Multiple Choice Questions

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Occurs when a "follower" receives the benefit of an expenditure made by a "leader" by imitating the leader's behavior.

A. The Principle of Comparative Advantage

B. free-rider problem

C. put option

D. asymmetric information

Occurs when inaccurate information can falsely exist

A. moral hazard

B. free-rider problem

C. The Principle of Valuable Ideas

D. adverse selection

Refers to situations wherein the agent can take unseen actions for personal benefit even though such actions are costly to the principal.

A. adverse selection

B. zero-sum game

C. moral hazard

D. The Behavioral Principle

Remaining maturity refers to:

A. the length of an asset s life when it is issued.

B. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet, a statement of cash flows, and accompanying notes.

C. a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

D. the amount of time remaining until its maturity.

Generally accepted accounting principles (GAAP) refers to

A. the length of an asset s life when it is issued.

B. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet, a statement of cash flows, and accompanying notes.

C. a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

D. the extent to which something can be sold for cash quickly and easily without loss of value.

Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the current yield is 10%. Which of the following statements is true?

A. The current yield was a lot less than 9% when the bond was first issued

B. The market value of the bond is more than $1,000

C. The market value of the bond is less than $1,000

D. The current yield was a lot greater than 9% when the bond was first issued

If the yield to maturity for a bond is less than the bond's coupon rate, then the market value of the bond is

A. greater than the par value.

B. equal to the par value.

C. cannot tell

D. less than the par value.

According to the CAPM, the expected return for a portfolio is determined by the portfolio's.

A. variance.

B. beta.

C. standard deviation.

D. none of these

Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include

A. lower transaction costs.

B. less political risk.

C. costs of converting currencies.

D. all of these

According to the Principle of Risk-Return Trade-Off, investors require a higher return to compensate for

A. lack of diversification

B. less risk

C. greater risk

D. diversification

One problem with using negative values for w1 (the proportion invested in the riskless asset) to represent a borrowed amount is that the implied borrowing rate of interest is the same as

A. the prime rate of interest

B. the lending rate of interest

C. the nominal rate of interest

D. the current rate of interest

Stony Products has an inventory conversion period (ICP) of about 60.83 days. The receivables collection period (RCP) is 36.50 days. The payables deferral period (PDP) is about 30.42 days. What is Stony's cash conversion cycle (CCC)?

A. about 66 days

B. about 68 days

C. about 69 days

D. about 67 days

Stony Products has a payables turnover of six times. What is Stony's payables deferral period (PDP)?

A. about 30.42 days

B. about 56.50 days

C. about 60.83 days

D. none of these

Stony Products has a receivables turnover of ten times. What is Stony s receivables collection period (RCP)?

A. about 35.42 days

B. about 36.50 days

C. about 40.83 days

D. none of these

Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes

A. an irrelevant consideration for a cost of capital.

B. the relevant consideration for a cost of capital.

C. important only if the firm faces financial distress.

D. none of these

Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes

A. an irrelevant consideration for a cost of capital.

B. the relevant consideration for a cost of capital.

C. important only if the firm faces financial distress.

D. none of these

There are two important tax considerations for a capital budgeting project. These include which (if any) of the following?

A. It is indeed cash flow that s irrelevant.

B. The standard cash flow estimation does not explicitly identify the financing costs.

C. The Principle of Incremental Benefits reminds us that it is the incremental cash flow that s relevant.

D. none of these

Ideas for capital budgeting projects come from all levels within an organization. The bottom up process results in ideas percolating through the organization.

A. sideways

B. downward

C. upward

D. any way

Studies show systematic differences in capital structures across industries. These are due mostly to differences in

A. the firm s inventory turnover ratio.

B. accounting practices.

C. management s attitude toward what other industries are doing.

D. the ability of assets to support borrowing.

A firm cannot simply adopt the industry average debt ratio, because differences exist among firms in any particular industry with respect to

A. tax position.

B. size.

C. competitive position.

D. all of these

Studies show systematic differences in capital structures across industries. These are due mostly to differences in

A. hiring and firing practices.

B. the availability of tax shelter provided by things other than debt, such as accelerated depreciation, investment tax credit, and operating tax loss carryforwards.

C. what the arbitrage pricing theory tells us.

D. none of these

There can be a variety of motives for stock repurchases including

A. a buyback of overvalued stock.

B. an increase in leverage.

C. a decrease in anticipated earnings.

D. all of these

Says to look for opportunities to develop asset-based financing arrangements that offer new positive-NPV financing mechanisms.

A. The Time Value of Money Principle

B. The Principle of Valuable Ideas

C. The Principle of Comparative Advantage

D. The Principle of Self-Interested Behavior

Says to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will provide.

A. The Capital Market Efficiency

B. The Options Principle

C. The Principle of Incremental Benefits

D. The Principle of Comparative Advantage

The wholesale price for Captain John s is $0.612 per loaf, and the variable cost of production is $0.387 per loaf. Captain John s is expecting that expansion will allow them to sell an additional 4.5 million loaves in the next five years. What additional revenues minus expenses will be generated from expansion?

A. $912,500

B. $1,000,500

C. $1,102,000

D. $1,012,500

The wholesale price for Captain John s is $1.70 per loaf, and the variable cost of production is $0.80 per loaf. What is the contribution margin?

A. $2.50

B. $0.90

C. cannot tell

D. $1.70

You are thinking about abandoning your business. If you do, then you will receive $168,000 on an after-tax basis from the land associated with your business.

Abandoning your business would bring $15,000 on an after-tax basis from sale of equipment; also, you would not have to repair equipment at a cost of $10,800 per year on an after-tax basis. The before-tax cash flows from your business are $60,000 per year. Your tax rate is 25% and your required return is 12%. If you abandon your business, you will be able to spend your time earning wages that are equivalent to receiving an annuity of $16,000 per year on an after-tax basis until you retire in 12 years. At that time you could sell your land but would only realize what you could receive today. Should you abandon your business if you can make more money doing that?

A. No. The NPV from abandoning is negative.

B. Yes. Abandon the business.

C. No. The NPV from abandoning is smaller than -$5,000

D. Yes. The NPV is greater than $100,000

In efficient markets, as in the United States, you should think long and hard before you conclude that a market price is

A. wrong.

B. fair.

C. followed by many analysts.

D. all of these

Pursuing valuable ideas is the best way

A. to restrain your spending.

B. to achieve extraordinary returns.

C. to avoid risk.

D. to get yourself in trouble.

Says to forecast the firm s cash flows, and analyze the incremental cash flows of alternative decisions.

A. The Principle of Incremental Benefits

B. The Signaling Principle

C. The Principle of Risk-Return Trade-Off

D. The Time Value of Money Principle

Says to carefully evaluate and monitor the financial plan s impact on the firm and its stakeholders.

A. The Principle of Capital Market Efficiency

B. The Principle of Risk-Return Trade-Off

C. The Principle of Self-Interested Behavior

D. The Principle of Diversification

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