TEST BANK Fundamentals of Financial Management, 13th ed., Pearson Chapter 1: The Role of Financial Management Just click on the button next to each answer and you'll get immediate feedback Note: Your browser must support JavaScript in order to use this quiz "Shareholder wealth" in a firm is represented by: the number of people employed in the firm the book value of the firm's assets less the book value of its liabilities the amount of salary paid to its employees the market price per share of the firm's common stock The long-run objective of financial management is to: maximize earnings per share maximize the value of the firm's common stock maximize return on investment maximize market share What are the earnings per share (EPS) for a company that earned $100,000 last year in after-tax profits, has 200,000 common shares outstanding and $1.2 million in retained earning at the year end? $100,000 $6.00 $0.50 $6.50 A(n) would be an example of a principal, while a(n) example of an agent would be an shareholder; manager manager; owner accountant; bondholder shareholder; bondholder The market price of a share of common stock is determined by: the board of directors of the firm the stock exchange on which the stock is listed the president of the company individuals buying and selling the stock The focal point of financial management in a firm is: the number and types of products or services provided by the firm the minimization of the amount of taxes paid by the firm the creation of value for shareholders the dollars profits earned by the firm The decision function of financial management can be broken down into the decisions financing and investment investment, financing, and asset management financing and dividend capital budgeting, cash management, and credit management The controller's responsibilities are primarily treasurer's responsibilities are primarily related to in nature, while the operational; financial management financial management; accounting accounting; financial management financial management; operations In the US, the has been given the power to adopt auditing, quality control, ethics, and disclosure standards for public companies and their auditors as well as investigate and discipline those involved American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB) Public Company Accounting Oversight Board (PCAOB) Securities and Exchange Commission (SEC) 10 A company's is (are) potentially the most effective instrument of good corporate governance common stock shareholders board of directors top executive officers 11 The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to: a series of corporate scandals involving Enron, WorldCom, Global Crossing, Tyco and numerous others a dramatic rise in the US trade deficit charges of excessive compensation to top corporate executives rising complaints by investors and security analysts over the financial accounting for stock options The following item is NEW to the 13th edition 12 _ refers to meeting the needs of the present without compromising the ability of future generations to meet their own needs Corporate Social Responsibility (CSR) Sustainability Convergence Green Economics Chapter 2: The Business, Tax, and Financial Environments Just click on the button next to each answer and you'll get immediate feedback Note: Your browser must support JavaScript in order to use this quiz Which of the following enjoys limited liability? A general partnership A corporation A sole proprietorship None of the above Michael Cohn is a "member" (a type of owner) of a marine supply business Michael's business is a sole proprietorship a corporation a limited liability company a general partnership The Counting House, Inc., purchased 5-year property class equipment for $60,000 It uses the MACRS method of depreciation What is tax depreciation for the second year of the asset's life? $12,000 $19,200 $20,000 $24,000 A corporation in which you are a shareholder has just gone bankrupt Its liabilities are far in excess of its assets You will be called on to pay: a proportionate share of bondholder claims based on the number of common shares that you own a proportional share of all creditor claims based on the number of common shares that you own an amount that could, at most, equal what you originally paid for the shares of common stock in the corporation nothing A 30-year bond issued by Gary's Plaid Pants Warehouse, Inc., in 1997 would now trade in the primary money market secondary money market primary capital market secondary capital market A major advantage of the corporate form of organization is: reduction of double taxation limited owner liability legal restrictions ease of organization Money market mutual funds enable individuals and small businesses to invest indirectly in moneymarket instruments are available only to high net-worth individuals are involved in acquiring and placing mortgages are also known as finance companies The purpose of financial markets is to: increase the price of common stocks lower the yield on bonds allocate savings efficiently control inflation Which of the following is NOT an example of a financial intermediary? International Business Machines, Inc (IBM) Vanguard Mutual Fund El Dorado Savings and Loan Association Bank of America 10 How are funds allocated efficiently in a market economy? The most powerful economic unit receives the funds The economic unit that is willing to pay the highest expected