Bu 340 managerial finance ii exam 2, 3, 5, 7 and 8

MANAGERIAL FINANCE II EXAM 2

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__________ are an accounting measure of performance during a specific period of time, while __________ is the actual inflow or outflow of money.

A. Profits; cash flow

B. Cash flows; profit

C. Dividends; cash flow

D. Profits; a dividend

A firm has revenue of $50,000, the cost of goods sold is $23,000, other expenses (from selling and administration) are $14,000, interest expenses are $4,000, and depreciation is $5,000. What is the EBIT?

A. $4,000

B. $8,000

C. $13,000

D. $27,000

There are two main reasons why we need to deal with depreciation. Which of the following is one of these reasons?

A. The gain but not the loss when a capital asset is disposed

B. The loss but not the gain when a capital asset is disposed

C. The tax flow implications from the OCF

D. The tax rate implications from the OCF

The current book value of an asset serves as the basis for determining the gain or loss:

A. at retention.

B. at book value.

C. at market value.

D. at disposal.

The building of the __________ cash flow of a project is the cornerstone of the financial decision models.

A. depreciation

B. incremental

C. accounting

D. tax

The __________ are critical to business decisions, business growth, and ultimately business success.

A. risk and timing but not the amount of cash flow

B. the currency denomination of profits

C. risk and profits but not the amount of cash flow

D. timing and amount of cash flow

When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated, based on the book value of the asset at the time of disposal. If a __________ has occurred, __________ are incurred.

A. gain; tax reductions

B. gain; taxes

C. gain; tax credits

D. loss; taxes

The advantage of __________ over __________ depreciation is that you can write off more of your capital costs in the earlier years.

A. straight-line depreciation; the modified accelerated cost recovery system

B. straight-line depreciation; straight-line deductions

C. MACRS; straight-line

D. MACRS; straight-line deductions

A gain on disposal is recognized when the selling price of the asset is __________ the book value.

A. greater than

B. equal to

C. less than

D. greater than or equal to

Managers typically look at the initial outlay for the project as its capital expenditure and determine __________ from this capital expenditure.

A. interest expenses

B. dividends

C. depreciation

D. CEO expenses

The advantage of straight-line over MACRS depreciation is that you can write off:

A. more of your total capital costs.

B. your capital costs in fewer years.

C. a larger percentage of your capital costs earlier.

D. None of the above

A major metric of a company’s health and its prospects for a long life is how much __________ it can generate.

A. cash flow

B. depreciation

C. tax deferral

D. net income

A firm is considering purchasing an asset that will have a useful life of 10 years and cost $5 million; it will have installation costs of $500,000 and a salvage or residual value of $500,000. What is the annual straight-line depreciation for this asset?

A. $400,000 per year

B. $500,000 per year

C. $600,000 per year

D. $700,000 per year
The __________ a capital asset is not part of the MACRS and is ignored for depreciation expense.

A. salvage value of

B. dividends paid from

C. inventory from

D. straight-line value of

__________ costs each year do not reflect cash flow because the actual purchase and installation (outflow of dollars) of the asset have already taken place.

A. Depreciation

B. Sunk

C. Opportunity

D. Working Capital

A financial manager examines concepts such as sunk costs, opportunity costs, and erosion costs to help understand how to estimate the incremental cash flow of a project, which is:

A. the extra money the firm pays from taking on more inventory.

B. the additional money the firm receives from taking on a new project.

C. the prior money the firm receives from taking on a new project.

D. the additional money the firm receives from its choice of financing.

__________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow of a new project.

A. Cost recovery of divested assets

B. Capital expenditures

C. Sunk costs

D. Opportunity costs

Which of the statements below is true?

A. The increase in working capital accounts necessary to support a project also provides for cost increases at the end of the project.

B. An increase in working capital can be brought about by an increase in inventory.

C. Decreases in accounts receivables constitute a use of cash flow because you are helping your customers finance their purchases.

D. Decreases in accounts payable constitute a source of cash flow because you are using your suppliers to help finance your business operations.

A firm is considering purchasing two assets. Asset L will have a useful life of 20 years and cost $5 million; it will have installation costs of $1 million but no salvage or residual value. Asset S will have a useful life of 8 years and cost $2 million; it will have installation costs of $500,000 and a salvage or residual value of $400,000. Which asset will have a greater annual straight-line depreciation?

