long-term lease in which the lessor borrows funds on a nonrecourse basis. C. Short-term sale and leaseback arrangement that utilizes significant borrowed funds. D. Long-term lease in which the lessee receives immediate cash and the use of the asset. E. Short-term tax-oriented lease involving a recourse loan.
B
11. Which of the following characteristics would NOT cause a lease to be declared a capital lease for accounting purposes? I. The present value of the lease payments is at least 90% of the fair market value at the start of the lease. II. The lease transfers ownership of the property to the lessee by the end of the lease term. III. The lessee can purchase the asset at a bargain price when the lease expires. IV. The lease term is at least 70% of the estimated economic life of the asset. A. II only B. III only C. IV only D. II and IV only E. I, II, III, and IV
C
11. Which of the following is true about the WACC? A. The WACC is the appropriate discount rate for all new projects of the firm. B. The optimal capital structure is the one that maximizes the WACC. C. The value of the firm will be maximized when the WACC is minimized. D. The WACC is virtually impossible to calculate for a firm with multiple divisions. E. Since discount rates and firm value move in the same direction, minimizing the WACC will minimize the value of the firm.
C
13. The optimal capital structure is the mixture of debt and equity which: I. Maximizes the value of the firm. II. Minimizes the firm's weighted average cost of capital. III. Maximizes the market price of the firm's bonds. A. I only B. III only C. I and II only D. I and III only E. I, II, and III
C
15. __________ are frequently offered as a sweetener by firms in combination with private placements of bonds or loans. A. Put options B. Call options C. Warrants D. Call provisions E. Put bonds
C
15. ________________, it is impossible for a tax-free acquisition to take place. A. If an acquisition is for business purposes B. If the purchasing firm exchanges its own stock for the selling firm's equity C. If an acquisition is being undertaken with cash D. If the stockholders in the target firm will retain an equity interest in the bidder E. If the selling shareholders will be considered to have exchanged their old shares for new ones of equal value
C
17. Which one of the following statements concerning European options is correct? A. A European call can be exercised at any time up to and including the expiration date. B. A European call is more valuable than an American call based on its characteristics. C. A European option has value only if it is in-the-money at expiration. D. The value of a European call cannot be computed using the Black-Scholes model. E. European options cannot legally be issued in North America.
C
17. _____________ is a defensive tactic in which a firm makes a tender offer for a given amount of its own stock while excluding certain shareholders. A. A repurchase and/or standstill agreement B. A share rights plan C. An exclusionary self tender offer D. A poison pill E. A flip-over provision
C
18. Assume there are no corporate or personal taxes. According to M&M Proposition: A. I, the total value of the firm depends on how cash flows are divided up between stockholders and bondholders. B. I, a firm's capital structure is relevant. C. II, the cost of equity rises as the firm increases its use of debt financing. D. II, the cost of equity depends on the firm's business risk but not its financial risk. E. I and II, as debt increases, the increase in the cost of equity is more than offset by the lower cost of debt and the WACC falls.
C
19. Which of the following is a type of inventory shortage cost? A. Storage and tracking costs B. Insurance and taxes C. Restocking costs D. Losses due to obsolescence E. Opportunity cost of capital invested in inventory
C
2. A public offer by one firm to directly buy the shares of another firm is called a ____________. A. merger B. consolidation C. tender offer D. spinoff E. divestiture
C
2. The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's _________________. A. opening price B. intrinsic value C. strike price D. market price E. time value
C
2. The proposition that the cost of equity is a positive linear function of capital structure is called: A. The Capital Asset Pricing Model. B. M&M Proposition I. C. M&M Proposition II. D. The Law of One Price. E. The Efficient Markets Hypothesis.
C
2. When choosing a capital structure, the objective of the firm should be to: A. Choose the one that maximizes the current value of the firm's bonds. B. Choose the one that minimizes the value of the firm. C. Choose the one that minimizes the firm's WACC. D. Choose the one that results in the largest interest tax shield. E. Choose any capital structure since it is always irrelevant.
C
21. Studies of acquisitions and mergers suggest that shareholders of the: A. Bidding firm benefit the most from a merger. B. Bidding firm average at least a 5% excess return on a merger. C. Target firm have the most to gain from a merger. D. Bidding firm benefit in equal proportion to the shareholders of the target firm. E. Target firm benefit more if a proxy contest develops.