return receives the funds the economic unit that considers itself most in need of funds receives them Receipt of the funds is rotated so that each economic unit can receive them in turn 11 Assume that a "temporary" additional (US federal tax related) first-year bonus depreciation of 50 percent applies to a new, $100,000 piece of equipment purchased by Bellemans Chocolatier, Inc The asset has a $10,000 estimated final salvage value If this asset is fully depreciated for tax purposes over its useful life, the overall amount that Bellemans will have depreciated for tax purposes is $90,000 $100,000 $135,000 $150,000 Chapter 3: The Time Value of Money Just click on the button next to each answer and you'll get immediate feedback Note: Your browser must support JavaScript in order to use this quiz You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20 years You expect annual interest rates will be percent over that time period The maximum price you would be willing to pay for the annuity is closest to $32,000 $39,272 $40,000 $80,000 With continuous compounding at 10 percent for 30 years, the future value of an initial investment of $2,000 is closest to $34,898 $40,171 $164,500 $328,282 In years you are to receive $5,000 If the interest rate were to suddenly increase, the present value of that future amount to you would fall rise remain unchanged cannot be determined without more information Assume that the interest rate is greater than zero Which of the following cashinflow streams should you prefer? Year1 Year2 Year3 $400 $300 $200 Year4 $100 $100 $200 $300 $400 $250 $250 $250 $250 Any of the above, since they each sum to $1,000 You are considering investing in a zero-coupon bond that sells for $250 At maturity in 16 years it will be redeemed for $1,000 What approximate annual rate of growth does this represent? percent percent 12 percent 25 percent To increase a given present value, the discount rate should be adjusted upward downward True Fred For $1,000 you can purchase a 5-year ordinary annuity that will pay you a yearly payment of $263.80 for years The compound annual interest rate implied by this arrangement is closest to percent percent 10 percent 11 percent You are considering borrowing $10,000 for years at an annual interest rate of 6% The loan agreement calls for equal payments, to be paid at the end of each of the next years (Payments include both principal and interest.) The annual payment that will fully pay off (amortize) the loan is closest to $2,674 $2,890 $3,741 $4,020 When n = 1, this interest factor equals one for any positive rate of interest PVIF FVIF PVIFA FVIFA None of the above (you can't fool me!) 10 (1 + i) n PVIF FVIF PVIFA FVIFA 11 You can use to roughly estimate how many years a given sum of money must earn at a given compound annual interest rate in order to double that initial amount $59.04 14 Financial intermediaries not invest in new long-term securities include insurance companies and pension funds include the national and regional stock exchanges are usually underwriting syndicates 15 The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to: a series of corporate and accounting frauds involving Enron, Arthur Andersen, WorldCom, and numerous others a dramatic rise in the US trade deficit charges of excessive compensation to top corporate executives rising complaints by investors and security analysts over the financial accounting for stock options The following item is NEW to the 13th edition 16 Because of US "Securities Offering Reform" can take advantage of a special streamlined "shelf registration" process that provides for automatic effectiveness of a registration statement upon filing with the SEC (i.e., no SEC review) only unseasoned issuers only seasoned issuers only well-known seasoned issuers (WKSIs) only seasoned issuers and well-known seasoned issuers (WKSIs) Chapter 20: Long-Term Debt, Preferred Stock, and Common Stock Just click on the button next to each answer and you'll get immediate feedback Note: Your browser must support JavaScript in order to use this quiz A bond issue may be retired by: calling the bonds if there is a call feature converting the bonds (if convertible) into common stock making a single-sum payment at final maturity all of the above Protective covenants are: to protect employees to protect the interests of the company to protect shareholders to protect bondholders Which of the following bonds offer the investor the most protection? First-mortgage bonds Debentures Subordinated debentures Income bonds A company refunds its bonds for any of the following reasons EXCEPT for: to eliminate restrictive covenants to reduce interest costs to show higher reported profits to issue new bonds at higher rate of interest The call-option value of a callable bond is likely to be high when interest rates are volatile interest rates are low and expected to remain low interest rate are high and expected to remain high markets are inefficient Treasury stock is: common stock issued by the U.S government preferred stock issued by the U.S government common stock that has been repurchased and is being held by the issuing company a corporation's common stock outstanding A call provision, a sinking fund, and/or conversion are used to retire bonds and preferred stock bonds and common stock preferred stock and common stock only common stock Preferred shareholders' claims on assets and income of a firm come of creditors those