1. Wealth maximization as the goal of the firm implies enhancing the wealth of
A) the Board of Directors.
B) the firm's employees.
C) the federal government.
D) the firm's stockholders.
2. Profit maximization fails because it ignores all EXCEPT
A) the timing of returns.
B) earnings per share.
C) cash flows available to stockholders.
3. The ________ the coefficient of variation, the ________ the risk.
A) lower; lower
B) higher; lower
C) lower; higher
D) more stable; higher
4. The beta of the market
A) is greater than 1.
B) is less than 1.
C) is 1.
D) cannot be determined.
5. The higher an asset's beta,
A) the more responsive it is to changing market returns.
B) the less responsive it is to changing market returns.
C) the higher the expected return will be in a down market.
D) the lower the expected return will be in an up market.
6. The ________ rate of interest is typically the required rate of return on a three-month U.S.
7. The major factor(s) affecting the cost, or interest rate, on a bond is (are) its
B) size of the offering.
C) issuer risk.
D) basic cost of money.
E) all of the above.
8. A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding.
The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of
similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.
9. Key differences between common stock and bonds include all of the following EXCEPT
A) common stockholders have a voice in management; bondholders do not.
B) common stockholders have a senior claim on assets and income relative to bondholders.
C) bonds have a stated maturity but stock does not.
D) interest paid to bondholders is tax-deductible but dividends paid to stockholders are not.
10. All of the following features may be characteristic of preferred stock EXCEPT
B) no maturity date.
C) tax-deductible dividends.
11. A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends,
and a required return of 10 percent. The value of a share of the firm's common stock is
12. Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of
dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy
Lou, Inc.'s common stock is ________.
13. Tangshan Mining Company, with a cost of capital of 10 percent, is considering investing in
project A, with an initial investment of $1,000,000. Project A is expected to provide equal cash
inflows over its 15 year useful life. Based on this information, the breakeven cash inflow for the
D) none of the above.
14. A firm has fixed operating costs of $525,000, of which $125,000 is depreciation expense. The
firm's sales price per unit is $35 and its variable cost per unit is $22.50. The firm's cash
operating breakeven point in units is
15. A firm has fixed operating costs of $650,000, a sales price per unit of $20, and a variable cost
per unit of $13. At a base sales level of 500,000 units, the firm's degree of operating leverage is
16. The firm's ________ is the mix of long-term debt and equity utilized by the firm, which may
significantly affect its value by affecting return and risk.
A) dividend policy
B) capital budget
C) capital structure
D) working capital
17. Poor capital structure decisions can result in ________ the cost of capital, resulting in ________
acceptable investments. Effective capital structure decisions can ________ the cost of capital,
resulting in ________ acceptable investments.
A) increasing; fewer; lower; more
B) decreasing; more; higher; fewer
C) increasing; more; lower, fewer
D) decreasing; fewer; higher; more
18. Net working capital is defined as
A) a ratio measure of liquidity best used in cross-sectional analysis.
B) the portion of the firm's assets financed with short-term funds.
C) current liabilities minus current assets.
D) current assets minus current liabilities.
19. One major risk a firm assumes in an aggressive financing strategy is
A) the possibility that collections will be slower than expected.
B) the possibility that long-term funds may not be available when needed.
C) the possibility that short-term funds may not be available when needed.
D) the possibility that it will run out of cash.
20. If the firm was to shift $7,000 of fixed assets to current assets, the firm's net working capital
would ________, the annual profits on total assets would ________, and the risk of not being
able to meet current obligations would ________, respectively. (See Table 14.2)
A) increase; decrease; increase
B) decrease; increase; decrease
C) increase; decrease; decrease
D) decrease; increase; increase