C
21. Which of the following are the three elements of the terms of sale? I. Type of credit instrument II. Collection procedures to be followed III. Discount period and discount amount IV. Time period for which credit is granted A. I, II, and III B. I, II, and IV C. I, III, and IV D. II, III, and IV
C
21. Which of the following statements are correct concerning taxes and leasing? I. Tax-reduction is a legitimate reason for leasing. II. The lessor should be the party with the higher tax bracket. III. Leases should increase the total taxes paid. IV. If a firm has significant net operating losses, they should be the lessor in a lease. A. I and III only B. II and IV only C. I and II only D. II and III only E. III and IV only
C
24. Which one of the following statements is correct? A. Acquiring firms tend to avoid firms with large net operating losses when they are seeking a target firm to acquire. B. If an acquisition increases the debt level of a firm the tax liability of the firm tends to increase as a result. C. If either an increase or a decrease in the level of production causes the average cost per unit to increase the firm is currently operating at its optimal size. D. Firms can always benefit from economies of scale if they increase the size of their firm through acquisitions. E. If a firm uses its surplus cash to acquire another firm the shareholders of the acquiring firm immediately incur a tax liability related to the transaction.
C
25. Which of the following represent potential gains from an acquisition? I. The replacement of ineffective managers II. Lower costs per unit produced III. An increase in firm size so that diseconomies of scale are realized IV. Spreading of overhead costs A. II and III only B. I and IV only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV
C
26. A consolidation is defined as a merger wherein: A. one firm is completely absorbed by another firm. B. one firm acquires the assets, but not the liabilities, of another firm. C. both the acquiring firm and the acquired firm cease to exist. D. at least 80 percent of the common stock of one firm is acquired by another firm. E. at least 51 percent of the common stock of one firm is acquired by another firm.
C
26. According to __________, a firm's cost of equity increases with greater debt financing, while the WACC first decreases and then increases. A. M&M Proposition I with taxes B. M&M Proposition I without taxes C. the static theory of capital structure D. M&M Proposition II without taxes E. M&M Proposition II with taxes
C
27. When a firm defaults on a legal obligation, ___________. A. it is called a business failure B. the firm is in legal bankruptcy C. the firm is in technical insolvency D. the firm is in accounting insolvency E. the firm is in violation of protective covenants
C
29. Synergy exists when: A. the cash flows of the merged firm AB are less than the combined cash flows of the separate entities, A and B. B. the merger of two firms increases taxes without affecting pre-tax earnings. C. the value of a merged firm AB is greater than the combined values of the pre-merger firms, A and B. D. the capital needs of a merged firm AB are equal to the capital needs of the pre-merger firms, A and B. E. the pre-tax earnings of a merged firm AB are less than the pre-tax earnings of the separate entities, A and B.
C
30. Credit analysis is the process of determining the: A. discount rate which should be granted to a credit customer. B. particular terms of a sale. C. probability that a customer will default on their account. D. best type of credit instrument to use for a particular transaction. E. most logical type of collateral for a specific loan agreement.
C
31. The management of Traynor Enterprises is fighting a takeover attempt led by one of its shareholders. To try and stop this takeover, management decides to offer the shareholder $50 a share if she will sell all of her shares in the firm. Traynor stock is currently priced at $36 a share. This offer is an example of: A. a poison pill. B. a share rights plan. C. greenmail. D. a bear hug. E. a golden handshake.
C
34. A computerized system for setting raw material inventory levels that starts with projecting the number of finished goods to be manufactured is generally referred to as: A. economic order quantity model. B. the ABC inventory approach. C. materials requirements planning. D. the inventory depletion model. E. the reorder point system.
C
35. The net present value of a switch from a cash sales policy to a credit sales policy is expressed as: A. P´Q + PQ x (d -pie )/R. B. P´Q + PQ x (d -pie ) x R. C. -PQ + P´Q x (d -pie )/R. D. PQ - P´Q x (d -pie )/R. E. PQ/R + P´Q x (d -pie )
C
4. The NPV that is calculated when deciding whether to lease an asset or to buy it is called the: A. Open interest net present value. B. Depreciation net present value. C. Net advantage to leasing. D. Profitability index. E. Average accounting ratio for leasing.