of common shareholders those before; and also before after; but before after; and also after equal to; and equal to Dual classes of promotional are common in new ventures where usually goes to the founders bonds; bonds preferred stock; preferred stock common stock; common stock warrants; warrants Chapter 21: Term Loans and Leases Just click on the button next to each answer and you'll get immediate feedback Note: Your browser must support JavaScript in order to use this quiz One difference between a financial lease and operating lease is that: there is a often a call option in a financial lease there is often an option to buy in an operating lease an operating lease is often cancellable by the lessee a financial lease is often cancellable by the lessee The principal reason for the existence of leasing is that: intermediate-term loans are difficult to obtain this is a type of financing unaffected by changes in tax law companies, financial institutions, and individuals derive different benefits from owning assets leasing is a renewable source of intermediate-term funds A way to analyze whether debt or lease financing would be preferable is to: compare the net present values under each alternative, using the cost of capital as the discount rate compare the net present values under each alternative, using the after-tax cost of borrowing as the discount rate compare the payback periods for each alternative compare the effective interest costs involved for each alternative A conventional revolving credit agreement allows a firm: to borrow a fixed amount for the entire commitment period to borrow for a short-period with a right to renew the loan during the commitment period to possibly include a provision to convert the credit agreement into a term loan contract at maturity to all of the above The type of lease that includes a third party, a lender, is called a(n): sale and leaseback direct leasing arrangement leveraged lease operating lease One advantage of a financial lease is that: it has a shorter maturity than term loans it never appears as a liability on the balance sheet it eliminate the needs to make periodic payments it provides a way to indirectly depreciate land Medium-term notes (MTNs) have maturities that range up to one year (but no more) two years (but no more) ten years (but no more) thirty years (or more) A direct lease, a sale and leaseback, and a leveraged lease are all examples of operating leases financial leases full-service leases "off-balance sheet" methods of financing Chapter 22: Convertibles, Exchangeables, and Warrants Just click on the button next to each answer and you'll get immediate feedback Note: Your browser must support JavaScript in order to use this quiz A $500 par-value convertible debenture is selling at $520 If the conversion ratio is 20, what is the conversion price? $19.23 $20.18 $25.00 $26.00 A company has just issued convertible bonds with $1,000 par value and a conversion ratio of 40 Which of the following is most likely to be the market price per share of the company's common stock at present? Under $25 $25 Between $25 and $30 Above $30 If a warrant carries a right to buy one share of common stock and is exercisable at $20 per common share while the market price of a share is $30, the theoretical value of the warrant is: $20 $10 $5 $0 An exchangeable bond: can be exchanged for another bond of a different company can be exchanged for another bond of the same company involves the common stock of another company is the same thing as a convertible bond The call price of a convertible bond is generally equal to the conversion ratio times the market price per share of common stock greater than the face value of the bond equal to the face value of the bond divided by the conversion ratio equal to the value at maturity A(n) is a bond that may be exchanged for common stock of the same corporation exchangeable bond debenture convertible bond warrant A warrant is a relatively option to purchase price over a specified period of time short-term; bonds long-term; bonds short-term; common stock long-term; common stock at a specified exercise Some options have a current theoretical value and yet that is negative; sell for positive prices that is positive; have a zero current price of zero; sell for positive prices all of the above Chapter 23: Mergers and Other Forms of Corporate Restructuring Just click on the button next to each answer and you'll get immediate feedback Note: Your browser must support JavaScript in order to use this quiz Suppose that the market price of Company X is $45 per share and that of Company Y is $30 If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be: 667 1.0 1.125 1.5 The restructuring of a corporation should be undertaken if the restructuring can prevent an unwanted takeover the restructuring is expected to create value for shareholders the restructuring is expected to increase the firm's revenue the interests of bondholders are not negatively affected The "information effect" refers to the notion that a corporation's actions may convey information about its future prospects management is reluctant to provide financial information that is not required by law agents incur costs in trying to obtain information the financial manager should attempt to manage sensitive information about the firm In the long run, a successful acquisition is one that: enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage