Answer Options:
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock issue.
e. Missing inventory is written off against retained earnings.
Answer:
c
Question: Which of the following does NOT normally influence a firm’s dividend policy decision?
Answer Options:
a. The firm’s ability to accelerate or delay investment projects without adverse consequences.
b. A strong preference by most of its shareholders for current cash income versus potential future capital gains.
c. Constraints imposed by the firm’s bond indenture.
d. The fact that much of the firm’s equipment is leased rather than bought and owned.
e. The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.
Answer:
d. The fact that much of the firm’s equipment is leased rather than bought and owned.
Question: Since 70% of the preferred dividends received by a corporation are excluded from taxable income, the component cost of equity for a company that pays half of its earnings out as common dividends and half as preferred dividends should, theoretically, be rs(0.30)x(0.50) + rps(1 – T)(0.70)x(0.50). a. True b. False
Answer:
b. False
Question: Which of the following is NOT an example of a derivative security? a. Futures. b. Options. c. Swaps. d. Forward contracts. e. Preferred stock.
Answer:
e. Preferred stock.
Question: Other things held constant, the higher a firm’s total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)), the higher its TIE ratio will be. a. True b. False
Answer:
b. False
Question: Assume that a piece of leased equipment has a relatively high expected residual value. From the lessee’s viewpoint, it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate. a. True b. False
Answer:
a. True
Question: In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.
Answer Options:
a. True
b. False
Answer:
b. False
Question: The operating margin measures operating income per dollar of assets. a. True b. False
Answer:
b. False
Question: Other things held constant, the more debt a firm uses, the lower its operating margin will be.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Amram Inc. can issue a 20-year bond with a 6% annual coupon at par. This bond is not convertible, not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the second bond, the convertible, callable bond with the sinking fund, to have it sell initially at par? a. The coupon rate should be exactly equal to 6%. b. The coupon rate could be less than, equal to, or greater than 6%, depending on the specific terms set, but in the real world the convertible feature would probably cause the coupon rate to be less than 6%. c. The rate should be slightly greater than 6%. d. The rate should be over 7%. e. The rate should be over 8%.
Answer:
b
Question: Which of the following is an example of a capital market instrument?
Answer Options:
a. Commercial paper.
b. Preferred stock.
c. U.S. Treasury bills.
d. Banker’s acceptances.
e. Money market mutual funds.
Answer:
b. Preferred stock.
Question: The cost of perpetual preferred stock is found as the preferred’s annual dividend divided by the market price of the preferred stock. No adjustment is needed for taxes because preferred dividends, unlike interest on debt, are not deductible by the issuing firm. a. True b. False
Answer:
a. True
Question: Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.
Answer Options:
a. True
b. False
Answer:
a. True
Question: A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.
Answer Options:
a. True
b. False
Answer:
b. False
Question: A convertible debenture can never sell for more than its conversion value or less than its bond value.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Preferred stock normally has no voting rights. However, most preferred issues stipulate that the preferred stockholders can elect a minority number of the directors if the preferred dividend is omitted.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Operating leases often have terms that include a. maintenance of the equipment by the lessor. b. full amortization over the life of the lease. c. very high penalties if the lease is cancelled. d. restrictions on how much the leased property can be used. e. much longer lease periods than for most financial leases.
Answer:
a. maintenance of the equipment by the lessor.
Question: Other things held constant, the more debt a firm uses, the lower its return on total assets will be.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Other things held constant, the more debt a firm uses, the lower its profit margin will be.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm’s operating results. a. True b. False
Answer:
a. True
Question: A warrant is an option, and as such it cannot be used as a “sweetener.”
Answer Options:
a. True
b. False
Answer:
b. False