C
6. A financial lease is defined as a ____ lease under which the ____ is usually responsible for the maintenance, insurance, and taxes. A. Short-term; lessee B. Short-term; lessor C. Long-term; lessee D. Long-term; lessor E. Long-term; guarantor
C
7. A security issued by a firm that gives its owner the right to purchase new shares of stock at a fixed price over a given period of time is called a(n): A. American call option. B. American put option. C. American warrant. D. European call option. E. European put option.
C
7. A targeted stock repurchase of the firm directed at a potential bidder to discourage an unfriendly takeover attempt is called (a): A. Golden parachute. B. Standstill. C. Greenmail. D. Poison pill. E. White knight.
C
9. A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a: A. Golden suitor. B. Poison put. C. White knight. D. Shark repellent. E. Crown jewel
C
9. If a firm has a detailed credit policy it will likely lead to ___________________. A. frequent credit sales to customers with an average to high degree of default risk B. a policy where virtually all sales are made for cash C. only the most creditworthy of consumers receiving credit D. inconsistencies in the terms of credit sales granted customers E. organized payment efforts
C
9. The cost of equity capital, based on M&M Proposition II, can be defined as: A. RE = RD + (RA - RD) (D/E). B. RE = RA + (RA - RD) (E/D). C. RE = RA + (RA - RD) (D/E). D. RE = RA + (RD - RA) (E/D). E. RE = RD - (RD - RA) (D/E).
C
11. In July, you purchase a September 75 put option on Keebler, Inc. common stock. You: A. Should exercise the option at expiration if the price of Keebler stock is $80. B. Have given the seller the right to buy a share of Keebler stock at $75 sometime prior to the September expiration. C. Have the right to buy a share of Keebler stock at $75 sometime prior to the September expiration. D. Will have a negative cash flow at the time you initiate the contract and a positive cash flow when the option expires if the stock price is less than $75 at that time. E. Will have a worthless option in August if the stock price is $80 at that time.
D
12. In which of the following cases would the CRA disallow the lease? I. The lessee automatically acquires title to the property after payment of a specified amount in the form of rentals. II. The lease term is less than five years. III. The lessee has a bargain purchase price option. A. II only B. III only C. I and II only D. I and III only E. I, II, and III
D
13. An increase in _________________ will tend to lead to longer credit periods. I. product perishability II. consumer demand for the product III. product cost IV. competition among sellers of the product A. III only B. I and II only C. II and IV only D. III and IV only E. I, II, and IV only
D
14. Which of the following is NOT accurate regarding financial leverage? A. Whenever a firm's debt increases faster than its equity, financial leverage increases. B. Leverage is most beneficial when EBIT is relatively high. C. Investors can undo the effects of the firm's capital structure by using homemade leverage. D. Increasing financial leverage will always increase the EPS for stockholders. E. The level of financial leverage that produces the highest firm value is the one most beneficial to stockholders.
D
14. Which of the following is NOT required in order to calculate the net advantage to leasing (NAL)? A. The depreciation tax shield B. The cost of the leased asset C. The lease payment D. The lessee's cost of equity E. The lessee's after-tax borrowing rate
D
15. The total cost of granting credit has two components. ________ are the costs of lost sales incurred when credit is not granted and are inversely related to the amount of credit extended. ________ are the cash flows that are incurred when credit is granted and are positively related to the amount of credit extended. A. Stockout costs; Opportunity costs B. Carrying costs; Opportunity costs C. Opportunity costs; Interest costs D. Opportunity costs; Carrying costs E. Sales costs; Carrying costs
D
16. An increase in which of the following will increase the value of a call option? I. Underlying stock price II. Exercise price III. Time to expiration IV. Variance of the return on the underlying asset A. III and IV only B. I and III only C. II and IV only D. I, III, and IV E. I, II, III, and IV
D
16. Which of the following is a case in which tax gains are used as a justification for purchasing another firm? A. The target firm has resources to which the purchaser wants access. B. The target firm has no unused debt capacity. C. The target firm has access to markets that the bidder wishes to exploit. D. The target firm has unused net operating losses that can be used by the bidder. E. The target firm has resources that are complementary to the bidder.
