# 31. The prime rate

31. The prime rate
A) is the effective rate of interest for banks’ best customers.
B) has been quite volatile during the past two decades, moving as much as 8 percentage points
in a 12-month period.
C) is usually lower than treasury bill rates.
D) none of the above
32. Accounts receivable may be used as a source of financing by
A) pledging the receivables as loan collateral.
B) factoring the receivables to a finance company.
C) selling securities backed by the receivables.
D) all of the above
33. The required compensating balance is usually computed as a
A) percentage of customer loans outstanding.
B) factor of accounts receivable.
C) percentage of the bank’s commitments toward future loans.
D) a and c are correct
Chapter 9 The Time Value of Money
34. The concept of time value of money is important to financial decision making because
A) it emphasizes earning a return on invested capital.
B) it recognizes that earning a return makes \$1 worth more today than \$1 received in the future.
C) it can be applied to future cash flows in order to compare different streams of income.
D) all of the above
35. Mr. Nailor invests \$5,000 in a certificate of deposit at his local bank. He receives annual
interest of 8% for 7 years. How much interest will his investment earn during this time period?
A) \$2,915
B) \$3,570
C) \$6,254
D) \$8,570
36. Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be
\$170,000. If he can put aside \$10,000 at the end of each year, what rate of return must he earn
in order to have the amount needed?
A) Between 11% and 12%
B) Between 8% and 9%
C) 17%
D) None of the above
Chapter 10 Valuation and Rates of Return
37. A 20-year bond pays 12% on a face value of \$1,000. If similar bonds are currently yielding
9%, What is the market value of the bond? Use annual analysis.
A) over \$1,000
B) under \$1,000
C) over \$1,200
D) not enough information given to tell
38. An issue of preferred stock is paying an annual dividend of \$5. The growth rate for the firm’s
common stock is 14%. What is the preferred stock price if the required rate of return is 11%?
A) \$45.45
B) \$41.67
C) \$35.71
D) none of the above
39. Which of the following does not influence the yield to maturity for a security?
A) required real rate of return
B) risk free rate
D) yields of similar securities
40. The cost of common stock is usually greater than the simple dividend yield because
A) investors perceive risk in common stock.
B) investors expect both a current dividend and future growth.
C) dividends are not tax-deductible.
D) the company must make profits before it can pay dividends.
41. The dividend valuation model stresses the
A) importance of earnings per share.
B) importance of dividends and legal rules for maximum payment.
C) relationship of dividends to market prices.
D) relationship of dividends to earnings per share.
Chapter 11 Cost of Capital
42. Although debt financing is usually the cheapest component of capital, it cannot be used to
excess because
A) interest rates may change.
B) the firm’s stock price will increase and raise the cost of equity financing.
C) the financial risk of the firm may increase and thus drive up the cost of all sources of
financing.
D) underwriting costs may change.
43. Each project should be judged against
A) the specific means of financing used to support its implementation.
B) the going interest rate at that point in time.
C) the cost of new common stock equity.
D) none of the above.
44. The cost of debt is determined by taking the
A) present value of the interest payments and principal times one minus the tax rate.
B) historical yield on bonds times one minus the tax rate
C) estimated yield on new bond issues of the same risk times one minus the shareholder
marginal tax rate.
D) none of the above
45. The pre-tax cost of debt for a new issue of debt is determined by
A) the investor’s required rate of return on issued stock.
B) the coupon rate of existing debt.
C) the yield to maturity of outstanding bonds.
D) all of the above.
Chapter 14 Capital Markets
46. During the next ten years, the major threat to the dominance of the U.S. money and capital
markets will come from
A) Russia’s difficulty in transforming its economy into a capitalistic one.
B) Japan’s prolonged recession and banking crisis.
C) The Euro-zone countries comprising the European Monetary Union and a single currency.
D) The huge Chinese economy and its billion plus people.
47. With respect to the United States and its relationship with the rest of the world, it can be said
that
A) the U.S. has invested more dollars in the rest of the world than foreign countries have
invested in the U.S.
B) the U.S. has actively helped foreign countries finance the government deficits.
C) foreign investors hold large positions in U.S. government securities.
D) All of the above.
48. Financial instruments in the capital markets generally fall under what category in the
Balance Sheet?
A) Short-term liabilities and equities.
B) Long-term liabilities and equities.
C) Near cash assets.
D) None of the above.
Chapter 16 Long-Term Debt and Lease Financing
49. With regard to interest rates and bond prices it can be said that
A) a 1% change in interest rates will cause a greater change in long-term bond prices than short-term prices.
B) a 1% change in interest rates will cause a greater change in short-term bond prices than long-term prices.
C) long-term rates are more volatile than short-term rates.
D) a decrease in interest rates will cause bond prices to fall.
50. Which one of these conditions must be met for a lease to qualify as a capital lease?
A) The lease contains a bargain purchase price at the end of the lease.
B) The lease must have a value of at least \$10 million.
C) The lease must have a life of 10 years.
D) All of the above.
Chapter 17 Common and Preferred Stock Financing
51. Which of the following is not a true statement?
A) Common stockholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C) Common stockholders are legally entitled to some dividend.
D) A minority interest can still elect members to the Board of Directors under cumulative voting
even though someone else owns 51% of the stock.
52. Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative. The
dividend is \$6.50 per share and has not been paid for 3 years. If Kuhns earned \$3 million this
year, what could be the maximum payment to the preferred stockholders on a per share basis?
A) \$19.50 per share
B) \$15.00 per share
C) \$13.00 per share
D) \$6.50 per share
53. When comparing common stock of the same company it is fair to say that
A) all shares, no matter how many classes, are all created with the same equal rights.
B) companies sometimes have two different classes of shares with unequal rights to dividends
C) the Securities and Exchange Commission allows only one class of common stock.
D) investors are indifferent between class A and class B shares.
54. Dr. J. wants to buy an IBM personal computer which will cost \$2,788 four years from today.
He would like to set aside an equal amount at the end of each year in order to accumulate the
amount needed. He can earn 7% annual return. How much should he set aside?
A) \$697.00
B) \$627.93
C) \$823.15
D) \$531.81
Problems to be solved-Chapter 2
55. The following is the December 31, 2003 balance sheet for the Epics Corporation.
Assets Liabilities
Cash \$ 70,000 Accounts Payable \$ 100,000
Accounts Receivable 150,000 Notes Payable 120,000
Inventory 280,000 Bonds Payable 300,000
Total Current Assets \$ 500,000 Total Liabilities \$ 520,000
Plant and Equipment \$1,250,000 Equity
Less: Accum. Deprec. 250,000 Common Stock 300,000
Net plant and Equipment \$1,000,000 Paid In Capital 200,000
Retained Earnings 480,000
Total Assets \$1,500,000 Total Equity \$ 980,000
Total Liab. & Equity \$1,500,000
Sales for 2003 were \$2,000,000, with the cost of goods sold being 55% of sales. Depreciation
expense was 10% of the gross plant and equipment at the beginning of the year. Interest
expense was 9% on the notes payable and 11% on the bonds payable. Selling and
administrative expenses were \$200,000 and the firm’s tax rate is 40%.
Prepare an income statement.
56. Given the financial information for the A.E. Neuman Corporation,
a) Prepare a Statement of Cash Flows for the year ended December 31, 2002.
b) What is the dividend payout ratio for 2003?
c) If we increased the dividend payout ratio to 100%, what would happen to retained earnings?

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