Answer Options:
a. True
b. False
Answer:
a. True
Question: The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy. a. True b. False
Answer:
b. False
Question: The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Since the ROA measures the firm’s effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.
Answer Options:
a. True
b. False
Answer:
b. False
Question: The problem of dilution of stockholders’ earnings never results from the sale of call options, but it can arise if warrants are used.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price, and they also benefit from the 70% tax exemption on preferred dividends received. a. True b. False
Answer:
a. True
Question: Which of the following statements is most CORRECT? a. Preferred stock generally has a higher component cost of capital to the firm than does common stock. b. By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm’s common stock. c. From the issuer’s point of view, preferred stock is less risky than bonds. d. Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less. e. Unlike bonds, preferred stock cannot have a convertible feature.
Answer:
c. From the issuer’s point of view, preferred stock is less risky than bonds.
Question: The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future.
Answer Options:
a. True
b. False
Answer:
a. True
Question: From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same for own versus lease decisions. a. True b. False
Answer:
a. True
Question: Is it appropriate to use the fixed assets turnover ratio to appraise firms’ effectiveness in managing their fixed assets if and only if the firms being compared have the same proportion of fixed assets to total assets.
Answer Options:
a. True
b. False
Answer:
b. False
Question: The “apparent,” but not necessarily the “true,” financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed. a. True b. False
Answer:
a. True
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: The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being less risky and/or more likely to enjoy higher growth in the future.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Preferred stock typically has a par value, and the dividend is often stated as a percentage of par. The par value is also important in the event of liquidation, as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders. a. True b. False
Answer:
a. True
Question: Firms generally do not call their convertibles unless the conversion value is greater than the call price.
Answer Options:
a. True
b. False
Answer:
a. True