Answer Options:
a. True
b. False
Answer:
a. True
Question: Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost. a. True b. False
Answer:
a. True
Question: The profit margin measures net income per dollar of sales. a. True b. False
Answer:
a. True
Question: In the lease-versus-buy decision, leasing is often preferable a. because it has no effect on the firm’s ability to borrow to make other investments. b. because, generally, no down payment is required, and there are no indirect interest costs. c. because lease obligations do not affect the firm’s risk as seen by investors. d. because the lessee owns the property at the end of the lease term. e. because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
Answer:
e. because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
Question: If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value. a. True b. False
Answer:
b. False
Question: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. a. True b. False
Answer:
a. True
Question: Short Corp just issued bonds that will mature in 10 years, and Long Corp issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid. Further assume that the Treasury yield curve is based only on the pure expectations theory. Under these conditions, which of the following statements is CORRECT? a. If the yield curve for Treasury securities is flat, Short’s bond must under all conditions have the same yield as Long’s bonds. b. If the yield curve for Treasury securities is upward sloping, Long’s bonds must under all conditions have a higher yield than Short’s bonds. c. If Long’s and Short’s bonds have the same default risk, their yields must under all conditions be equal.
Answer:
b
Question: The higher the firm’s flotation cost for new common equity, the more likely the firm is to use preferred stock, which has no flotation cost, and retained earnings, whose cost is the average return on the assets that are acquired. a. True b. False
Answer:
b. False
Question: Leasing is often referred to as off-balance-sheet financing because lease payments are shown as operating expenses on a firm’s income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm’s balance sheet.
Answer Options:
a. True
b. False
Answer:
a. True
Question: The “preferred” feature of preferred stock means that it normally will provide a higher expected return than will common stock.
Answer Options:
a. True
b. False
Answer:
b. False
Question: A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it. Most traded warrants are originally attached to bonds or preferred stocks.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Unlike bonds, the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis. This is because dividends on preferred stock are not tax deductible, whereas interest on bonds is deductible.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Operating leases help to shift the risk of obsolescence from the user to the lessor.
Answer Options:
a. True
b. False
Answer:
a. True