A. Asset L has $12,500 more in depreciation per year.

B. Asset L has $37,500 more in depreciation per year.

C. Asset S has $12,500 more in depreciation per year.

D. Asset S has $37,500 more in depreciation per year.

A firm is considering purchasing two assets. Asset A will have a useful life of 15 years and cost $3 million; it will have installation costs of $400,000 but no salvage or residual value. Asset B will have a useful life of 6 years and cost $1.3 million; it will have installation costs of $180,000 and a salvage or residual value of $300,000. Which asset will have a greater annual straight-line depreciation?

A. Asset A has $30,000 more in depreciation per year.

B. Asset A has $40,000 more in depreciation per year.

C. Asset B has $30,000 more in depreciation per year.

D. Asset B has $40,000 more in depreciation per year.

MANAGERIAL FINANCE II EXAM 3

The appropriate capital budgeting decision rule is:

A. to accept projects with an NPV greater than $0.

B. to reject projects with an IRR greater than the required rate of return.

C. to reject projects with an NPV greater than $0.

D. to reject projects with an IRR greater than the required payback period.

Which of the following would be classified as debt lenders for a firm?

A. Preferred shareholders, banks, and nonbank lenders

B. Nonbank lenders, common shareholders, and commercial banks

C. Preferred shareholders, common shareholders, and suppliers

D. Suppliers, nonbank lenders, and commercial banks

Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?

A. Rd ÷ (1 + Tc)

B. Rd ÷ (1 – Tc)

C. Rd × (1 – Tc)

D. Rd × (1 + Tc)

Market values require multiplying the __________ of each component source of capital times the __________.

A. price; quantity

B. book value; quantity

C. price; book value

D. None of the above

When a company borrows money from a bank or sells bonds, it is called:

A. capital structure financing.

B. stock financing.

C. equity financing.

D. debt financing.

Which of the following is NOT considered a part of the firm’s capital structure?

A. Long-term debt

B. Retained earnings

C. Inventory

D. Preferred stock

Your firm has $4,000,000 available for investment in capital projects. Which combination of projects is the best, given this budget constraint?

A. A, B, C

B. A, B, D

C. A, C, D

D. B, C, D

Under which of the following circumstances is the pure play method of estimating a project’s beta particularly useful?

A. The firm is looking to expand its current business operations, doing essentially the same work.

B. The firm is looking to expand its current business operations into a brand new area unlike any of its internal projects.

C. The firm is looking to expand its current business operations. The work will be essentially the same as current operations but there is no obvious outside provider of the same service or product.

D. The pure play method works equally effectively under each and all of the above scenarios.

In capital budgeting, the appropriate decision rule for an average-risk project is to accept if the __________ is greater than the WACC.

A. NPV

B. IRR

C. cost of equity

D. cost of debt

Pricing preferred stock is most similar to pricing:

A. constant growth common stock

B. a perpetuity

C. a zero-coupon bond

D. a three-month Treasury bill

Generally speaking, when the information is available, investors prefer to use __________ rather than __________ when evaluating a firm.

A. past data; current data

B. market values; book values

C. current data; market values

D. book values; market values

The __________ is the return that the bank or bondholder demands on new borrowing.

A. IRR

B. WACC

C. cost of equity

D. cost of debt

Which of the following would be classified as equity financing for a firm?

A. Preferred shareholders, banks, and nonbank lenders

B. Nonbank lenders, common shareholders, and commercial banks

C. Preferred shareholders, common shareholders, and retained earnings

D. Suppliers, nonbank lenders, and commercial banks
Takelmer Industries has a different WACC for each of three types of projects. Low-risk projects have a WACC of 8%, average-risk projects a WACC of 10%, and high-risk projects a WACC of 12%. Which of the following projects do you recommend the firm accept?

A. A, B, C, D, G

B. B, C, E, F, G

C. A, D, E, F, G,

D. A, B, C, D, E, F, G

It is necessary to assign the appropriate cost of capital for each individual project that reflects that project’s __________ when doing capital budgeting.

