Corporate Finance - Berk DeMarzo- Test Bank Chapter 21

Our conversations with corporate treasurers suggest to us that the use of book values is popular because of the volatility of the stock market. It is frequently claimed that the inherent volatility of the stock market makes market-based debt ratios move around too much. It is also true that restrictions of debt in bond covenants are usually expressed in book values rather than market values. Moreover, firms such as Standard & Poor’s and Moody’s use debt ratios expressed in book values to measure creditworthiness.A key fact is that whether we use book or market values, debt ratios for U.S. non-financial firms generally have been well below 100 percent of total equity in recent years; that is, firms generally use less debt than equity.Summary and ConclusionsThe basic sources of long-term financing are long-term debt, preferred stock, and common stock. This chapter described the essential features of each.1. We emphasized that common shareholders have:1. Residual risk and return in a corporation.2. Voting rights.3. Limited liability if the corporation elects to default on its debt and must transfer some orall of its assets to the creditors.2. Long-term debt involves contractual obligations set out in indentures. There are many kinds ofdebt, but the essential feature is that debt involves a stated amount that must be repaid. Interest payments on debt are considered a business expense and are tax deductible.3. Preferred stock has some of the features of debt and some of the features of common equity.Holders of preferred stock have preference in liquidation and in dividend payments compared to holders of common equity.4. Firms need financing for capital expenditures, working capital, and other long-term uses. Mostof the financing is provided from internally generated cash flow. In the United States only about 25 percent of financing comes from new debt and new equity. Only firms in Japan have historically relied more on external financing than on internal financing.5. In the 1980s and recently, U.S. firms retired massive amounts of equity. These share buybackshave been financed with new debt.Concept Questions1. Bond Features What are the main features of a corporate bond that would be listed in theindenture?2. Preferred Stock and Debt What are the differences between preferred stock and debt?3. Preferred Stock Preferred stock doesn’t offer a corporate tax shield on the dividends paid.Why do we still observe some firms issuing preferred stock?4. Preferred Stock and Bond Yields The yields on nonconvertible preferred stock are lowerthan the yields on corporate bonds. Why is there a difference? Which investors are the primary holders of preferred stock? Why?5. Corporate Financing What are the main differences between corporate debt and equity? Whydo some firms try to issue equity in the guise of debt?6. Call Provisions A company is contemplating a long-term bond issue. It is debating whether toinclude a call provision. What are the benefits to the company from including a call provision? What are the costs? How do these answers change for a put provision?7. Proxy What is a proxy?8. Preferred Stock Do you think preferred stock is more like debt or equity? Why?9. Long-Term Financing As was mentioned in the chapter, new equity issues are generally onlya small portion of all new issues. At the same time, companies continue to issue new debt. Why docompanies tend to issue little new equity but continue to issue new debt?10. Internal versus External Financing What is the difference between internal financing andexternal financing?11. Internal versus External Financing What factors influence a firm’s choice of external versusinternal equity financing?12. Classes of Stock Several publicly traded companies have issued more than one class of stock.Why might a company issue more than one class of stock?13. Callable Bonds Do you agree or disagree with the following statement: In an efficient market,callable and noncallable bonds will be priced in such a way that there will be no advantage or disadvantage to the call provision. Why?14. Bond Prices If interest rates fall, will the price of noncallable bonds move up higher than thatof callable bonds? Why or why not?15. Sinking Funds Sinking funds have both positive and negative characteristics for bondholders.Why?Questions and Problems connect™BASIC (Questions 1–7)1. Corporate Voting The shareholders of the Unicorn Company need to elect seven newdirectors. There are 600,000 shares outstanding currently trading at $39 per share. You would like to serve on the board of directors; unfortunately no one else will be voting for you. How much will it cost you to be certain that you can be elected if the company uses straight voting? How much will it cost you if the company uses cumulative voting?2. Cumulative Voting An election is being held to fill three seats on the board of directors of afirm in which you hold stock. The company has 5,800 shares outstanding. If the election is conducted under cumulative voting and you own 300 shares, how many more shares must you buy to be assured of earning a seat on the board?3. Cumulative Voting The shareholders of Motive Power Corp. need to elect three new directorsto the board. There are 1,200,000 shares of common stock outstanding, and the current share price is $9. If the company uses cumulative voting procedures, how much will it cost to guarantee yourself one seat on the board of directors?4. Corporate Voting Power Inc. is going to elect six board members next month. Betty Brownowns 15.2 percent of the total shares outstanding. How confident can she be of having one of her candidate friends elected under the cumulative voting rule? Will her friend be elected for certain if the voting procedure is changed to the staggering rule, under which shareholders vote on three board members at a time?5. Zero Coupon Bonds You buy a zero coupon bond at the beginning of the year that has a facevalue of $1,000, a YTM of 7 percent, and 25 years to maturity. If you hold the bond for the entire year, how much in interest income will you have to declare on your tax return?6. Valuing Callable Bonds KIC, Inc., plans to issue $5 million of bonds with a coupon rate of 12percent and 30 years to maturity. The current market interest rates on these bonds are 11 percent.In one year, the interest rate on the bonds will be either 14 percent or 7 percent with equal probability. Assume investors are risk-neutral.1. If the bonds are noncallable, what is the price of the bonds today?2. If the bonds are callable one year from today at $1,450, will their price be greater or lessthan the price you computed in (a)? Why?7. Valuing Callable Bonds New Business Ventures, Inc., has an outstanding perpetual bond witha 10 percent coupon rate that can be called in one year. The bond makes annual couponpayments. The call premium is set at $150 over par value. There is a 40 percent chance that the interest rate in one year will be 12 percent, and a 60 percent chance that the interest rate will be 7 percent. If the current interest rate is 10 percent, what is the current market price of the bond?INTERMEDIATE (Questions 8-13)8. Valuing Callable Bonds Bowdeen Manufacturing intends to issue callable, perpetual bondswith annual coupon payments. The bonds are callable at $1,250. One-year interest rates are 11 percent. There is a 60 percent probability that long-term interest rates one year from today will be13 percent, and a 40 percent probability that they will be 9 percent. Assume that if interest ratesfall the bonds will be called. What coupon rate should the bonds have in order to sell at par value?9. Valuing Callable Bonds Illinois Industries has decided to borrow money by issuing perpetualbonds with a coupon rate of 8 percent, payable annually. The one-year interest rate is 8 percent.Next year, there is a 35 percent probability that interest rates will increase to 9 percent, and there is a 65 percent probability that they will fall to 6 percent.1. What will the market value of these bonds be if they are noncallable?2. If the company decides instead to make the bonds callable in one year, what coupon willbe demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates rise and that the call premium is equal to the annual coupon.3. What will be the value of the call provision to the company?10. Bond Refunding An outstanding issue of Public Express Airlines debentures has a callprovision attached. The total principal value of the bonds is $250 million, and the bonds have an annual coupon rate of 8 percent. The company is considering refunding the bond issue. Refunding means that the company would issue new bonds and use the proceeds from the new bond issuance to repurchase the outstanding bonds. The total cost of refunding would be 12 percent of the principal amount raised. The appropriate tax rate for the company is 35 percent. How low does the borrowing cost need to drop to justify refunding with a new bond issue?11. Bond Refunding Charles River Associates is considering whether to call either of the twoperpetual bond issues the company currently has outstanding. If the bond is called, it will be refunded, that is, a new bond issue will be made with a lower coupon rate. The proceeds from the new bond issue will be used to repurchase one of the existing bond issues. The information about the two currently outstanding bond issues is:The corporate tax rate is 35 percent. What is the NPV of the refunding for each bond? Which, if either, bond should the company refinance?12. Interest on Zeroes Tesla Corporation needs to raise funds to finance a plant expansion, andit has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent.1. What will these bonds sell for at issuance?2. Using the IRS amortization rule, what interest deduction can the company take on thesebonds in the first year? In the last year?3. Repeat part (b) using the straight-line method for the interest deduction.4. Based on your answers in (b) and (c), which interest deduction method would TeslaCorporation prefer? Why?13. Zero Coupon Bonds Suppose your company needs to raise $30 million and you want to issue30-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you’re evaluating two issue alternatives: An 8 percent semiannual coupon bond and a zero coupon bond. Your company’s tax rate is 35 percent.1. How many of the coupon bonds would you need to issue to raise the $30 million?How many of the zeroes would you need to issue?2. In 30 years, what will your company’s repayment be if you issue the coupon bonds? Whatif you issue the zeroes?CHALLENGE (Questions 14-15)14. Valuing the Call Feature Consider the prices of the following three Treasury issues as ofFebruary 24, 2009:The bond in the middle is callable in February 2010. What is the implied value of the call feature? (Hint: Is there a way to combine the two noncallable issues to create an issue that has the same coupon as the callable bond?)15. Treasury Bonds The following Treasury bond quote appeared in The Wall Street Journal onMay 11, 2004.Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible?。

