Question 1

To state that financing at current market terms is a zero-NPV transaction indicates that:

Accepted Answer

A)  firms should avoid these methods of financing. 
B)  there is no cost involved in the financing. 
C)  the market has not set financing terms correctly. 
D)  there are no "bargains" when financing at current terms. 
A)  firms should avoid these methods of financing. 
B)  there is no cost involved in the financing. 
C)  the market has not set financing terms correctly. 
D)  there are no "bargains" when financing at current terms. D

Question 2

Convertible bonds resemble a combination of which two types of securities?

Accepted Answer

A)  Investment grade bonds and junk bonds 
B)  Bonds and common stock 
C)  Bonds and warrants 
D)  Bonds and preferred stock 
A)  Investment grade bonds and junk bonds 
B)  Bonds and common stock 
C)  Bonds and warrants 
D)  Bonds and preferred stock C

Question 3

The true value of a security is:

Accepted Answer

A)  the value of that security at some future date. 
B)  the sum of all future income from that security. 
C)  the amount of funds invested to date in the security. 
D)  the price that incorporates all currently available information. 
A)  the value of that security at some future date. 
B)  the sum of all future income from that security. 
C)  the amount of funds invested to date in the security. 
D)  the price that incorporates all currently available information. D

Question 4

Bonds with the callable feature tend to sell at lower prices than bonds without such a feature.

Accepted Answer

A) True 
 B)False

Question 5

Eurobonds are long-term,corporate liabilities that:

Accepted Answer

A)  are issued by European firms. 
B)  must be held inside the United States by foreigners. 
C)  are marketed in many countries. 
D)  are repaid in U.S. dollars. 
A)  are issued by European firms. 
B)  must be held inside the United States by foreigners. 
C)  are marketed in many countries. 
D)  are repaid in U.S. dollars.

Question 6

Companies sometimes sell the cash flows from a bundle of loans.Such bonds are known as asset-backed bonds.

Accepted Answer

A) True 
 B)False

Question 7

Which one of the following statements is correct about a floating interest rate loan if the interest rate is defined as "Prime plus 1 percent"? The interest rate:

Accepted Answer

A)  is set to vary at a rate equal to the prime rate plus 1 percent. 
B)  can fluctuate up to a maximum of 1% above the current prime rate over the life of the loan. 
C)  will be fixed at the current prime rate plus 1 percent. 
D)  will vary with the prime rate but changes will only occur in 1 percent intervals. 
A)  is set to vary at a rate equal to the prime rate plus 1 percent. 
B)  can fluctuate up to a maximum of 1% above the current prime rate over the life of the loan. 
C)  will be fixed at the current prime rate plus 1 percent. 
D)  will vary with the prime rate but changes will only occur in 1 percent intervals.

Question 8

If shareholders do not like the policies that management pursues,they can vote in a different board of directors.

Accepted Answer

A) True 
 B)False

Question 9

The call provision of callable bonds comes at the expense of bond holders,for it limits their capital gain potential.

Accepted Answer

A) True 
 B)False

Question 10

The price at which new shares are sold to investors almost always exceeds par value.The difference is entered into the company's accounts as additional paid-in capital,or capital surplus.

Accepted Answer

A) True 
 B)False

Question 11

Which one of the following statements is correct about a corporation in the 35% tax bracket that can invest either in a bond paying 8% interest or in the preferred stock of another corporation that pays a 6% dividend? Ignore any differences in risk.

Accepted Answer

A)  The preferred stock should be selected because its after-tax yield is 0.17% higher. 
B)  The preferred stock should be selected because its after-tax yield is 0.80% higher. 
C)  The bond should be selected because its after-tax yield is 0.17% lower. 
D)  The bond should be selected because its after-tax yield is 1.3% higher. 
A)  The preferred stock should be selected because its after-tax yield is 0.17% higher. 
B)  The preferred stock should be selected because its after-tax yield is 0.80% higher. 
C)  The bond should be selected because its after-tax yield is 0.17% lower. 
D)  The bond should be selected because its after-tax yield is 1.3% higher.

Question 12

How much will be recorded as a firm's additional paid-in capital if the firm issues 1 million shares that have a $5 par value for $15 per share?