A. life

B. cash flows

C. riskiness

D. managers

If all projects are assigned the same discount rate for purposes of evaluation, which of the following could occur?

A. Low-risk projects could be rejected when in fact they are good investment choices.

B. High-risk projects could be accepted when in fact they are poor investment choices.

C. High-risk projects could be accepted when in fact they are good investment choices.

D. All of the choices could occur when using a single discount rate for all projects.

The __________ is the cost of each financing component multiplied by that component’s percent of the total funding amount.

A. NPV

B. IRR

C. cost of capital

D. cost of debt

International Geographica is adding a new magazine project to the company portfolio and has the following information: The expected market return is 12%, the risk-free rate is 4%, and the expected return on the new project is 20%. What is the beta of the project?

A. 1.00

B. 1.50

C. 1.75

D. 2.00

The cost of capital is:

A. the cost of debt in a firm that finances with both debt and equity.

B. the cost of each financing component multiplied by that component’s percent of the total borrowed.

C. another name for the IRR.

D. All of the above

__________ refers to a method of matching a single project of a company to another company with a single business focus in an effort to assign an appropriate level of risk to the project.

A. Ghosting

B. Pure play

C. Outside assignment

D. Subjective assignment

MANAGERIAL FINANCE II EXAM 5

The amount of sales a company predicts is a function of two types of data. Which of the types below is one of these two types?

A. Accounting data

B. Internal data

C. Rationing data

D. Legal data

In the daily planning for cash or the cash forecast, we want to hone in on the management of cash as it applies to the __________ of the company.

A. short-term borrowing and long-term investing

B. long-term borrowing and short-term investing

C. short-term borrowing and short-term investing

D. long-term borrowing and long-term investing

A company estimates the following expenditures: total shipping costs of $1,100; wages paid to workers of $9,600; overhead costs of $4,300; raw materials of $5,000; and, dividends and interest paid of $2,200. What are the total production costs?

A. $22,200

B. $21,100

C. $20,100

D. $20,000

A company estimates the following expenditures: interest paid of $17,500; wages paid to workers of $74,600; overhead costs of $12,300; raw materials of $55,000; shipping costs of $7,100, and dividends paid to common stock holders of $15,000. What are the total production costs?

A. $141,900

B. $149,000

C. $166,500

D. $181,500

__________ consists of items such as the current interest rates, housing starts, gross national product (GNP), disposable income estimates, or other economic indicators.

A. Accounting data

B. Internal data

C. External data

D. Financial data

NorWest Outdoor Store will have cash receipts of $47,000 in December and cash disbursements of $41,000 for this month. If its beginning cash is $7,000 and its reserves are $4,000, what will its excess be for December?

A. There is no excess, but a shortfall.

B. $6,000

C. $9,000

D. $13,000

As with a lot of planning, the financial forecast begins with __________ estimates and __________ schedules.

A. sales; production

B. sales; profit

C. dividends; production

D. profits; dividend

There are a variety of ways to produce pro formas, but they usually rely on two primary inputs. One of these primary inputs is:

A. the projected sales for the current year.

B. the projected sales for the past year.

C. the prior year’s financial statements.

D. this year’s financial statements.

One of the functions of a finance manager is:

A. to forecast for the coming period.

B. to forecast for the present period.

C. to forecast for the past period.

D. to forecast for the present and future periods.

Which of the below is a source of cash?

A. Cash Sales

B. Wages and Salaries

C. Rent or Lease payments

D. Dividend payments

In short-term cash management as it pertains to the operations of the firm, which of the below is NOT one of the general objectives?

A. Determining the cash surplus

B. Determining the job satisfaction level of employees

C. Determining the money the company can invest

D. Determining the cash deficit

Short-term financial planning typically uses forecasted:

A. earnings.

B. income statements.

C. working capital statements.

D. All of the above

__________ consists of items such as number of sales personnel in the field and average sales per representative, competitors and alternative products, and production capabilities and schedules, as well as other factors known mainly to the company.

A. External data

B. Product data

C. Employee data

D. Internal data

Short-term decisions are viewed as decisions that have short-term impacts and can be changed or modified at:  

A. relatively low costs.

B. relatively high costs.

C. relatively high time requirements.

D. relatively low costs with high time requirements.

Financial forecasts are seldom right on the money, so to speak, but they do provide a yardstick by which a company can measure:

A. its past adherence to its long-term plan.

B. its past deviation from its long-term plan.

C. its adherence to or deviation from its short-term plan.

D. its current deviation from its future plan.

The amount and timing of sales are usually provided by the __________ department.