Fundamentals of Corporate Finance, 12e (Ross)Chapter 3 Working with Financial Statements1) Which one of the following is a source of cash for a tax-exempt firm?A) Increase in accounts receivableB) Increase in depreciationC) Decrease in accounts payableD) Increase in common stockE) Increase in inventory2) Which one of the following is a use of cash?A) Decrease in fixed assetsB) Decrease in inventoryC) Increase in long-term debtD) Decrease in accounts receivablesE) Decrease in accounts payable3) Which one of the following is a source of cash?A) Repurchase of common stockB) Acquisition of debtC) Purchase of inventoryD) Payment to a supplierE) Granting credit to a customer4) Which one of the following is a source of cash?A) Increase in accounts receivableB) Decrease in common stockC) Increase in fixed assetsD) Decrease in accounts payableE) Decrease in inventory5) On the statement of cash flows, which one of the following is considered a financing activity?A) Increase in inventoryB) Decrease in accounts payableC) Increase in net working capitalD) Dividends paidE) Decrease in fixed assets6) On the statement of cash flows, which one of the following is considered an operating activity?A) Increase in net fixed assetsB) Decrease in accounts payableC) Purchase of equipmentD) Dividends paidE) Repayment of long-term debt7) According to the statement of cash flows, an increase in inventory will ________ the cash flow from ________ activities.A) increase; operatingB) decrease; financingC) decrease; operatingD) increase; financingE) increase; investment8) According to the statement of cash flows, an increase in interest expense will ________ the cash flow from ________ activities.A) decrease; operatingB) decrease; financingC) increase; operatingD) increase; financingE) Increase; investment9) Activities of a firm that require the spending of cash are known as:A) sources of cash.B) uses of cash.C) cash collections.D) cash receipts.E) cash on hand.10) The sources and uses of cash over a stated period of time are reflected on the:A) income statement.B) balance sheet.C) tax reconciliation statement.D) statement of cash flows.E) statement of operating position.11) A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:A) total assets.B) total equity.C) net income.D) taxable income.E) sales.12) Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?A) Statement of standardizationB) Statement of cash flowsC) Common-base year statementD) Common-size statementE) Base reconciliation statement13) On a common-size balance sheet all accounts for the current year are expressed as a percentage of:A) sales for the period.B) the base year sales.C) total equity for the base year.D) total assets for the current year.E) total assets for the base year.14) On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following?A) Current year salesB) Current year total assetsC) Base-year salesD) Base-year total assetsE) Base-year accounts receivables15) Which one of the following ratios is a measure of a firm's liquidity?A) Cash coverage ratioB) Profit marginC) Debt-equity ratioD) Quick ratioE) NWC turnover16) An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.A) Increase in the cash ratioB) Increase in the net working capital to total assets ratioC) Decrease in the quick ratioD) Decrease in the cash coverage ratioE) Increase in the current ratio17) An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?A) Accounts payableB) CashC) InventoryD) Accounts receivableE) Fixed assets18) A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit?A) CurrentB) CashC) Debt-equityD) QuickE) Total debt19) A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following?A) Pay all of its debts that are due within the next 48 hoursB) Pay all of its debts that are due within the next 48 daysC) Cover its operating costs for the next 48 hoursD) Cover its operating costs for the next 48 daysE) Meet the demands of its customers for the next 48 hours20) Ratios that measure a firm's liquidity are known as ________ ratios.A) asset managementB) long-term solvencyC) short-term solvencyD) profitabilityE) book value21) Which one of the following statements is correct?A) If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.B) Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.C) The debt-equity ratio can be computed as 1 plus the equity multiplier.D) An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.E) An increase in the depreciation expense will not affect the cash coverage ratio.22) If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?A) 0B) .5C) 1.0D) 1.5E) 2.023) The cash coverage ratio directly measures the ability of a company to meet its obligation to pay:A) an invoice to a supplier.B) wages to an employee.C) interest to a lender.D) principal to a lender.E) a dividend to a shareholder.24) All-State Moving had sales of $899,000 in 2017 and $967,000 in 2018. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?A) The total asset turnover rate increased.B) The days' sales in receivables increased.C) The net working capital turnover rate increased.D) The fixed asset turnover decreased.E) The receivables turnover rate decreased.25) The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?A) Decrease in the inventory turnover rateB) Decrease in the net working capital turnover rateC) Increase in the fixed asset turnover rateD) Decrease in the day's sales in inventoryE) Decrease in the total asset turnover rate26) RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following?A) Utilizing its fixed assets more efficiently than Sam'sB) Utilizing its total assets more efficiently than Sam'sC) Generating $1 in sales for every $1.26 in net fixed assetsD) Generating $1.26 in net income for every $1 in net fixed assetsE) Maintaining the same level of current assets as Sam's27) Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ________ ratios.A) asset managementB) long-term solvencyC) short-term solvencyD) profitabilityE) turnover28) If a company produces a return on assets of 14 percent and also a return on equity of 14 percent, then the firm:A) may have short-term, but not long-term debt.B) is using its assets as efficiently as possible.C) has no net working capital.D) has a debt-equity ratio of 1.0.E) has an equity multiplier of 1.0.29) Which one of the following will decrease if a firm can decrease its operating costs, all else constant?A) Return on equityB) Return on assetsC) Profit marginD) Total asset turnoverE) Price-earnings ratio30) Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?A) Al's has more net income than Ben's.B) Ben's is increasing its earnings at a faster rate than Al's.C) Al's has a higher market value per share than does Ben's.D) Ben's has a lower market-to-book ratio than Al's.E) Al's has a higher earnings growth rate than Ben's.31) Tobin's Q relates the market value of a firm's assets to which one of the following?A) Initial cost of creating the firmB) Current book value of the firmC) Average asset value of similar firmsD) Average market value of similar firmsE) Today's cost to duplicate those assets32) The price-sales ratio is especially useful when analyzing firms that have:A) volatile market prices.B) negative earnings.C) positive PEG ratios.D) a high Tobin's Q.E) increasing sales.33) Mortgage lenders probably have the most interest in the ________ ratios.A) return on assets and profit marginB) long-term debt and times interest earnedC) price-earnings and debt-equityD) market-to-book and times interest earnedE) return on equity and price-earnings34) Relationships determined from a company's financial information and used for comparison purposes are known as:A) financial ratios.B) identities.C) dimensional analysis.D) scenario analysis.E) solvency analysis.35) DL Farms currently has $600 in debt for every $1,000 in equity. Assume the company uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action?A) Equity multiplierB) Total asset turnoverC) Profit marginD) Return on assetsE) Return on equity36) Which one of these identifies the relationship between the return on assets and the return on equity?A) Profit marginB) Profitability determinantC) Balance sheet multiplierD) DuPont identityE) Debt-equity ratio37) Which one of the following accurately describes the three parts of the DuPont identity?A) Equity multiplier, profit margin, and total asset turnoverB) Debt-equity ratio, capital intensity ratio, and profit marginC) Operating efficiency, equity multiplier, and profitability ratioD) Return on assets, profit margin, and equity multiplierE) Financial leverage, operating efficiency, and profitability ratio38) An increase in which of the following must increase the return on equity, all else constant?A) Total assets and salesB) Net income and total equityC) Total asset turnover and debt-equity ratioD) Equity multiplier and total equityE) Debt-equity ratio and total debt39) Which one of the following is a correct formula for computing the return on equity?A) Profit margin × ROAB) ROA × Equity multiplierC) Profit margin × Total asset turnover × Debt-equity ratioD) Net income/Total assetsE) Debt-equity ratio × ROA40) The DuPont identity can be used to help managers answer which of the following questions related to a company's operations?I. How many sales dollars are being generated per each dollar of assets?II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generating per dollar of sales?IV. Does the company have the ability to meet its debt obligations in a timely manner?A) I and III onlyB) II and IV onlyC) I, II, and III onlyD) II, III and IV onlyE) I, II, III, and IV41) The U.S. government coding system that classifies a company by the nature of its business operations is known as the:A) Centralized Business Index.B) Peer Grouping codes.C) Standard Industrial Classification codes.D) Governmental ID codes.E) Government Engineered Coding System.42) Which one of the following statements is correct?A) Book values should always be given precedence over market values.B) Financial statements are rarely used as the basis for performance evaluations.C) Historical information is useful when projecting a company's future performance.D) Potential lenders place little value on financial statement information.E) Reviewing financial information over time has very limited value.43) The most acceptable method of evaluating the financial statements is to compare the company's current financial:A) ratios to the company's historical ratios.B) statements to the financial statements of similar companies operating in other countries.C) ratios to the average ratios of all companies located within the same geographic area.D) statements to those of larger companies in unrelated industries.E) statements to the projections that were created based on Tobin's Q.44) All of the following issues represent problems encountered when comparing the financial statements of two separate entities except the issue of the companies:A) being conglomerates with unrelated lines of business.B) having geographically varying operations.C) using differing accounting methods.D) differing seasonal peaks.E) having the same fiscal year.45) Which one of these is the least important factor to consider when comparing the financial situations of utility companies that generate electric power and have the same SIC code?A) Type of ownershipB) Government regulations affecting the firmC) Fiscal year endD) Methods of power generationE) Number of part-time employees46) At the beginning of the year, Brick Makers had cash of $183, accounts receivable of $392, accounts payable of $463, and inventory of $714. At year end, cash was $167, accounts payables was $447, inventory was $682, and accounts receivable was $409. What is the amount of the net source or use of cash by working capital accounts for the year?A) Net use of $16 cashB) Net use of $17 cashC) Net source of $17 cashD) Net source of $15 cashE) Net use of $15 cash47) During the year, Al's Tools decreased its accounts receivable by $160, increased its inventory by $115, and decreased its accounts payable by $70. How did these three accounts affect the sources of uses of cash by the firm?A) Net source of cash of $120B) Net source of cash of $205C) Net source of cash of $45D) Net use of cash of $115E) Net use of cash of $2548) Lani's generated net income of $911, depreciation expense was $47, and dividends paid were $25. Accounts payables increased by $15, accounts receivables increased by $28, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity?A) $776B) $865C) $959D) $922E) $98549) For the past year, Jenn's Floral Arrangements had taxable income of $198,600, beginning common stock of $68,000, beginning retained earnings of $318,750, ending common stock of $71,500, ending retained earnings of $316,940, interest expense of $11,300, and a tax rate of 21 percent. What is the amount of dividends paid during the year?A) $157,280B) $159,935C) $163,200D) $153,555E) $158,70450) The Floor Store had interest expense of $38,400, depreciation of $28,100, and taxes of $19,600 for the year. At the start of the year, the firm had total assets of $879,400 and current assets of $289,600. By year's end total assets had increased to $911,900 while current assets decreased to $279,300. What is the amount of the cash flow from investment activity for the year?A) −$51,150B) $21,850C) $29,300D) −$70,900E) −$89,40051) Williamsburg Market is an all-equity firm that has net income of $96,200, depreciation expense of $6,300, and an increase in net working capital of $2,800. What is the amount of the net cash from operating activity?A) $91,300B) $99,700C) $93,400D) $105,300E) $113,70052) The accounts payable of a company changed from $136,100 to $104,300 over the course of a year. This change represents a:A) use of $31,800 of cash as investment activity.B) source of $31,800 of cash as an operating activity.C) source of $31,800 of cash as a financing activity.D) source of $31,800 of cash as an investment activity.E) use of $31,800 of cash as an operating activity.53) Oil Creek Auto has sales of $3,340, net income of $274, net fixed assets of $2,600, and current assets of $920. The firm has $430 in inventory. What is the common-size statement value of inventory?A) 12.22 percentB) 44.16 percentC) 16.54 percentD) 13.36 percentE) 46.74 percent54) Pittsburgh Motors has sales of $4,300, net income of $320, total assets of $4,800, and total equity of $2,950. Interest expense is $65. What is the common-size statement value of the interest expense?A) .89 percentB) 1.51 percentC) 1.69 percentD) 2.03 percentE) 1.35 percent55) Last year, which is used as the base year, a firm had cash of $52, accounts receivable of $223, inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of $61,accounts receivable of $204, inventory of $527, and net fixed assets of $1,216. What is this year's common-base-year value of inventory?A) .67B) .91C) .88D) 1.04E) 1.1856) Duke's Garage has cash of $68, accounts receivable of $142, accounts payable of $235, and inventory of $318. What is the value of the quick ratio?A) 2.25B) .53C) .71D) .89E) 1.3557) Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working capital to total assets ratio?A) .31B) .42C) .47D) .51E) .5658) DJ's has total assets of $310,100 and net fixed assets of $168,500. The average daily operating costs are $2,980. What is the value of the interval measure?A) 31.47 daysB) 47.52 daysC) 56.22 daysD) 68.05 daysE) 104.62 days59) Corner Books has a debt-equity ratio of .57. What is the total debt ratio?A) .36B) .30C) .44D) 2.27E) 2.7560) SS Stores has total debt of $4,910 and a debt-equity ratio of 0.52. What is the value of the total assets?A) $16,128.05B) $7,253.40C) $9,571.95D) $11,034.00E) $14,352.3161) JK Motors has sales of $96,400, costs of $53,800, interest paid of $2,800, and depreciation of $7,100. The tax rate is 21 percent. What is the value of the cash coverage ratio?A) 15.21B) 12.14C) 17.27D) 23.41E) 12.6862) Terry's Pets paid $2,380 in interest and $2,200 in dividends last year. The times interest earned ratio is 2.6 and the depreciation expense is $680. What is the value of the cash coverage ratio?A) 1.42B) 2.72C) 2.94D) 2.89E) 2.4663) The Up-Towner has sales of $913,400, costs of goods sold of $579,300, inventory of $123,900, and accounts receivable of $78,900. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?A) 74.19 daysB) 84.69 daysC) 78.07 daysD) 96.46 daysE) 71.01 days64) Flo's Flowers has accounts receivable of $4,511, inventory of $1,810, sales of $138,609, and cost of goods sold of $64,003. How many days does it take the firm to sell its inventory and collect the payment on the sale assuming that all sales are on credit?A) 11.88 daysB) 22.20 daysC) 16.23 daysD) 14.50 daysE) 18.67 days65) The Harrisburg Store has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and current liabilities of $3,908. How many dollars' worth of sales are generated from every $1 in total assets?A) $1.08B) $1.14C) $1.19D) $84E) $9366) TJ's has annual sales of $813,200, total debt of $171,000, total equity of $396,000, and a profit margin of 5.78 percent. What is the return on assets?A) 8.29 percentB) 6.48 percentC) 9.94 percentD) 7.78 percentE) 8.02 percent67) Frank's Used Cars has sales of $807,200, total assets of $768,100, and a profit margin of 6.68 percent. The firm has a total debt ratio of 54 percent. What is the return on equity?A) 13.09 percentB) 12.04 percentC) 11.03 percentD) 8.56 percentE) 15.26 percent68) Bernice's has $823,000 in sales. The profit margin is 4.2 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $16.50. What is the price-earnings ratio?A) 3.58B) 3.98C) 4.32D) 3.51E) 4.2769) Hungry Lunch has net income of $73,402, a price-earnings ratio of 13.7, and earnings per share of $.43. How many shares of stock are outstanding?A) 13,520B) 12,460C) 165,745D) 171,308E) 170,70270) A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 21.3, and a book value per share of $7.92. What is the market-to-book ratio?A) 2.12B) 1.84C) 1.39D) 2.45E) 2.6971) Taylor's Men's Wear has a debt-equity ratio of 48 percent, sales of $829,000, net income of $47,300, and total debt of $206,300. What is the return on equity?A) 19.29 percentB) 11.01 percentC) 15.74 percentD) 18.57 percentE) 14.16 percent72) Nielsen's has inventory of $29,406, accounts receivable of $46,215, net working capital of $4,507, and accounts payable of $48,919. What is the quick ratio?A) 1.55B) .49C) 1.32D) .94E) .9273) The Strong Box has sales of $859,700, cost of goods sold of $648,200, net income of $93,100, and accounts receivable of $102,300. How many days of sales are in receivables?A) 57.60 daysB) 40.32 daysC) 54.53 daysD) 29.41 daysE) 43.43 days74) Corner Books has sales of $687,400, cost of goods sold of $454,200, and a profit margin of 5.5 percent. The balance sheet shows common stock of $324,000 with a par value of $5 a share, and retained earnings of $689,500. What is the price-sales ratio if the market price is $43.20 per share?A) 4.28B) 12.74C) 6.12D) 4.07E) 14.5175) Gem Jewelers has current assets of $687,600, total assets of $1,711,000, net working capital of $223,700, and long-term debt of $450,000. What is the debt-equity ratio?A) .87B) .94C) 1.21D) 1.15E) 1.0676) Russell's has annual sales of $649,200, cost of goods sold of $389,400, interest of $23,650, depreciation of $121,000, and a tax rate of 21 percent. What is the cash coverage ratio for the year?A) 8.43B) 10.99C) 11.64D) 5.87E) 18.2277) Lawn Care, Inc., has sales of $367,400, costs of $183,600, depreciation of $48,600, interest of $39,200, and a tax rate of 25 percent. The firm has total assets of $422,100, long-term debt of $102,000, net fixed assets of $264,500, and net working capital of $22,300. What is the return on equity?A) 24.26 percentB) 15.38 percentC) 38.96 percentD) 29.96 percentE) 17.06 percent78) Frank's Welding has net fixed assets of $36,200, total assets of $51,300, long-term debt of $22,000, and total debt of $29,700. What is the net working capital to total assets ratio?A) 12.18 percentB) 16.82 percentC) 14.42 percentD) 17.79 percentE) 9.90 percent79) The Green Fiddle has current liabilities of $28,000, sales of $156,900, and cost of goods sold of $62,400. The current ratio is 1.22 and the quick ratio is .71. How many days on average does it take to sell the inventory?A) 128.13 daysB) 74.42 daysC) 199.81 daysD) 147.46 daysE) 83.53 days80) Green Yard Care has net income of $62,300, a tax rate of 21 percent, and a profit margin of 6.7 percent. Total assets are $1,100,500 and current assets are $328,200. How many dollars of sales are being generated from every dollar of net fixed assets?A) $2.83B) $1.37C) $.84D) $1.20E) $1.2381) Jensen's Shipping has total assets of $694,800 at year's end. The beginning owners' equity was $362,400. During the year, the company had sales of $711,000, a profit margin of 5.2 percent, a tax rate of 21 percent, and paid $12,500 in dividends. What is the equity multiplier at year-end?A) 1.67B) 1.72C) 1.93D) 1.80E) 1.8682) Western Gear has net income of $12,400, a tax rate of 21 percent, and interest expense of $1,600. What is the times interest earned ratio for the year?A) 9.63B) 7.75C) 10.81D) 14.97E) 10.9783) Big Tree Lumber has earnings per share of $1.36. The firm's earnings have been increasing at an average rate of 2.9 percent annually and are expected to continue doing so. The firm has 21,500 shares of stock outstanding at a price per share of $23.40. What is the firm's PEG ratio?A) 2.27B) 11.21C) 4.85D) 3.94E) 5.9384) Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings ratio of 17.6, and a profit margin of 7.1 percent. What is the earnings growth rate?A) 2.48 percentB) 1.06 percentC) 3.32 percentD) 5.20 percentE) 10.60 percent85) A firm has total assets with a current book value of $71,600, a current market value of $82,300, and a current replacement cost of $90,400. What is the value of Tobin's Q?A) .85B) .87C) .90D) .94E) .9186) Dixie Supply has total assets with a current book value of $368,900 and a current replacement cost of $486,200. The market value of these assets is $464,800. What is the value of Tobin's Q?A) .79B) .76C) .96D) 1.26E) 1.0587) Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is $225,000 and the market value of the firm's debt is $101,000. The firm has 20,000 shares of stock outstanding and a book value per share of $2.09. What is the market-to-book ratio?A) 2.75 timesB) 3.18 timesC) 3.54 timesD) 4.01 timesE) 4.20 times88) The Tech Store has annual sales of $416,000, a price-earnings ratio of 18, and a profit margin of 3.7 percent. There are 12,000 shares of stock outstanding. What is the price-sales ratio?A) .97B) .67C) 1.08D) 1.15E) .8689) Lassiter Industries has annual sales of $328,000 with 8,000 shares of stock outstanding. The firm has a profit margin of 4.5 percent and a price-sales ratio of 1.20. What is the firm's price-earnings ratio?A) 21.9B) 17.4C) 18.6D) 26.7E) 24.390) Drive-Up has sales of $31.4 million, total assets of $27.6 million, and total debt of $14.9 million. The profit margin is 3.7 percent. What is the return on equity?A) 6.85 percentB) 9.15 percentC) 11.08 percentD) 13.31 percentE) 14.21 percent91) Corner Supply has a current accounts receivable balance of $246,000. Credit sales for the year just ended were $2,430,000. How many days on average did it take for credit customers to pay off their accounts during this past year?A) 44.29 daysB) 55.01 daysC) 55.50 daysD) 36.95 daysE) 41.00 days92) BL Industries has ending inventory of $302,800, annual sales of $2.33 million, and annual cost of goods sold of $1.41 million. On average, how long did a unit of inventory sit on the shelf before it was sold?A) 47.43 daysB) 22.18 daysC) 78.38 daysD) 61.78 daysE) 83.13 days93) Billings Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the days' sales in receivables?A) 21.90 daysB) 27.56 daysC) 33.18 daysD) 35.04 daysE) 36.19 days94) Stone Walls has a long-term debt ratio of .6 and a current ratio of 1.2. Current liabilities are $800, sales are $7,800, the profit margin is 6.5 percent, and return on equity is 15.5 percent. What is the amount of the firm's net fixed assets?A) $8,880.15B) $8,017.43C) $7,666.67D) $5,848.15E) $8,977.43。