Accepted Answer

A)  $0 
B)  $5 million 
C)  $10 million 
D)  $15 million 
A)  $0 
B)  $5 million 
C)  $10 million 
D)  $15 million

Question 13

A convertible bond generally has a higher market value than a comparable non-convertible bond.

Accepted Answer

A) True 
 B)False

Question 14

If 100 million shares of common stock are issued with a par value of $2 and additional paid in capital is $800 million,the total par value of the issued shares is:

Accepted Answer

A)  $200 million. 
B)  $600 million. 
C)  $800 million. 
D)  $1 billion. 
A)  $200 million. 
B)  $600 million. 
C)  $800 million. 
D)  $1 billion.

Question 15

Firms tend to issue more debt when internal funds are low.

Accepted Answer

A) True 
 B)False

Question 16

A capital surplus is created when the selling price of new shares is greater than the par value.

Accepted Answer

A) True 
 B)False

Question 17

Any capital surplus shown by a firm on its balance sheet results from:

Accepted Answer

A)  not paying out all net income as dividends. 
B)  repurchasing shares for treasury stock. 
C)  issuing stock at a price higher than par value. 
D)  retained earnings. 
A)  not paying out all net income as dividends. 
B)  repurchasing shares for treasury stock. 
C)  issuing stock at a price higher than par value. 
D)  retained earnings.

Question 18

If a corporation receives $50,000 in preferred stock dividends,how much tax does it pay on these dividends? The corporate tax rate is 35%.

Accepted Answer

A)  $0 
B)  $5,250 
C)  $12,250 
D)  $17,500 
A)  $0 
B)  $5,250 
C)  $12,250 
D)  $17,500

Question 19

In a bankruptcy situation,funded debt will be repaid while unfunded debt will not.

Accepted Answer

A) True 
 B)False

Question 20

Wheat's Market just issued 17,500 new shares of common stock at a price of $20 a share.How will this transaction affect the equity accounts on the firm's balance sheet if the par value is $1 per share?

Accepted Answer

A)  The common stock account will increase by $350,000. 
B)  The common stock account will decrease by $17,500. 
C)  Paid in surplus will increase by $332,500. 
D)  Paid in surplus will increase by $350,000. 
A)  The common stock account will increase by $350,000. 
B)  The common stock account will decrease by $17,500. 
C)  Paid in surplus will increase by $332,500. 
D)  Paid in surplus will increase by $350,000.

Exam 14: Introduction to Corporate Financing and Governance

To state that financing at current market terms is a zero-NPV transaction indicates that:

Convertible bonds resemble a combination of which two types of securities?

The true value of a security is:

Bonds with the callable feature tend to sell at lower prices than bonds without such a feature.

Eurobonds are long-term,corporate liabilities that:

Companies sometimes sell the cash flows from a bundle of loans.Such bonds are known as asset-backed bonds.

Which one of the following statements is correct about a floating interest rate loan if the interest rate is defined as "Prime plus 1 percent"? The interest rate:

If shareholders do not like the policies that management pursues,they can vote in a different board of directors.

The call provision of callable bonds comes at the expense of bond holders,for it limits their capital gain potential.

The price at which new shares are sold to investors almost always exceeds par value.The difference is entered into the company's accounts as additional paid-in capital,or capital surplus.

Which one of the following statements is correct about a corporation in the 35% tax bracket that can invest either in a bond paying 8% interest or in the preferred stock of another corporation that pays a 6% dividend? Ignore any differences in risk.

How much will be recorded as a firm's additional paid-in capital if the firm issues 1 million shares that have a $5 par value for $15 per share?

A convertible bond generally has a higher market value than a comparable non-convertible bond.

If 100 million shares of common stock are issued with a par value of $2 and additional paid in capital is $800 million,the total par value of the issued shares is:

Firms tend to issue more debt when internal funds are low.

A capital surplus is created when the selling price of new shares is greater than the par value.

Any capital surplus shown by a firm on its balance sheet results from:

If a corporation receives $50,000 in preferred stock dividends,how much tax does it pay on these dividends? The corporate tax rate is 35%.

In a bankruptcy situation,funded debt will be repaid while unfunded debt will not.

Wheat's Market just issued 17,500 new shares of common stock at a price of $20 a share.How will this transaction affect the equity accounts on the firm's balance sheet if the par value is $1 per share?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk,Return,and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Risk Management

Filters