A. advertising or finance

B. accounting or sales

C. sales or marketing

D. marketing or planning

The __________ schedule will usually be based on the __________ forecast.

A. sales; production

B. production; sales

C. forecast; scheduled

D. production; cash

There are two primary tools used to forecast and set in action a company plan. Which of the tools below is one of these?

A. Statements of retained earnings

B. Profit budgets

C. Income statements

D. Pro forma statements

Which one of the costs below is NOT a production cost?

A. The wages paid to workers

B. The raw materials for manufacturing products

C. The dividends paid to shareholders

D. The shipping costs that get the product to the customer

It is __________ of cash flow that is(are) important to the financial manager.

A. the timing and amount

B. just the timing

C. the timing but not the amount

D. just the amount

The optimal order quantity as determined by the EOQ occurs when:

A. ordering costs equal carrying costs.

B. ordering costs are exactly 1/2 of carrying costs.

C. ordering costs are exactly twice as much as carrying costs.

D. None of the above

EOQ equals:

A.

B.

C.

D.

Estimating __________ is one part of managing short-term cash needs. The second part is estimating __________.

A. cash inflow, accounts payable

B. cash inflow, cash outflow

C. accounts receivable, cash outflow

D. accounts receivable, cash inflow

__________ is additional inventory kept on hand so that if an order is delayed in arrival the current inventory is sufficient to cover the delay.

A. Excess inventory

B. Safety stock

C. Stock overage

D. Type A

Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm’s finance department has estimated the following profile for its light-duty trailers and customer base: Annual sales: 10,000 trailers Annual production costs per trailer: $1,500 Lost sales if credit is not provided for customers: 2,000 trailers Default rate if all customers purchase on credit: 3% What is the dollar value of bad debts the firm expects to accumulate over a year?

A. $9,250,000

B. $4,500,000

C. $8,000,000

D. $450,000

Which of the following is NOT an inventory management technique?

A. ABC

B. 6 SIGMA

C. JIT

D. EOQ

Total carrying cost equals:

A. the average carry cost per item times the maximum level of inventory.

B. the average carry cost per item times the minimum level of inventory.

C. the average carry cost per item times the average level of inventory divided by 2.

D. the average carry cost per item times the average level of inventory.

The __________ starts at the time production begins and ends with the collection of cash from the sale of the product.

A. accounts receivable cycle

B. business operating cycle

C. cash conversion cycle

D. production cycle

The __________ begins at the time a firm first starts to make a product and lasts until the time the customer buys the product.

A. business operating cycle

B. accounts receivable cycle

C. cash conversion cycle

D. production cycle

Jolly Roger Kite Company has a payment cycle of 17 days, a collection cycle of 31 days, and a production cycle of 12 days. What is the average cash conversion cycle for the Jolly Roger Company?

A. 2 days

B. 36 days

C. 26 days

D. 60 days

The Hannibal Homers minor league baseball club is considering an expansion of its stadium to increase capacity by 2,000 seats. Management estimates increased revenue from ticket and concession sales to be $600,000 per year for the next 5 years. The cost of expansion is $750,000, with an additional $50,000 in working capital. The working capital increase is permanent (will not be recovered after 5 years). Annual costs are expected to increase by $200,000 per year, the club’s cost of capital is 14%, and its tax rate is 30%. If the stadium addition is depreciated in a straight line to a value of $0.00 over 5 years, what is the IRR of this project? (Ignore any revenues or costs associated with a terminal value of the project after five years.) Use a financial calculator to determine your answer.

A. 9.41%

B. 14.00%

C. 25.33%

D. 29.45%

Of the following items, which would be considered working capital as opposed to a capital asset?

A. Disposable parts that aid in installation and are shipped with each sale

B. A CAD/CAM machine used in the manufacturing process

C. An addition to the existing building designed to facilitate a new product line

D. None of the above is working capital assets.

Float, from the buyer’s perspective, is called __________ float, and from the seller’s perspective is called __________ float.