Fundamentals of Corporate Finance, 12e (Ross)Chapter 1 Introduction to Corporate Finance1) Which one of the following functions should be the responsibility of the controller rather than the treasurer?A) Depositing cash receiptsB) Processing cost reportsC) Analyzing equipment purchasesD) Approving credit for a customerE) Paying a vendorAnswer: BDifficulty: 1 EasyTopic: Management organization and rolesLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation2) The treasurer of a corporation generally reports directly to the:A) board of directors.B) chairman of the board.C) chief executive officer.D) president.E) vice president of finance.Answer: EDifficulty: 1 EasyTopic: Management organization and rolesLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: RememberAACSB: Reflective ThinkingAccessibility: Keyboard Navigation3) Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure?A) The vice president of finance reports to the chairman of the board.B) The chief executive officer reports to the president.C) The controller reports to the chief financial officer.D) The treasurer reports to the president.E) The chief operations officer reports to the vice president of production.Answer: CDifficulty: 1 EasyTopic: Management organization and rolesLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: RememberAACSB: Reflective ThinkingAccessibility: Keyboard Navigation4) An example of a capital budgeting decision is deciding:A) how many shares of stock to issue.B) whether or not to purchase a new machine for the production line.C) how to refinance a debt issue that is maturing.D) how much inventory to keep on hand.E) how much money should be kept in the checking account.Answer: BDifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation5) When evaluating the timing of a project's projected cash flows, a financial manager is analyzing:A) the amount of each expected cash flow.B) only the start-up costs that are expected to require cash resources.C) only the date of the final cash flow related to the project.D) the amount by which cash receipts are expected to exceed cash outflows.E) when each cash flow is expected to occur.Answer: EDifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation6) Capital structure decisions include determining:A) which one of two projects to accept.B) how to allocate investment funds to multiple projects.C) the amount of funds needed to finance customer purchases of a new product.D) how much debt should be assumed to fund a project.E) how much inventory will be needed to support a project.Answer: DDifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation7) The decision to issue additional shares of stock is an example of:A) working capital management.B) a net working capital decision.C) capital budgeting.D) a controller's duties.E) a capital structure decision.Answer: EDifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation8) Which one of the following questions is a working capital management decision?A) Should the company issue new shares of stock or borrow money?B) Should the company update or replace its older equipment?C) How much inventory should be on hand for immediate sale?D) Should the company close one of its current stores?E) How much should the company borrow to buy a new building?Answer: CDifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation9) Which one of the following is a working capital management decision?A) What type(s) of equipment is (are) needed to complete a current project?B) Should the firm pay cash for a purchase or use the credit offered by the supplier?C) What amount of long-term debt is required to complete a project?D) How many shares of stock should the firm issue to fund an acquisition?E) Should a project should be accepted?Answer: BDifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation10) Working capital management decisions include determining:A) the minimum level of cash to be kept in a checking account.B) the best method of producing a product.C) the number of employees needed to work during a particular shift.D) when to replace obsolete equipment.E) if a competitor should be acquired.Answer: ADifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation11) Which one of the following terms is defined as the management of a firm's long-term investments?A) Working capital managementB) Financial allocationC) Agency cost analysisD) Capital budgetingE) Capital structureAnswer: DDifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation12) Which one of the following terms is defined as the mixture of a firm's debt and equity financing?A) Working capital managementB) Cash managementC) Cost analysisD) Capital budgetingE) Capital structureAnswer: EDifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation13) A firm's short-term assets and its short-term liabilities are referred to as the firm's:A) working capital.B) debt.C) investment capital.D) net capital.E) capital structure.Answer: ADifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: RememberAACSB: Reflective ThinkingAccessibility: Keyboard Navigation14) Which one of the following questions is least likely to be addressed by financial managers?A) How should a product be marketed?B) Should customers be given 30 or 45 days to pay for their credit purchases?C) Should the firm borrow more money?D) Should the firm acquire new equipment?E) How much cash should the firm keep on hand?Answer: ADifficulty: 1 EasyTopic: Financial management decisionsLearning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation15) A business owned by a solitary individual who has unlimited liability for the firm's debt is called a:A) corporation.B) sole proprietorship.C) general partnership.D) limited partnership.E) limited liability company.Answer: BDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation16) A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:A) corporation.B) sole proprietorship.C) general partnership.D) limited partnership.E) limited liability company.Answer: CDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation17) A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:A) general partner.B) sole proprietor.C) limited partner.D) corporate shareholder.E) zero partner.Answer: CDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation18) A business created as a distinct legal entity and treated as a legal "person" is called a(n):A) corporation.B) sole proprietorship.C) general partnership.D) limited partnership.E) unlimited liability company.Answer: ADifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation19) Which one of the following statements concerning a sole proprietorship is correct?A) A sole proprietorship is designed to protect the personal assets of the owner.B) The profits of a sole proprietorship are subject to double taxation.C) The owner of a sole proprietorship is personally responsible for all of the company's debts.D) There are very few sole proprietorships remaining in the U.S. today.E) A sole proprietorship is structured the same as a limited liability company.Answer: CDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation20) Which one of the following statements concerning a sole proprietorship is correct?A) The life of a sole proprietorship is limited.B) A sole proprietor can generally raise large sums of capital quite easily.C) Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation.D) A sole proprietorship is taxed the same as a C corporation.E) A sole proprietorship is the most regulated form of organization.Answer: ADifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation21) Which of the following individuals have unlimited liability for a firm's debts based on their ownership interest?A) Only general partnersB) Only sole proprietorsC) All stockholdersD) Both limited and general partnersE) Both general partners and sole proprietorsAnswer: EDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation22) The primary advantage of being a limited partner is:A) the receipt of tax-free income.B) the partner's active participation in the firm's activities.C) the lack of any potential financial loss.D) the daily control over the business affairs of the partnership.E) the partner's maximum loss is limited to their capital investment.Answer: EDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation23) A general partner:A) is personally responsible for all partnership debts.B) has no say over a firm's daily operations.C) faces double taxation whereas a limited partner does not.D) has a maximum loss equal to his or her equity investment.E) receives a salary in lieu of a portion of the profits.Answer: ADifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation24) A limited partnership:A) has an unlimited life.B) can opt to be taxed as a corporation.C) terminates at the death of any one limited partner.D) has at least one partner who has unlimited liability for all of the partnership's debts.E) consists solely of limited partners.Answer: DDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation25) A partnership with four general partners:A) distributes profits based on percentage of ownership.B) has an unlimited partnership life.C) limits the active involvement in the firm to a single partner.D) limits each partner's personal liability to 25 percent of the partnership's total debt.E) must distribute 25 percent of the profits to each partner.Answer: EDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation26) One disadvantage of the corporate form of business ownership is the:A) limited liability of its shareholders for the firm's debts.B) double taxation of distributed profits.C) firm's greater ability to raise capital than other forms of ownership.D) firm's potential for an unlimited life.E) firm's ability to issue additional shares of stock.Answer: BDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation27) Which one of the following statements is correct?A) The majority of firms in the U.S. are structured as corporations.B) Corporate profits are taxable income to the shareholders when earned.C) Corporations can have an unlimited life.D) Shareholders are protected from all potential losses.E) Shareholders directly elect the corporate president.Answer: CDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation28) Which one of the following statements is correct?A) A general partnership is legally the same as a corporation.B) Income from both sole proprietorships and partnerships that is taxable is treated as individual income.C) Partnerships are the most complicated type of business to form.D) All business organizations have bylaws.E) Only firms organized as sole proprietorships have limited lives.Answer: BDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation29) The articles of incorporation:A) describe the purpose of the firm and set forth the number of shares of stock that can be issued.B) are amended periodically especially prior to corporate elections.C) explain how corporate directors are to be elected and the length of their terms.D) sets forth the procedures by which a firm regulates itself.E) include only the corporation's name and intended life.Answer: ADifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation30) Corporate bylaws:A) must be amended should a firm decide to increase the number of shares authorized.B) cannot