D
17. Which one of the following should be included in a lease-purchase analysis? I. The amount of the lease payment II. The cost of the asset if purchased today III. The amount of the depreciation tax shield IV. The amount of the benefit to be derived from the use of the asset A. I and II only B. I and III only C. II and IV only D. I, II, and III only E. I, III, and IV only
D
18. A firm has inadequate ____________ if it does not have sufficient assets to pledge in the case of default. As a result it will likely be rejected for credit. A. capacity B. character C. capital D. collateral E. economic conditions
D
18. The seller of an American call has the: A. Right, but not the obligation, to buy an asset at the strike price on or before the expiration date. B. Right, but not the obligation, to buy an asset only on the expiration date. C. Right, if they so choose, to sell an asset at the strike price on or before the expiration date. D. Obligation to sell an asset on or before the expiration date, if the buyer exercises the option. E. Obligation to sell an asset at the strike price on the expiration date.
D
18. Which of the following statements is/are true? I. In a successful takeover, the shareholders of the acquiring firm usually realize substantial gains. II. It appears that the gains reaped by target firms from tender offer takeovers are higher than the gains realized from mergers. III. On average, friendly mergers may be arranged at lower premiums than unfriendly tender offers. A. II only B. III only C. I and II only D. II and III only E. I, II, and III
D
19. Assume that 20% of the shareholders of ABC Co. are extremely unhappy with the company's management and would like to replace all of the senior executives. To do this, they need control over the board of directors. This situation has a high probability of leading to a: A. Conglomerate acquisition. B. Going private transaction. C. Management buyout. D. Proxy contest. E. Pooling of interests.
D
19. Which of the following is true concerning the rate of return earned on shares of a levered firm in terms of the possible range of earnings? There are no taxes. A. The returns do not differ from those of an unlevered firm. B. The returns are greater than for an unlevered firm on the upside and equal on the downside. C. The returns are the same as for an unlevered firm on the upside and lower on the downside. D. The returns are greater than for an unlevered firm on the upside and lower on the downside. E. The returns are the same as for an unlevered firm on the upside and greater on the downside.
D
2. A longer-term, fully-amortized lease under which the lessee is responsible for insurance, taxes, and upkeep, and which the lessee generally cannot cancel without penalty, is called a(n): A. Open lease. B. Straight lease. C. Operating lease. D. Financial lease. E. Tax-oriented lease.
D
20. Using the EOQ model, a manager can determine _____________. This allows the firm to place orders before inventories reach a critical level, allowing for sufficient delivery time. A. carrying costs B. safety stocks C. restocking costs D. reorder points E. theft losses
D
22. A customer purchases $500 of goods and receives credit terms of 2/10, net 20. The credit terms are defined as: A. Ten percent discount if paid in two days, otherwise payable in full after a total of thirty days. B. Two percent discount if paid in ten days, otherwise payable in full after a total of thirty days. C. Two percent penalty imposed if paid more than ten days after the due date, which is twenty days from date of sale. D. Two percent discount if paid in ten days, otherwise payable in full in twenty days. E. Two percent discount on ten percent of the sale if the bill is paid in twenty days.
D
23. A proposed acquisition may create synergy by: I. increasing the market power of the combined firm. II. improving the distribution network of the acquiring firm. III. providing the combined firm with a strategic advantage. IV. reducing the utilization of the acquiring firm's assets. A. I and III only B. II and III only C. I and IV only D. I, II, and III only E. I, II, III, and IV
D
23. According to ___________, a firm's cost of equity increases with greater debt financing, but the WACC remains unchanged. A. M&M Proposition I with taxes B. M&M Proposition I without taxes C. the static theory of capital structure D. M&M Proposition II without taxes E. M&M Proposition II with taxes
D
25. Which one of the following is the correct sequence of events related to the cash flows from a credit sale? I. Customer mails cheque II. The bank credits the firm's account III. Credit sale is made IV. Firm deposits cheque in bank A. I, II, III, IV B. III, I, II, IV C. II, III, IV, I D. III, I, IV, II E. III, II, I, IV
D
27. The ABC approach to inventory management is based on the concept that: A. inventory should arrive just in time to be used. B. the inventory period should be constant for all inventory items. C. basic inventory items that are essential to production and also inexpensive should be ordered in small quantities only. D. a small percentage of the inventory items probably represents a large percentage of the inventory cost. E. one-third of a year's inventory need should be on hand, another third should be in the order process and the last third should not be ordered yet.