A. financing; crediting

B. disbursement; collection

C. crediting; financing

D. collection; disbursement
A __________ inventory item is an item that is not used in current operations but is serving a backup role in case the current item fails during operation.

A. Type C

B. redundant

C. reticent

D. beta generation

Lipscomb is set to establish a reorder policy for his remote snack bar located on Vacation Island. He sells 10 cases of soda per day and has a lead time for delivery of one week. Occasionally, bad weather or mechanical difficulty can delay his delivery by up to three days. At what point should Lipscomb reorder (how many cases on hand) if he wants to also compensate for unexpected order delays?

A. 30 cases

B. 70 cases

C. 100 cases

D. There is not enough information to answer this question.

In terms of the float, the buyer of a product wants to __________ and the seller wants to __________.

A. increase the collection float; decrease the disbursement float

B. decrease the disbursement float; decrease the collection float

C. decrease the collection float; decrease the disbursement float

D. increase the disbursement float; decrease the collection float

Which of the following is a consideration when a company decides which customers should receive credit?

A. The amount of potential business from the customer

B. The credit policies of competing firms

C. The results of credit screening

D. All are considerations that the company takes into account.

BarnBurner Music, a music publishing firm located in Tennessee, bills its clients on the first of the month. For example, any sale made in the month of July is billed August 1 and is due September 1. Clients traditionally pay as follows: 50% at the end of the first month, 40% at the end of the second month, 8% at the end of the third month, and 2% default on their bills. What is the dollar value of January billings collected in April?

A. $7,040

B. $29,600

C. $5,920

D. $0.00

Which of the following choices lists the least to most aggressive actions in the pursuit of overdue debt?

A. 1) a collection agency, 2) court action, 3) a letter requesting overdue payment

B. 1) court action, 2) a collection agency, 3) a letter requesting overdue payment

C. 1) a letter requesting overdue payment, 2) court action, 3) a collection agency

D. 1) a letter requesting overdue payment, 2) a collection agency, 3) court action

The company offering a discount on accounts payable is trying to __________, and the firm that pays on time rather than take a discount is attempting to __________.

A. speed up cash outflow; slow down cash inflow

B. speed up cash inflow; slow down cash inflow

C. speed up cash inflow; slow down cash outflow

D. speed up cash outflow; slow down cash outflow

MANAGERIAL FINANCE II EXAM 7

Financial ratios __________ industries.

A. can vary across

B. are unchanging across

C. are homogeneous across

D. are always different across

Which of the following statements is true?

A. The current ratio is current assets divided by current liabilities.

B. Total asset turnover is net income divided by total assets.

C. The cash coverage ratio equals cash divided by current liabilities.

D. The quick ratio equals current assets – current liabilities divided by current liabilities.

Comparing two companies using __________ may point out differences in management styles.

A. common-size financial statements

B. sales growth

C. historical share prices

D. earnings per share

In the business world, we need to be able to measure __________ performance and predict __________ performance if we want to deliver positive results.

A. past; future

B. past; present

C. present; future

D. present; past

Earnings per share is the:

A. price per share divided by the earnings per share.

B. net income divided by the number of outstanding shares.

C. market value per shares divided by the book value per share.

D. P/E ratio divided by the earnings growth rate times 100.

Which of the statements below is false?

A. The acid ratio test equals current assets minus inventories divided by current liabilities.

B. Examples of liquidity ratios include the current ratio, the cash coverage ratio, and the quick ratio.

C. The current ratio is current assets divided by current liabilities.

D. Inventory turnover equals cost of goods sold divided by inventory.

To convert an income statement into a common-size income statement, we restate all the numbers as percentages of:

A. total revenues.

B. cost of goods sold.

C. net income.

D. total assets.

__________ can be helpful for managers to understand short-term cash obligations.

A. Profitability ratios

B. Asset management ratios

C. Solvency ratios

D. Liquidity ratios

Which of the statements below is FALSE?

A. When the current ratio is greater than 1, we are also saying that net working capital is positive as current assets are greater than current liabilities.