be amended once adopted.C) define the name by which the firm will operate.D) describe the intended life and purpose of the organization.E) determine how a corporation regulates itself.Answer: EDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation31) A limited liability company:A) can only have a single owner.B) is comprised of limited partners only.C) is taxed similar to a partnership.D) is taxed similar to a C corporation.E) generates totally tax-free income.Answer: CDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation32) Which business form is best suited to raising large amounts of capital?A) Sole proprietorshipB) Limited liability companyC) CorporationD) General partnershipE) Limited partnershipAnswer: CDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation33) A ________ has all the respective rights and privileges of a legal person.A) sole proprietorshipB) general partnershipC) limited partnershipD) corporationE) limited liability companyAnswer: DDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation34) Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?A) Sole proprietorshipB) Joint stock companyC) Limited partnershipD) General partnershipE) CorporationAnswer: CDifficulty: 2 MediumTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: ApplyAACSB: Knowledge ApplicationAccessibility: Keyboard Navigation35) Sally and Alicia are equal general partners in a business. They are content with their current management and tax situation but are uncomfortable with their unlimited liability. Which form of business entity should they consider as a replacement to their current arrangement assuming they wish to remain the only two owners of the business?A) Sole proprietorshipB) Joint stock companyC) Limited partnershipD) Limited liability companyE) CorporationAnswer: DDifficulty: 2 MediumTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: ApplyAACSB: Knowledge ApplicationAccessibility: Keyboard Navigation36) The growth of both sole proprietorships and partnerships is frequently limited by the firm's:A) double taxation.B) bylaws.C) inability to raise cash.D) limited liability.E) agency problems.Answer: CDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation37) Corporate dividends are:A) tax-free because the income is taxed at the personal level when earned by the firm.B) tax-free because they are distributions of aftertax income.C) tax-free since the corporation pays tax on that income when it is earned.D) taxed at both the corporate and the personal level when the dividends are paid to shareholders.E) taxable income of the recipient even though that income was previously taxed.Answer: EDifficulty: 1 EasyTopic: Forms of business organizationLearning Objective: 01-03 Articulate the financial implications of the different forms of business organization.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation38) Financial managers should primarily focus on the interests of:A) stakeholders.B) the vice president of finance.C) their immediate supervisor.D) shareholders.E) the board of directors.Answer: DDifficulty: 1 EasyTopic: Goal of financial managementLearning Objective: 01-02 Explain the goal of financial management.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation39) Which one of the following best states the primary goal of financial management?A) Maximize current dividends per shareB) Maximize the current value per shareC) Increase cash flow and avoid financial distressD) Minimize operational costs while maximizing firm efficiencyE) Maintain steady growth while increasing current profitsAnswer: BDifficulty: 1 EasyTopic: Goal of financial managementLearning Objective: 01-02 Explain the goal of financial management.Bloom's: RememberAACSB: Reflective ThinkingAccessibility: Keyboard Navigation40) Which one of the following best illustrates that the management of a firm is adhering to thegoal of financial management?A) An increase in the amount of the quarterly dividendB) A decrease in the per unit production costsC) An increase in the number of shares outstandingD) A decrease in the net working capitalE) An increase in the market value per shareAnswer: EDifficulty: 1 EasyTopic: Goal of financial managementLearning Objective: 01-02 Explain the goal of financial management.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation41) Financial managers should strive to maximize the current value per share of the existing stock to:A) guarantee the company will grow in size at the maximum possible rate.B) increase employee salaries.C) best represent the interests of the current shareholders.D) increase the current dividends per share.E) provide managers with shares of stock as part of their compensation.Answer: CDifficulty: 1 EasyTopic: Goal of financial managementLearning Objective: 01-02 Explain the goal of financial management.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation42) Decisions made by financial managers should primarily focus on increasing the:A) size of the firm.B) growth rate of the firm.C) gross profit per unit produced.D) market value per share of outstanding stock.E) total sales.Answer: DDifficulty: 1 EasyTopic: Goal of financial managementLearning Objective: 01-02 Explain the goal of financial management.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation43) The Sarbanes-Oxley Act of 2002 is a governmental response to:A) decreasing corporate profits.B) the terrorist attacks on 9/11/2001.C) a weakening economy.D) deregulation of the stock exchanges.E) management greed and abuses.Answer: EDifficulty: 1 EasyTopic: Ethics, governance, and regulationLearning Objective: 01-04 Explain the conflicts of interest that can arise between managers and owners.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation44) Which one of the following is an unintended result of the Sarbanes-Oxley Act?A) More detailed and accurate financial reportingB) Increased management awareness of internal controlsC) Corporations delisting from major exchangesD) Increased responsibility for corporate officersE) Identification of internal control weaknessesAnswer: CDifficulty: 1 EasyTopic: Ethics, governance, and regulationLearning Objective: 01-04 Explain the conflicts of interest that can arise between managers and owners.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation45) A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:A) must continue to provide audited financial statements to the public.B) must continue to provide a detailed list of internal control deficiencies on an annual basis.C) can provide less information to its shareholders than it did prior to "going dark".D) can continue publicly trading its stock but only on the exchange on which it was previously listed.E) ceases to exist.Answer: CDifficulty: 1 EasyTopic: Ethics, governance, and regulationLearning Objective: 01-04 Explain the conflicts of interest that can arise between managers and owners.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation46) The Sarbanes-Oxley Act of 2002 holds a public company's ________ responsible for the accuracy of the company's financial statements.A) managersB) internal auditorsC) external legal counselD) internal legal counselE) Securities and Exchange Commission agentAnswer: ADifficulty: 1 EasyTopic: Ethics, governance, and regulationLearning Objective: 01-04 Explain the conflicts of interest that can arise between managers and owners.Bloom's: UnderstandAACSB: Reflective ThinkingAccessibility: Keyboard Navigation。

Fundamentals of Corporate Finance, 12e (Ross)Chapter 15 Raising Capital1) Business Aid is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?A) Green shoe fundingB) Tombstone underwritingC) Venture capitalD) Red herring fundingE) Life cycle capital2) It is common for venture capitalists to receive at least ________ percent of a start-up company's equity in exchange for the venture capital.A) 10B) 15C) 20D) 30E) 403) Equity financing of new, non-public companies is broadly referred to as:A) singular-risk financing.B) mezzanine-level stock.C) stylized financing.D) private equity.E) exit funding.4) Which one of the following statements concerning venture capital financing is correct?A) Venture capitalists desire shares of common stock but avoid preferred stock.B) Venture capital is relatively easy to obtain.C) Venture capitalists rarely assume active roles in the management of the financed firm.D) Venture capitalists should have key contacts and financial strength.E) Venture capital is relatively inexpensive in today's competitive markets.5) Which one of the following statements concerning venture capitalists is correct?A) Venture capitalists always assume management responsibility for the companies they finance.B) Exit strategy is a key consideration when selecting a venture capitalist.C) Venture capitalists limit their services to providing money to start-up firms.D) Most venture capitalists are long-term investors in the companies they finance.E) A venture capitalist normally invests in a new idea from conception through the IPO.6) When selecting a venture capitalist, which one of the following characteristics is probably the least important?A) Financial strengthB) Level of involvementC) ContactsD) Exit strategyE) Underwriting experience7) Trevor is the CEO of Harvest Foods, which is a privately held corporation. What is the first step he must take if he wishes to take Harvest Foods public?A) Select an underwriterB) Obtain SEC approvalC) Gain board approvalD) Prepare a registration statementE) Distribute a prospectus8) Which one of these describes an exception to the registration filing requirement of the SEC?A) Loans that mature in one year or lessB) Issues that have an approved prospectusC) Loans of $10 million or lessD) Issues of less than $5 millionE) Issues that have received an approved letter of comment9) The Securities and Exchange Commission:A) verifies the accuracy of the information contained in the prospectus.B) publishes red herrings on prospective new security offerings.C) examines the prospectus during the Green Shoe period.D) reviews registration statements to ensure they comply with current laws and regulations.E) determines the final offer price once they have approved the registration statement.10) What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public?A) ProspectusB) Red herringC) IndentureD) Public disclosure statementE) Registration statement11) M&C Merchants is offering $2.5 million of new securities to the general public. Which SEC regulation governs this offering?A) Regulation AB) Regulation CC) Regulation GD) Regulation QE) Regulation R12) What is a prospectus?A) A letter issued by the SEC authorizing a new issue of securitiesB) A report stating that the SEC recommends a new security to investorsC) A letter issued by the SEC that outlines the changes required for a registration statement to be approvedD) A document that describes the details of a proposed security offering along with relevant information about the issuerE) An advertisement in a financial newspaper that describes a security offering13) Which one of the following is a preliminary prospectus?A) TombstoneB) Green shoeC) Registration statementD) Rights offerE) Red herring14) Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:A) red herrings.B) tombstones.C) Green Shoes.D) registration statements.E) cash offers.15) The raising of small amounts of capital from a large number of people is known as:A) a rights offering.B) over allocating.C) a diversified offer.D) crowdfunding.E) a standby offer.16) During a 12-month period, a company is permitted to issue new securities through crowdfunding up to a limit of:A) $200 thousand.B) $500 