D
28. Which of the following are true when a firm is operating at its target capital structure point? I. The WACC is at its minimum point. II. The debt-equity ratio is equal to 1. III. Shareholder value is maximized. IV. The total value of the firm is maximized. A. I and IV only B. II and III only C. I and III only D. I, III, and IV only E. I, II, III, and IV
D
29. The incremental investment in receivables under the accounts receivable approach is equal to: A. (P - v) * Q´. B. PQ´. C. P * (Q´ - Q). D. (P * Q) + [v * (Q´ - Q)]. E. (P * Q) * (Q´ - Q).
D
32. Which one of the following is the correct order of events taken by a firm in its collection efforts? I. Legal action II. Telephone call III. Delinquency letter IV. Collection agency A. I, II, III, IV B. II, III, IV, I C. II, III, I, IV D. III, II, IV, I E. III, II, I, IV
D
5. Going-private transaction in which a large percentage of the money used to buy the outstanding stock is borrowed is called a: A. Tender offer. B. Proxy contest. C. Merger. D. Leveraged buyout. E. Consolidation.
D
5. The implicit costs associated with corporate default, such as lost sales, are the __________ of the firm. A. flotation costs B. default beta coefficients C. direct bankruptcy costs D. indirect bankruptcy costs E. default risk premium
D
5. The minimum level of inventory a firm keeps on hand at any given time is called its: A. Net working capital in inventory. B. Shortage cost. C. Economic order quantity. D. Safety stock. E. Reorder point.
D
7. The financial restructuring of a failing firm to attempt to continue operations as a going concern is called a ________________. A. merger B. repurchase program C. liquidation D. reorganization E. divestiture
D
7. The model that attempts to determine the optimal order size when restocking inventory is called the: A. MRP model. B. ABC approach. C. JIT system. D. EOQ model. E. Safety stock model.
D
8. If a call option is "in-the-money" on the expiration date, the: A. Strike price is more than the market price of the stock. B. Option is expiring unexercised that day and the seller gets to keep the option premium. C. Buyer of the option is getting a refund equal to the option premium paid. D. Call has an intrinsic value that is equal to the stock price minus the strike price. E. Seller of the call gets to keep the option premium without relinquishing any shares of stock.
D
9. A ticket to a baseball game gives the holder the right, but not the obligation, to attend a specified game. Thus, a baseball ticket is effectively a(n) ________ option on the possession of a seat, which has an expiration date equal to __________. A. American call; the end of the baseball season B. European call; the end of the baseball season C. American call; the day of the game D. European call; the day of the game E. Convertible bond; the end of the baseball season
D
9. Which of the following is/are characteristics of an operating lease? I. The payments are enough for the lessor to recover the cost of the equipment. II. The lessee maintains the asset. III. The lessee has the right to cancel the contract before expiration. A. I only B. II only C. III only D. I and II only E. II and III only
D
10. A transaction involving only one firm, which results in a stock being delisted and no longer available to the public is a(n): A. Reverse IPO. B. Proxy acquisition. C. All cash merger. D. All stock merger. E. Going-private transaction.
E
10. Assume the lessor borrows to purchase an asset, and then leases it to another firm. If the lease is a(n) __________ and the lessee subsequently defaults, the lessor does not have to continue making payments on the loan. A. single investor lease B. operating lease C. conditional sales agreement lease D. sale and leaseback arrangement E. leveraged lease
E
10. The terms of sale typically specify each of the following EXCEPT: A. Type of credit instrument. B. Credit period. C. Cash discount period. D. Cash discount. E. Probability of payment.