B. Financial leverage ratios deal with long-term solvency and the use of debt as a financing tool.

C. The debt ratio is total assets minus total equity divided by equity.

D. Times interest earned equals EBIT divided by interest expense.

Financial analysts provide recommendations to their clients about what company:

A. to buy.

B. to invest in.

C. to sell or divest.

D. All of the above

To convert a balance sheet into a common-size balance sheet statement, we restate all the numbers as percentages of:

A. revenue.

B. total assets.

C. total owners’ equity.

D. total liabilities.

EBIT is $10,000 and interest expense is $4,000. If the tax rate is 30%, what is the net income?

A. $3,800

B. $4,200

C. $5,200

D. $8,400

Which industry has the highest average industry debt-to-equity ratio?

A. Oil and gas

B. Airlines

C. Auto

D. Drugs

__________ is the listing of all assets and all claims against the assets of a company.

A. The Balance Sheet or Statement of Financial Position

B. Income Statement

C. The Sources and Uses of Cash

D. All of the above

Which of the statements below is FALSE?

A. The cash coverage ratio is EBIT plus depreciation divided by interest expense.

B. Times interest earned equals EBIT divided by interest expense.

C. The times interest earned ratio tells us the number of times a company has resorted to debt financing over the year.

D. The debt ratio basically tells us the amount in debt for every dollar of assets.

Orange Electronics Inc. has a profitability ratio of 0.14, an asset turnover ratio of 1.7, a debt to equity ratio of 0.60, and a total asset to equity ratio of 1.60. What is the firm’s ROE?

A. 14.28%

B. 22.85%

C. 38.08%

D. 41.76%

Total current liabilities are $100,000 and total owners’ equity is
$2,000,000. What are total assets?

A. We need to know retained earnings before we can compute total assets.

B. We need more information on long-term liabilities before we can compute
total assets.

C. $2,000,000

D. $2,100,000

Because financial ratios can vary across industries, it is __________ these ratios by industry.

A. not necessary to study

B. unimportant to benchmark

C. important to benchmark

D. futile to examine

Which industry has the lowest average industry debt-to-equity ratio?

A. Auto

B. Retail

C. Oil and gas

D. Airlines

The debt-to-equity ratios for Firm 1, Firm 2, Firm 3, and Firm 4 are 0.25, 0.35, 0.35, and 0.45, respectively. The earnings per share for Firm 1, Firm 2, Firm 3, and Firm 4 are $4.5, $3.5, $3, and $2.5, respectively. Generally speaking, which firm is placing fewer burdens on its borrowing?

A. Firm 1

B. Firm 2

C. Firm 3

D. Firm 4

You have agreed to a $50,000 fixed-rate loan from First National Bank today and promise to repay the loan with 36 equal monthly payments at an APR of 6.50%. How large are your monthly payments? Use a financial calculator to determine your answer.

A. $1,246.77

B. $1,458.21

C. $1,532.45

D. $1,650.71

The __________ is the formal contract for the bond between the issuing company and the buyer.

A. debenture

B. sinking fund

C. indenture

D. prospectus

Banks and other lending institutions:

A. frown on family funding for start-up businesses.

B. have lending models better fitted for start-up businesses compared with established businesses.

C. are in competition with the Small Business Administration (SBA) for start-up loans.

D. are often the next sources of financing for businesses after personal and family contributions.

A letter of credit or line of credit is a preapproved borrowing amount that works much like a:

A. premium loan.

B. discount loan.

C. syndicated loan.

D. credit card.

Which of the following statements is FALSE about sole proprietorships?

A. They mix the assets of the company with the personal assets of the owner.

B. The owner receives some, but not all, of the profits.

C. The limitation of capital may constrain growth.

D. The owner makes all decisions.

If you go to your bank and it grants you a lump sum loan today that requires monthly payments for a fixed period of time to repay the borrowed money, you have most likely received a:

A. discount loan.

B. line of credit.

C. straight loan with a preset payment schedule.

D. compensating balance loan.

__________ is a government-authorized agency created to enforce the 1933 Securities Act.

A. The Securities and Exchange Commission (SEC)

B. The Federal Reserve System (FRS)

C. The Federal Deposit Insurance Corporation (FDIC)

D. The Stock Exchange Commission (SEC)

Syndicated loans are:

A. loans where multiple banks join together to make a loan to a single company.

B. loans made to television stations to purchase re-runs.

C. loans where one bank makes several loans to firms in the same industry in an effort to diversify the bank’s loan portfolio.