thousand.C) $1 million.D) $5 million.E) $50 million.17) What is an issue of securities that is offered for sale to the general public on a direct cash basis called?A) Best efforts underwritingB) Firm commitment underwritingC) General cash offerD) Rights offerE) Herring offer18) Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?A) Best efforts offerB) Firm commitment offerC) General cash offerD) Rights offerE) Priority offer19) JLK is a partnership that was formed two years ago and has been extremely successful thus far. The owners have decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called?A) Venture capital offeringB) Shelf offeringC) Private placementD) Seasoned equity offeringE) Initial public offering20) What is a seasoned equity offering?A) An offering of shares by shareholders for repurchase by the issuerB) Shares of stock that have been recommended for purchase by the SECC) Equity securities held by a company's founder that are being offered for sale to the general publicD) Sale of newly issued equity shares by a publicly owned companyE) Outstanding shares that are offered for sale by one of a company's original founders21) Executive Tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as a(n):A) aftermarket specialist.B) venture capitalist.C) underwriter.D) seasoned writer.E) primary investor.22) Underwriters generally:A) pay a spread to the issuing firm.B) provide only best efforts underwriting in the U.S.C) accept the risk of selling the new securities in exchange for the gross spread.D) market and distribute an entire issue of new securities within their own firm.E) pass the risk of unsold shares back to the issuing firm via a firm commitment agreement.23) A syndicate can best be defined as a:A) venture capitalist.B) group of attorneys providing services for an IPO.C) block of investors who control a firm.D) bank that loans funds to finance the start-up of a new company.E) group of underwriters sharing the risk of selling a new issue of securities.24) The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:A) gross spread.B) under price amount.C) filing fee.D) new issue premium.E) offer price.25) Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was this?A) Best effortsB) ShelfC) OversubscribedD) Private placementE) Firm commitment26) Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following terms best describes this underwriting?A) Dutch auctionB) Best effortsC) Public rightsD) Private placementE) Market commitment27) The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the ________ period.A) auctionB) quietC) lockupD) Green ShoeE) red28) Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 shares were purchased in accordance with which one of the following?A) Green Shoe provisionB) Red herring provisionC) Quiet provisionD) Lockup agreementE) Post-issue agreement29) With firm commitment underwriting, the issuing firm:A) is unsure of the total amount of funds it will receive until after the offering is completed.B) is unsure of the number of shares it will actually issue until after the offering is completed.C) knows exactly how many shares will be purchased by the general public during the offer period.D) retains the financial risk associated with unsold shares.E) knows upfront the amount of money it will receive from the stock offering.30) Which one of the following is a key goal of the aftermarket period?A) Collecting the largest number of Dutch auction bids as possibleB) Determining a fair offer priceC) Supporting the market price for a new securities issueD) Establishing a broad-based underwriting syndicateE) Distributing red herrings to as many potential investors as possible31) Which one of the following statements is correct?A) The quiet period commences when a registration statement is filed with the SEC and ends on the day the IPO shares commence trading.B) Lockup agreements outline how oversubscribed IPO shares will be allocated.C) Additional IPO shares can be issued in accordance with the lockup agreement.D) Quiet period restrictions only apply to the issuer of new securities.E) A public interview with an issuer's CFO could cause a forced delay in the issuer's IPO.32) With Dutch auction underwriting:A) each winning bidder pays the minimum price offered by any bidder.B) all successful bidders pay the same price per share.C) all bidders receive at least a portion of the quantity for which they bid.D) the selling firm receives the maximum possible price for each security sold.E) the bidder for the largest quantity receives the first allocation of securities.33) Individual investors might avoid requesting 100 shares in an upcoming IPO because they:A) do not want to be bothered with submitting their bid to the SEC for approval.B) do not want to abide by the quiet period requirement.C) are prevented from entering orders for less than 1,000 shares.D) are more apt to receive shares if the IPO is under allocated.E) would have to pay a premium based on their small order size.34) If a firm commitment IPO is overpriced then the:A) investors in the IPO may consider suing the underwriters.B) Green Shoe provision will probably be utilized.C) stock price will generally increase on the first day of trading.D) issuing firm is guaranteed to be successful in the long term.E) issuing firm receives less money than it probably should have.35) All of the following are supporting arguments in favor of IPO underpricing except which one?A) Helps prevent the "winner's curse"B) Rewards institutional investors who share their market value opinionsC) Reduces potential lawsuits against underwritersD) Diminishes underwriting riskE) Provides better returns to issuing firms36) When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:A) increase.B) decrease.C) remain constant.D) respond, but the direction of the response is not predictable as shown by past studies.E) decrease momentarily and then immediately increase substantially within an hour following the announcement.37) The total direct costs of underwriting an equity IPO:A) tend to increase on a percentage basis as the total proceeds of the IPO increase.B) are generally between 7 and 9 percent, regardless of the issue size.C) tend to be less than the direct costs of issuing bonds on a percentage of proceeds basis.D) exclude the gross spread.E) can be as low as 5.5 percent and as high as 25 percent of gross proceeds.38) Which one of the following statements is correct concerning the direct costs of issuing securities?A) Domestic bonds are generally more expensive to issue than equity IPOs.B) The gross spread as a percentage of proceeds is the same for similar-sized IPOs and SEOs.C) A seasoned offering is always more expensive on a percentage basis than an IPO.D) There tends to be substantial economies of scale when issuing any type of security.E) The costs of issuing convertible bonds tend to be less on a percentage basis than the costs of issuing straight debt.39) Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock?A) Pre-issue dateB) Aftermarket dateC) Declaration dateD) Holder-of-record dateE) Ex-rights date40) The date on which a shareholder is officially listed as the recipient of stock rights is called the:A) issue date.B) offer date.C) declaration date.D) holder-of-record date.E) ex-rights date.41) A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a(n) ________ underwriting.A) standbyB) best effortsC) firm commitmentD) direct feeE) oversubscription42) BK & Co. offered 15,000 shares in a rights offer. T.L. Moore & Co. was the underwriter that by prior agreement purchased the 639 unsold shares. For its participation in this rights offer, T.L. Moore & Co. is most likely entitled to:A) the gross margin.B) the optional spread.C) a standby fee.D) the subscription price.E) an oversubscription fee.43) Franklin Minerals recently had a rights offering of 12,000 shares at an offer price of $17 a share. Isabelle is a shareholder who exercised her rights option by buying all of the rights to which she was entitled based on the number of shares she owns. Currently, there are six shareholders who have opted not to participate in the rights offering. Isabelle would like to purchase these unsubscribed shares. Which one of the following will allow her to do so?A) Standby provisionB) Oversubscription privilegeC) Open offer privilegeD) New issues provisionE) Overallotment provision44) Existing shareholders:A) may or may not have a pre-emptive right to newly issued shares.B) must purchase new shares whenever rights are issued.C) are prohibited from selling their rights.D) are generally well advised to let the rights they receive expire.E) can maintain their proportional ownership positions without exercising their rights.45) To purchase a share in a rights offering, an existing shareholder generally just needs to:A) pay the subscription amount in cash.B) submit the required form along with the required number of rights.C) pay the difference between the market price of the stock and the subscription price.D) submit the required number of rights along with a payment for the underwriting fee.E) submit the required number of rights along with the subscription price.46) The value of a right depends upon the number of rights required for each new share as well as the:A) subscription price and book value per share.B) market and book values per share.C) market price, book value, and subscription price.D) market and subscription prices.E) difference between the market and book values per share.47) Before a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. Which one of the following terms best describes this situation?A) OverallotmentB) Percentage ownership dilutionC) Green Shoe allocationD) Red herring allotmentE) Abnormal event48) Which one of the following statements concerning dilution is correct?A) Dilution of percentage ownership occurs whenever an investor fully participates in a rights offer.B) Market value dilution increases as the net present value of a project increases.C) Market value dilution occurs when the net present value of a project is negative.D) Neither book value dilution nor market value dilution has any direct bearing on individual shareholders.E) Book value dilution is the cause of market value dilution.49) Roy owns 200 shares of RTF Inc. He has opted not to participate in the current rights offering by this company. As a result, Roy will most likely be subject to:A) an oversubscription cost.B) underpricing.C) dilution.D) the Green Shoe provision.E) a locked-in period.50) Direct business loans typically ranging from one to five years are called:A) private placements.B) debt SEOs.C) notes payable.D) debt IPOs.E) term loans.51) The High-End mutual fund recently loaned $13.6 million to Henderson Hardware for 15 years at 6.8 percent interest. This loan is best described as a:A) private placement.B) debt SEO.C) note payable.D) debt IPO.E) term loan.52) Which one of the following statements is correct concerning the issuance of long-term debt?A) A direct private long-term loan has to be registered with the SEC.B) Direct placement debt tends to have more restrictive covenants than publicly issued debt.C) Distribution costs are lower for public debt than for private debt.D) It is easier to renegotiate public debt than private debt.E) Wealthy individuals tend to dominate the private debt market.53) Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:A) 3 months.B) 6 months.C) 180 days.D) 2 years.E) 5 years.54) Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The company plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this?A) Standby registrationB) Shelf registrationC) Regulation A registrationD) Regulation Q