E
10. Three weeks ago, you sold an IBM September $110 call option for $2.25. Now, in August, IBM is selling for $117.50 per share and your call is trading for $9.75. Ignoring transactions costs, you may do which of the following? A. Exercise the call and then sell the 100 shares of IBM stock for $117.50 per share B. Exercise the call and sell 100 shares of IBM for $110 per share C. Forego your right to exercise the call until later D. Sell the call to net a $7.50 profit per share E. Sell an additional call option contract for $9.75
E
11. In the financial world, the term poison pill refers to: A. The restructuring of a firm such that the stock is delisted and no longer available to the public. B. A type of financial agreement that forces firms to buy back their securities at a stated price. C. An unfriendly takeover offer that is so attractive it cannot be refused. D. An unfriendly takeover that replaces the existing management. E. A tactic to make unfriendly takeover attempts unappealing.
E
12. Which of the following statements is correct? A. The credit period is the length of time for which a discount can be taken. B. Trade credit terms are set by the buyer. C. Trade credit is classified as a liability for the seller. D. A cash discount is generally offered to slow down payment of invoices. E. The invoice date is the beginning of the credit period.
E
12. Which of the following statements is false? A. Option contracts are a zero sum game. B. If an in-the-money option is not exercised at expiration, you will lose money. C. It is possible for you to lose all of your investment in an option. D. One advantage to buying options on a stock rather than the stock itself is that it requires a smaller initial investment. E. As the price of a stock falls, the value of a put option on the stock also falls.
E
13. From the viewpoint of the lessee, the relevant discount rate for evaluating a lease versus buy decision is _________________________. A. the cost of issuing new common stock B. the pretax cost of issuing debt C. the lessor's cost of debt D. the firm's cost of capital E. the after-tax cost of issuing debt
E
14. Which of the following is considered a carrying cost for the firm when it grants credit? I. The required return on receivables II. Losses from bad debts III. The cost of managing credit IV. The cost of managing credit collections A. I and III only B. II and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV
E
14. Which of the following would increase the value of an American call option? I. The exercise price is decreased II. The value of the underlying asset increases III. The expiration date is extended IV. The variance of the underlying asset increases A. I and III only B. II and IV only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV
E
15. Good reasons for leasing include all of the following EXCEPT that: A. Taxes may be reduced by leasing. B. Leasing transfers uncertainty about the future value of the leased asset to the lessor. C. Leasing may encumber fewer assets than borrowing. D. Leasing may not increase a firm's financial leverage. E. Leasing is a source of 100% financing for an asset.
E
15. Suppose you work for the CFO of Danforth, Inc. He believes sales and operating income will be sharply higher each year for the foreseeable future. If he seeks to maximize earnings per share, he should _____________. (Assume there are no taxes.) A. increase the firm's debt to equity ratio B. increase the firm's debt to equity ratio if the firm's EBIT will remain below the break-even (comparing levered to unlevered) level of EBIT C. decrease the firm's debt to equity ratio D. not change the firm's debt to equity ratio E. decrease the firm's debt to equity ratio if the firm's EBIT will remain below the break-even (comparing levered to unlevered) level of EBIT
E
16. ABC Co. is considering granting credit to a new corporate customer. ABC is concerned about the new customer's credit history. ABC would likely find each of the following useful EXCEPT ________________. A. the customer's financial statements B. a Dun & Bradstreet report C. a Credited report D. a credit report from the customer's bank E. an aging of ABC's receivables
E
19. The intrinsic value of a call is: I. the value of the call if it were about to expire. II. equal to the lower bound of a call's value. III. another name for the market price of a call. IV. always equal to zero if the call is currently out of the money. A. I and III only B. II and IV only C. I and II only D. II, III, and IV only E. I, II, and IV only
E
2. The amount paid by an acquirer to the shareholders of the acquired firm that exceeds the stand-alone value is called the: A. Green mail. B. Golden parachute. C. Goodwill. D. Poison put. E. Merger premium.
E
20. A successful merger requires that the: A. P/E ratio maintains its pre-merger value. B. Debt-equity ratio of the firm remains at its pre-merger level. C. Book value per share must remain constant. D. Book value per share must increase. E. Value of the whole exceeds the value of the sum of the parts.