D. loans bought by other banks that have unused funds available for loans.

Bonds may be issued through either a __________ or a __________.

A. private auction; federal auction

B. state agency; federal agency

C. public auction; private placement

D. None of the above

With a line of credit, the bank is compensated:

A. based on the outstanding balance of the loan.

B. based on the principal value of the credit line.

C. exclusively with a fixed annual payment.

D. based on a fixed interest rate tied to the T-bill rate.

Starting a business with __________ is by far the most common start-up financing.

A. bonds and equity

B. personal and family funds

C. bank loans

D. venture capital

A preliminary prospectus is called a(n):

A. indenture.

B. tombstone.

C. red herring.

D. letter of comment.

Commercial paper has a minimum denomination of:

A. $10,000.

B. $50,000.

C. $100,000.

D. $500,000.

What is the street name for the advertisement issued during the period of time when a firm is waiting for approval from the SEC to issue new securities? This advertisement typically contains the name of the issuing firm and the list of investment bankers involved in underwriting and marketing the new issue.

A. Indenture

B. Tombstone

C. Red herring

D. Letter of comment

A major issue with venture capitalists and angel investors is the rate at which their funds will be used up. This is called the:

A. consumption or constriction rate.

B. burn rate or bleed rate.

C. IV rate.

D. depreciation rate.

Commercial paper and bankers’ acceptances are two forms of corporate financing typically undertaken by:

A. start-up firms.

B. mature firms.

C. sole proprietorships.

D. All of the above

A __________ type of loan is similar to a line of credit. However, even though only a portion of the loan is available to the borrower, interest is paid on the entire face value of the loan.

A. line of credit

B. compensating balance

C. straight loan with preset payment schedule

D. discount

For your firm’s initial public offering of stock, your investment banker has guaranteed a specific amount of funds your firm will receive. This is an example of what type of investment banker compensation?

A. Due diligence

B. Firm commitment

C. IPO

D. Best-efforts

The two chapters for commercial businesses to handle financial difficulties under the Bankruptcy Reform Act of 1978 are:

A. Chapters 7 and 11.

B. Chapters 7 and 13.

C. Chapters 9 and 11.

D. Chapters 11 and 13.

Typical U.S. Small Business Administration (SBA) guarantee loans carry an interest rate equal to:

A. the prime rate.

B. current market rates.

C. the prime rate plus a 1% default risk premium.

D. the prime rate less 1% due to the SBA guarantee.

MANAGERIAL FINANCE ll EXAM 8

__________ is the degree to which a firm or individual utilizes borrowed money to make money.

A. Variable leverage

B. Fixed leverage

C. Operating leverage

D. Financial leverage

__________ means that managers or owners of a company know more about the future performance of the company than potential outside lenders.

A. Symmetric information

B. External financing

C. Asymmetric information

D. Two-sided information

At the optimal debt-to-equity ratio, the cost of capital (WACC) is __________ for the firm. This point reflects the maximum benefit of leverage.

A. the lowest

B. the highest

C. at the midpoint

D. irrelevant

If earnings reflect a return greater than the cost of debt, then:

A. the more debt the company has sold, the worse off the shareholders are.

B. the less debt the company has sold, the better off the shareholders are.

C. the more debt the company has sold, the better off the shareholders are.

D. the more debt the company has bought, the better off the shareholders are.

According to the Pecking Order Hypothesis, less profitable companies in an asymmetric world will need more __________; they will first seek __________ and will avoid the __________.

A. external funding; equity funding; debt market

B. internal funding; the use of retained earnings; debt market

C. external funding; debt financing; equity market

D. internal funding; the use of retained earnings; equity market

Which of the statements below is FALSE?

A. The “riskier” borrower will most likely have to pay a lower cost for funds.

B. In the bond market, we see different rates as the different yields on bonds for different companies.

C. In the equity market, we see different rates as the different required returns for companies due to their different betas.

D. In general, the cost of funds for an individual or company will be directly related to the lender’s view of the risk of repayment of the funds.

Which of the statements below is FALSE?