registrationE) Private placement registration55) The Boat Works decided to go public by offering a total of 135,000 shares of common stockto the public. The company hired an underwriter who arranged a firm commitment underwriting and an initial selling price of $24 a share with a spread of 8.3 percent. As it turned out, the underwriters only sold 122,400 shares to the public. What is the amount paid to the issuer?A) $2,227,280B) $3,074,420C) $2,971,080D) $2,692,820E) $2,477,38056) Nelson Paints recently went public by offering 50,000 shares of common stock to the public. The underwriters provided their services in a best efforts underwriting. The offering price was set at $17.50 a share and the gross spread was $2.30. After completing their sales efforts, the underwriters determined that they sold a total of 47,500 shares. How much cash did the company receive from its IPO?A) $722,000B) $717,000C) $735,000D) $705,000E) $748,00057) LC Delivery has decided to sell 1,800 shares of stock through a Dutch auction. The bids received are as follows: 600 shares at $37 a share, 800 shares at $36, 900 shares at $35, 200 shares at $34, and 100 shares at $32 a share. How much will the company receive in total from selling the 1,800 shares? Ignore all transaction and flotation costs.A) $63,100B) $52,500C) $63,000D) $58,800E) $52,10058) Bakers' Town Bread is selling 1,500 shares of stock through a Dutch auction. The bids received are as follows: 200 shares at $17 a share, 400 shares at $15, 700 shares at $14, 400 shares at $13, and 200 shares at $11 a share. How much cash will the company receive from selling these shares of stock? Ignore all transaction and flotation costs.A) $22,000B) $22,500C) $23,000D) $24,500E) $20,20059) Eastern Electric is offering 2,100 shares of stock in a Dutch auction. The bids include: 1,400 shares at $32 a share, 1,500 shares at $31, 1,400 shares at $30, and 900 shares at $29 a share. How much cash will Eastern Electric receive from selling these shares? Ignore all transaction and flotation costs.A) $62,100B) $64,200C) $60,000D) $63,000E) $63,30060) You have been instructed to place an order for a client to purchase 500 shares of every IPO that comes to market. The next two IPOs are each priced at $26 a share and will begin trading on the same day. The client is allocated 500 shares of IPO A and 240 shares of IPO B. At the end of the first day of trading, IPO A was selling for $23.90 a share and IPO B was selling for $29.40 a share. What is the client's total profit or loss on these two IPOs as of the end of the first day of trading?A) − $286B) − $234C) − $148D) $275E) $32961) Richard placed an order for 1,000 shares in each of three IPOs at $28 a share. He was allocated 1,000 shares of IPO A, 200 shares of IPO B, and 600 shares of IPO C. On the first day of trading, IPO A opened at $28 a share and ended the day at $24.25 a share. IPO B opened at $30 a share and finished the day at $37 a share. IPO C opened at $28 a share and ended the day at $27.65 a share. What is the total profit or loss on these three IPO purchases as of the end of the first day of trading?A) − $2,160B) − $1,850C) − $1,950D) $2,240E) $2,17562) Two IPOs will commence trading next week. Scott places an order to buy 600 shares of IPOA. Steve places an order to purchase 600 shares of IPO A and 600 shares of IPOB. Both IPOs are priced at $21 a share. Scott is allocated 300 shares of IPO A. Steve is allocated 300 shares of IPO A and 600 shares of IPO B. At the end of the first day of trading, IPO A is selling for $23.30 a share and IPO B is selling for $17.75 a share. How much additional profit did Steve have at the end of the first day of trading as compared to Scott?A) $1,950B) $1,260C) $1,870D) −$1,950E) −$1,26063) Davis Bros. and The Storage Shed have both announced IPOs at $32 per share. One of these is undervalued by $9, and the other is overvalued by $4, but you have no way of knowing whichis which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. What is the amount of the difference between your expected profit and the amount of profit you could earn if you could get 1,000 shares of both IPO offerings?A) $4,500B) $5,000C) $4,000D) $5,500E) $6,00064) Wear Ever is expanding and needs $6.8 million to help fund this growth. The company estimates it can sell new shares of stock for $43 a share. It also estimates it will cost an additional $352,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a spread of 7.5 percent. How many shares of stock must be sold for the company to fund its expansion?A) 170,376B) 185,127C) 179,811D) 154,209E) 61,80665) Mountain Teas wants to raise $13.6 million to open a new production facility. The company estimates the issue costs for legal and accounting fees will be $386,000. The underwriters have set the stock price at $27.50 a share and the underwriting spread at 8.15 percent. How many shares of stock must be sold to meet this cash need?A) 528,414B) 553,709C) 569,315D) 492,144E) 501,90966) Outdoor Goods needs $3.8 million to modernize its production equipment. The underwriters set the stock price at $29.50 a share with an underwriting spread of 7.35 percent. This would be a firm commitment underwriting. The estimated issue costs are $272,000. How many shares of stock must be sold to finance this project?A) 148,984B) 188,917C) 152,311D) 186,299E) 162,40067) Flagler Inc. needs to raise $11.6 million, including all accounting and legal fees, to finance its expansion so has decided to sell new shares of equity via a general cash offering. The offer price is $22.50 per share and the underwriting spread is 7.85 percent. How many shares need to be sold?A) 559,474B) 604,011C) 566,667D) 571,008E) 538,40968) New Education needs to raise $8.79 million to finance its expansion and has decided to sell new shares of equity via a general cash offering. The offer price is $31.40 per share, the underwriting spread is 7.32 percent, and the associated administrative expenses and fees are $517,600. How many shares need to be sold?A) 348,907B) 361,222C) 311,111D) 329,937E) 319,83269) The Huff Co. has just gone public. Under a firm commitment agreement, the company received $17.64 for each of the 3.2 million shares sold. The initial offering price was $22.50 per share, and the stock rose to $24.15 per share in the first day of trading. The company paid $984,900 in direct legal and other costs and incurred $340,000 in indirect costs. What was the flotation cost as a percentage of the net amount raised?A) 38.56 percentB) 40.32 percentC) 41.68 percentD) 40.20 percentE) 39.09 percent70) Mountain Mining requires $3.3 million to expand its current operations and has decided to raise these funds through a rights offering at a subscription price of $18 a share. The current market price of the company's stock is $24.70 a share. How many shares of stock must be sold to fund the expansion plans?A) 140,015B) 133,603C) 148,909D) 183,333E) 195,60771) Northwest Rail wants to raise $27.8 million through a rights offering to upgrade its rail lines. How many shares of stock need to be sold if the current market price is $30.34 a share and the subscription price is $26.50 a share?A) 916,282B) 937,856C) 985,065D) 1,058,604E) 1,049,05772) S&S wants to raise $11.3 million through a rights offering with a subscription price of $15 a share. The company has 1.24 million shares outstanding and a market price of $17.50 a share. Each shareholder will receive one right for each share of stock owned. How many rights will be needed to purchase one new share of stock in this offering?A) 1.42B) 1.75C) 1.65D) 1.82E) 1.5573) P&T wants to raise $2.8 million through a rights offering with a subscription price of $20 a share. Currently, the company has 750,000 shares of stock outstanding at a market price of $24.50 a share. One right will be granted for each share of stock outstanding. How many rights are required to purchase one new share of stock in this offering?A) 5.36B) 6.02C) 5.55D) 6.56E) 6.6774) Miller Fruit wants to expand and needs $1.6 million to do so. Currently, the firm has 465,000 shares of stock outstanding at a market price per share of $32.50. The firm decided on a rights offering with one right granted for each share of outstanding stock. The subscription price is $28 a share. How many rights are needed to purchase one new share of stock in this offering?A) 8.14B) 7.17C) 8.22D) 8.63E) 9.45。

Fundamentals of Corporate Finance, 12e (Ross)Chapter 11 Project Analysis and Evaluation1) Forecasting risk is defined as the possibility that:A) some proposed projects will be rejected.B) some proposed projects will be temporarily delayed.C) incorrect decisions will be made due to erroneous cash flow projections.D) some projects will be mutually exclusive.E) tax rates could change over the life of a project.2) The key means of defending against forecasting risk is to:A) rely primarily on the net present value method of analysis.B) increase the discount rate assigned to a project.C) shorten the life of a project.D) identify sources of value within a project.E) ignore any potential salvage value that might be realized.3) Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is he using?A) Simulation testingB) Sensitivity analysisC) Break-even analysisD) Rationing analysisE) Scenario analysis4) Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?A) Determining how fixed costs affect NPVB) Estimating the residual value of fixed assetsC) Identifying the potential range of reasonable outcomesD) Determining the minimal level of sales required to break-even on an accounting basisE) Determining the minimal level of sales required to break-even on a financial basis5) Which one of the following will be used in the computation of the best-case analysis of a proposed project?A) Minimal number of units that are expected to be produced and soldB) The lowest expected salvage value that can be obtained for a project's fixed assetsC) The most anticipated sales price per unitD) The lowest variable cost per unit that can reasonably be expectedE) The highest level of fixed costs that is actually anticipated6) The base case values used in scenario analysis are the values considered to be the most:A) optimistic.B) desired by management.C) pessimistic.D) likely to create a positive net present value.E) likely to occur.7) Which of the following variables will be forecast at their highest expected level under a best-case scenario?A) Fixed costs and units valueB) Variable costs and sales priceC) Fixed costs and sales priceD) Salvage value and units soldE) Initial cost and variable costs8) When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:A) best-case sensitivity analysis.B) worst-case sensitivity analysis.C) best-case scenario analysis.D) worst-case scenario analysis.E) base-case scenario analysis.9) Which one of the following statements concerning scenario analysis is correct?A) The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project.B) Scenario analysis defines the entire range of results that could be realized from a proposed investment project.C) Scenario analysis determines which variable has the greatest impact on a project's final outcome.D) Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.E) Management is guaranteed a positive outcome for a project when the worst-case scenario produces a positive NPV.10) Sensitivity analysis determines the:A) range of possible outcomes given that most variables are reliable only within a stated range.B) degree to which the net present value reacts to changes in a single variable.C) net present value range that can be realized from a proposed project.D) degree to which a project relies on its initial