E
20. The incremental cash flows of leasing consider which of the following? I. the cost of the asset II. the lease payment amount III. the applicable tax rate IV. the annual depreciation expense A. I and III only B. II and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV
E
23. The following sequence of events occurs: How long is the accounts receivable period? Customer buys goods on credit OCT 4 Customer writes cheque for pmt OCT 18 Customer mails cheque OCT 19 Firm receives cheque OCT 21 Firm deposits cheque OCT 23 Bank credit's Firm's account OCT 24 A. 14 days B. 15 days C. 17 days D. 18 days E. 20 days
E
24. Which of the following correctly completes the following: M&M I with taxes shows ___________________. A. the value of an unlevered firm exceeds the value of a levered firm by the present value of the interest tax shield B. a levered firm can increase its value by reducing debt C. the optimal amount of leverage for a firm is not possible to determine D. the value of a levered firm is equal to its after-tax EBIT discounted by the unlevered cost of capital E. there is a linear relationship between the amount of debt in a levered firm and its value
E
26. Which of the following are commonly used methods of analyzing the creditworthiness of a potential customer? I. review their payment history with other firms II. review their credit report III. analyze their financial statements IV. ask your bank for assistance in acquiring credit information on the potential customer if they are a business firm A. I and III only B. II and IV only C. I and II only D. I, II, and III only E. I, II, III, and IV
E
27. When one group of shareholders transfers control of a firm to a different group of shareholders, the transfer is referred to in general terms as a: A. leveraged buyout. B. strategic alliance. C. joint venture. D. horizontal acquisition. E. takeover.
E
28. At the optimal order quantity size, the: A. total cost of holding inventory is fully offset by the restocking costs. B. carrying costs are equal to zero. C. restocking costs are equal to zero. D. total costs equal the carrying costs. E. carrying costs equal the restocking costs.
E
28. Which one of the following statements concerning taxes and acquisitions is correct? A. In a tax-free acquisition, the shareholders in the acquiring firm maintain their status quo while the shareholders in the target firm are treated as if they sold their shares. B. In a taxable acquisition, any gains or losses of the target shareholders will be taxed as ordinary income. C. If the shareholders of the target firm receive shares of the acquiring firm in an acquisition, the acquisition is generally considered a taxable acquisition. D. In a taxable acquisition, the shareholders in both the target firm and the acquiring firm are treated as if they sold their shares and any capital gains are subject to taxation. E. In a taxable acquisition, the shareholders in the target firm are treated as though they sold their shares and any capital gains or losses will be realized.
E
3. An option that may be exercised at any time up to its expiration date is called a(n): A. Futures option. B. Asian option. C. Bermudan option. D. European option. E. American option.
E
3. The acquisition of a firm in a different production process stage than the bidder is called a: A. Conglomerate acquisition. B. Forward acquisition. C. Backward acquisition. D. Horizontal acquisition. E. Vertical acquisition.
E
3. The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are: A. Conditions, control, cessation, capital, and capacity. B. Conditions, character, capital, control, and capacity. C. Capital, collateral, control, character, and capacity. D. Character, capacity, control, cessation, and collateral. E. Character, capacity, capital, collateral, and conditions.
E
3. The equity risk derived from the firm's capital structure policy is called ___________ risk. A. market B. systematic C. extrinsic D. business E. financial
E
30. Which one of the following combination of firms is most apt to create synergistic benefits through their use of complementary resources? A. a grocery store and an office supply store B. a bakery and a dry cleaner C. a gas station and a dentist's office D. a car wash and a hair salon E. a hotel and a convention center
E
31. Which one of the following customers is most apt to be granted the most liberal credit terms? A. one-time customer who will not be returning B. one-time customer who has the potential of being a large volume customer C. long-standing cash customer who buys in small volume D. repeat customer who will always be a small volume customer E. repeat customer who has the potential of being a large volume customer
E
33 The economic order quantity method of inventory management identifies the optimal inventory level by: A. subdividing the inventory into three categories based on item cost. B. computing the cost of the inventory sold on an average day. C. determining exactly the amount of inventory needed on a given day. D. equating the cost of inventory with the monthly average cost of goods sold. E. equating inventory restocking costs with the costs of carrying inventory.
E
8. Corporate charter provisions allowing existing shareholders to purchase stock at some fixed price in the event of a hostile outside takeover attempt are called ___________________. A. Pac-man defenses B. shark repellent plans C. golden parachute provisions D. greenmail provisions E. share rights plans
E
8. The extent to which a firm relies on debt is referred to as: A. Homemade leverage. B. The target ratio. C. Business leverage. D. Proposition I. E. Financial leverage.
E