A. Two different individuals or companies could go to the same bank and request exactly the same amount of funding for their projects and yet could be required to pay different costs for their funds.

B. It is important to remember that a public company is a separate entity and in that capacity can borrow from bondholders, preferred stockholders, and common shareholders, but not from banks.

C. Lenders, regardless of their classification, all consider their funds as investments, for which they hope to make a positive return.

D. The return to the investor is the cost to the seller.

Given a choice, firms will exhaust the cheapest source of external funding first before moving on to the __________ source.

A. more economic

B. most cheap

C. most expensive

D. next cheapest

Fresh out of Harvard Business School, Joe Walker, the new CFO of Joe’s Southern Cornbread Company, wants to shake things up at the sleepy little food company headquartered in Birmingham, Alabama. The firm is currently an all-equity firm because “that’s the way we’ve always done it.” Under pressure from a new group of major stockholders, however, Walker is considering acquiring some debt (leverage) in an effort to boost earnings per share. The company currently has 600 shares, but he is thinking about borrowing $6,000 at 10% per year and buying back 200 of those shares. Refer to the scenario above. What level of EBIT would make this an attractive strategy?

A. $2,000

B. $1,800

C. $1,600

D. $1,400

The more __________ used, the greater the leverage a company employs on behalf of its owners.

A. debt

B. equity

C. debt and equity

D. All of these

The indirect costs of bankruptcy can include which of the following?

A. Setting aside projects with good NPVs

B. Lost sales

C. Loss of confidence in the firm’s products and services

D. All of the above

Information is asymmetric when one party in a transaction has a different set of __________ than the other party in the transaction.

A. asymmetries

B. information

C. hypotheses

D. earnings

Fresh out of Harvard Business School, Joe Walker, the new CFO of Joe’s Southern Cornbread Company, wants to shake things up at the sleepy little food company headquartered in Birmingham, Alabama. The firm is currently an all-equity firm because “that’s the way we’ve always done it.” Under pressure from a new group of major stockholders, however, Walker is considering acquiring some debt (leverage) in an effort to boost earnings per share. The company currently has 600 shares, but he is thinking about borrowing $6,000 at 10% per year and buying back 200 of those shares. Refer to the scenario above. What would the unleveraged and leveraged EPSs look like if EBIT were only $1,200?

A. All-equity EPS = $2.00, leveraged-equity EPS = $1.50

B. All-equity EPS = $3.00, leveraged-equity EPS = $2.00

C. All-equity EPS = $2.00, leveraged-equity EPS = $3.00

D. All-equity EPS = $4.50, leveraged-equity EPS = $3.00

The initial decision of what products and services to produce has a much __________ on the profitability of the firm when compared to the __________.

A. smaller impact; financing decision

B. larger impact; dividend decision

C. larger impact; investment decision

D. larger impact; financing decision

A large public firm cannot issue which of the following types of securities?

A. Common stock

B. T-Bills

C. Preferred stock

D. Bonds

A rising cost of capital (WACC) __________ the value of the firm’s future cash flows.

A. increases

B. reduces

C. keeps constant

D. has no effect on

Financial leverage is the degree to which a firm or individual utilizes:

A. borrowed money to pay wages.

B. borrowed money to pay dividends.

C. borrowed money to magnify equity earnings.

D. borrowed money to diminish equity earnings.

A __________ is a separate entity and in that capacity can borrow from banks, bondholders, preferred stockholders, and common shareholders.

A. limited partnership

B. sole proprietorship

C. government organization

D. public company

To say that the investing decision and financing decision of a firm are separable is to say:

A. that firms first select what products or services they will produce and then select how best to finance these products or services.

B. that firms first select how best to finance products or services and then select what products or services they will produce.

C. that firms first select what services they want and then what products they will produce.

D. that firms first select what products they will produce and then what services they want.

With the background ideas of using the cheapest source first and the impact of asymmetric information, the Pecking Order Hypothesis predicts which of the following?

A. Firms prefer internal financing second to external financing.

B. If external financing is required, firms should first seek equity financing.

C. If external financing is required, firms will choose to issue the riskiest security first, starting with debt financing and using equity as a last resort.

D. If external financing is required, firms will choose to issue the safest or cheapest security first, starting with debt financing and using equity as a last resort.

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