enables the acquirer to diversify its asset base increases the market price of the acquirer's stock over what it would have been without the acquisition increases financial leverage Bidding companies often pay too much for the acquired firm The hubris hypothesis explains this by suggesting that the bidders have too little information to make an optimal decision have big egos and this impedes rational decision-making have difficulty in thinking strategically over the long-term are overly influenced by the tax consequences of an acquisition A tender offer is a goodwill gesture by a "white knight." a would-be acquirer's friendly takeover attempt a would-be acquirer's offer to buy stock directly from shareholders viewed as sexual harassment when it occurs in the workplace The public sale of common stock in a subsidiary in which the parent usually retains majority control is called a pure play a spin-off a partial sell-off an equity carve-out In the United States, goodwill charges arising from a current acquisition are generally deductible for "tax purposes" over 15 years 20 years 40 years no years (i.e., these goodwill charges are not deductible for "tax purposes") Empirical evidence on acquisitions indicates the shareholders of the selling company, and those of the buying company no; no substantial; no no; substantial excess returns on average to e xcess returns on average to substantial; substantial 10 One means for a company to "go private" is divestiture the pure play the leveraged buyout (LBO) the prepackaged reorganization 11 Recent accounting changes in the US eliminated the purchase method, allowing only the pooling-of-interests method for mergers and acquisitions eliminated the pooling-of-interests method, allowing only the purchase method for mergers and acquisitions allow for both the purchase method and the pooling-of-interests method for mergers and acquisitions outlawed the recording of goodwill for any merger or acquisition Chapter 24: International Financial Management Just click on the button next to each answer and you'll get immediate feedback Note: Your browser must support JavaScript in order to use this quiz Which of the following is a legitimate reason for international investment? Dividends from a foreign subsidiary are tax exempt in the United States Most governments not tax foreign corporations There are possible benefits from international diversification International investments have less political risk than domestic investments Interest-rate parity refers to the concept that, where market imperfections are few, the same goods must sell for the same price across countries interest rates across countries will eventually be the same there is an offsetting relationship between interest rate differentials and differentials in the forward spot exchange market there is an offsetting relationship provided by costs and revenues in similar market environments The forward market is especially well-suited to offer hedging protection against translation risk exposure transactions risk exposure political risk exposure taxation Suppose that the Japanese yen is selling at a forward discount in the forwardexchange market This implies that most likely this currency has low exchange-rate risk this currency is gaining strength in relation to the dollar interest rates are higher in Japan than in the United States interest rates are declining in Japan Following FASB Statement No 52, gains or losses from currency translation are shown: on the income statement as currency gains (or losses) on the balance sheet as an adjustment to owners' equity on the balance sheet as an adjustment to cash nowhere because gains or losses from currency changes need not be shown All of the following are hedges against exchange-rate risk EXCEPT balancing monetary assets and liabilities use of spot market foreign-currency swaps adjustment of funds commitments between countries A multinational can centralize cash management and attempt to reduce exchange rate risk exposure through the use of a reinvoicing center a bill of lading a time draft countertrade Forfaiting most closely resembles export factoring countertrade netting reinvoicing The euro is the name for a currency deposited outside its country of origin a bond sold internationally outside of the country in whose currency the bond is denominated a common European currency a type of sandwich 10 Assume that a Big Mac hamburger is selling for £1.99 in the United Kingdom, the same hamburger is selling for $2.71 in the United States, and the actual exchange rate (to buy $1.00 with British pounds) is 0.63 According to the British pound is the US dollar purchasing-power parity; undervalued interest-rate parity; undervalued purchasing-power parity; overvalued interest-rate parity; overvalued Clear Answ ers , ... to $3 2,0 00 $3 9,2 72 $4 0,0 00 $8 0,0 00 With continuous compounding at 10 percent for 30 years, the future value of an initial investment of $ 2,0 00 is closest to $3 4,8 98 $4 0,1 71 $16 4,5 00 $32 8,2 82 In... amounts of of and multiples above the minimum $1 0,0 00; $1 0,0 00 $1 0,0 00; $ 1,0 00 $ 1,0 00; $ 1,0 00 $ 1,0 00; $100 $100; $100 13 Accounts receivable conversion (a.k.a ., check conversion) is the conversion of. .. House, Inc ., purchased 5-year property class equipment for $6 0,0 00 It uses the MACRS method of depreciation What is tax depreciation for the second year of the asset's life? $1 2,0 00 $1 9,2 00 $2 0,0 00