costs.E) ideal ratio of variable costs to fixed costs for profit maximization.11) Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function?A) The steepness of the function relates to the project's degree of operating leverage.B) The steeper the function, the less sensitive the project is to changes in the sales quantity.C) The resulting function will be a hyperbole.D) The resulting function will include only positive values.E) The slope of the function measures the sensitivity of the net present value to a change in sales quantity.12) As the degree of sensitivity of a project to a single variable rises, the:A) less important the variable is to the final outcome of the project.B) less volatile the project's net present value is to that variable.C) greater is the importance of accurately predicting the value of that variable.D) greater is the sensitivity of the project to the other variable inputs.E) less volatile is the project's outcome.13) A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why?A) Sensitivity analysis; to identify the key variable that affects a project's profitabilityB) Scenario analysis; to guarantee each project will be profitableC) Cash breakeven; to ensure the firm recoups its initial investmentD) Accounting breakeven; to ensure each project earns its required rate of returnE) Financial breakeven; to ensure each project has a positive NPV14) Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?A) ScenarioB) SimulationC) Break-evenD) SensitivityE) Cash flow15) Simulation analysis is based on assigning a ________ and analyzing the results.A) narrow range of values to a single variableB) narrow range of values to multiple variables simultaneouslyC) wide range of values to a single variableD) wide range of values to multiple variables simultaneouslyE) single value to each of the variables16) Which one of the following types of analysis is the most complex to conduct?A) ScenarioB) Break-evenC) SensitivityD) Degree of operating leverageE) Simulation17) Scenario analysis is defined as the:A) determination of the initial cash outlay required to implement a project.B) determination of changes in NPV estimates when what-if questions are posed.C) isolation of the effect that a single variable has on the NPV of a project.D) separation of a project's sunk costs from its opportunity costs.E) analysis of the effects that a project's terminal cash flows has on the project's NPV.18) An analysis of the change in a project's NPV when a single variable is changed is called ________ analysis.A) forecastingB) scenarioC) sensitivityD) simulationE) break-even19) Combining scenario analysis with sensitivity analysis can yield a crude form of ________ analysis.A) forecastingB) combinedC) complexD) simulationE) break-even20) Variable costs can be defined as the costs that:A) remain constant for all time periods.B) remain constant over the short run.C) vary directly with sales.D) are classified as noncash expenses.E) are inversely related to the number of units sold.21) Fixed costs:A) change as a small quantity of output produced changes.B) are constant over the short-run regardless of the quantity of output produced.C) are defined as the change in total costs when one more unit of output is produced.D) are subtracted from sales to compute the contribution margin.E) can be ignored in scenario analysis since they are constant over the life of a project.22) The change in revenue that occurs when one more unit of output is sold is referred to as:A) marginal revenue.B) average revenue.C) total revenue.D) erosion.E) scenario revenue.23) The change in variable costs that occurs when production is increased by one unit is referred to as the:A) marginal cost.B) average cost.C) total cost.D) scenario cost.E) net cost.24) By definition, which one of the following must equal zero at the accounting break-even point?A) Net present valueB) DepreciationC) Contribution marginD) Net incomeE) Operating cash flow25) Which one of these combinations must increase the contribution margin?A) Increasing both the sales price and the variable cost per unitB) Increasing the sales quantity and increasing the variable cost per unitC) Decreasing the sales price and increasing the sales quantityD) Decreasing both fixed costs and depreciation expenseE) Increasing the sales price and decreasing the variable cost per unit26) Which of the following are inversely related to variable costs per unit?A) Sales quantity and sales priceB) Net profit per unit and sales quantityC) Operating cash flow and sales quantityD) Operating cash flow per unit and contribution margin per unitE) Contribution margin per unit and marginal costs27) Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale?A) Average variable costB) Average total costC) Average total revenueD) Marginal revenueE) Marginal cost28) The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms:1. The prices will apply only to units purchased in excess of the quantity normally purchased bya customer.2. The units purchased must be paid for in cash at the time of sale.3. The total quantity sold under these terms cannot exceed the excess capacity of the firm.4. The net profit of the firm should not be affected.5. The prices will be in effect for one week only.Given these conditions, the special sale price should be set equal to the:A) average variable cost of materials only.B) average cost of all variable inputs.C) sensitivity value of the variable costs.D) marginal cost of materials only.E) marginal cost of all variable inputs.29) The contribution margin per unit is equal to the:A) sales price per unit minus the total costs per unit.B) variable cost per unit minus the fixed cost per unit.C) sales price per unit minus the variable cost per unit.D) pretax profit per unit.E) aftertax profit per unit.30) Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output?A) IRR and OCFB) Net income and contribution marginC) IRR and net incomeD) OCF and NPVE) Net income and NPV31) A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes.A) Sales price per unitB) Management salariesC) Variable labor costs per unitD) Initial fixed asset purchasesE) Fixed costs32) Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project:A) will never pay back.B) has a zero net present value.C) is operating at a higher level than if it were operating at its cash break-even level.D) is operating at a higher level than if it were operating at its financial break-even level.E) is lowering the total net income of the firm.33) A project that has a payback period exactly equal to the project's life is operating at:A) its maximum capacity.B) the financial break-even point.C) the cash break-even point.D) the accounting break-even point.E) a zero level of output.34) Valerie just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $120,000. Annual sales are estimated at $189,000 and the tax rate is 21 percent. The net present value is negative $120,000. Based on this analysis, the project is expected to operate at the:A) maximum possible level of production.B) minimum possible level of production.C) financial break-even point.D) accounting break-even point.E) cash break-even point.35) A project that has a projected IRR of negative 100 percent will also have a(n):A) discounted payback period equal to the life of the project.B) operating cash flow that is positive and equal to the depreciation.C) net present value that is negative and equal to the initial investment.D) payback period that is exactly equal to the life of the project.E) net present value that is equal to zero.36) Which one of the following characteristics relates to the cash break-even point for a given project?A) The project never pays back.B) The discounted payback period equals the project's life.C) The NPV is equal to zero.D) The IRR equals the required rate of return.E) The OCF is equal to the depreciation expense.37) When the operating cash flow of a project is equal to zero, the project is operating at the:A) maximum possible level of production.B) minimum possible level of production.C) financial break-even point.D) accounting break-even point.E) cash break-even point.38) Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?A) Capital break-evenB) Cash break-evenC) Accounting break-evenD) Financial break-evenE) Internal break-even39) Which one of these is most associated with an IRR of negative 100 percent?A) Degree of operating leverageB) Accounting break-even pointC) Contribution marginD) Simulation analysisE) Cash break-even point40) You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the:A) contribution margin per unit and set that margin equal to the fixed costs per unit.B) degree of operating leverage at the current sales level.C) accounting break-even point.D) cash break-even point.E) financial break-even point.41) Theresa is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that she is considering is most apt to cause that project to produce a positive NPV instead? Consider each change independently.A) Decrease the sales priceB) Increase the materials cost per unitC) Decrease the labor hours per unit producedD) Decrease the sales quantityE) Increase the amount of the initial investment in net working capital42) Given the following, which feature identifies the most desirable level of output for a project?A) Operating cash flow equal to the depreciation expenseB) Payback period equal to the project's lifeC) Discounted payback period equal to the project's lifeD) Zero IRRE) Zero operating cash flow43) Assume both the discount and tax rates are positive values. At the financial break-even point, the:A) payback period equals the project's life.B) NPV is negative.C) OCF is zero.D) contribution margin per unit equals the fixed costs per unit.E) IRR equals the required return.44) By definition, which one of the following must equal zero at the cash break-even point?A) Net present valueB) Internal rate of returnC) Contribution marginD) Net incomeE) Operating cash flow45) Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points?A) AccountingB) LeveragedC) MarginalD) CashE) Financial46) Operating leverage is the degree of dependence a firm places on its:A) variable costs.B) fixed costs.C) sales.D) operating cash flows.E) depreciation tax shield.47) Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?A) Degree of sensitivityB) Degree of operating leverageC) Accounting break-evenD) Cash break-evenE) Contribution margin48) You are considering a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should consider:A) lowering the degree of operating leverage.B) lowering the contribution margin per unit.C) increasing the initial cash outlay.D) increasing the fixed costs per unit.E) lowering the operating cash flow.49) Which one of the following characteristics best describes a project that has a low degree of operating leverage?A) High variable costs relative to the fixed costsB) Relatively high initial cash outlayC) OCF that is highly sensitive to the sales quantityD) High level of forecasting riskE) High depreciation expense50) Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?A) Hiring additional employees rather than using temporary outside contractorsB) Subcontracting portions of the project rather than purchasing new equipment to do all the work in-houseC) Buying equipment rather than leasing it short-termD) Lowering the projected selling price per unitE) Changing the proposed labor-intensive production method to a more capital intensive method51) The degree of operating leverage is equal to:A) 1 + OCF/(FC + VC).B) 1 + OCF/FC.C) 1 + FC/OCF.D) 1 + VC/OCF.E) 1 − (FC + VC)/OCF.52) Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of:A) scenario analysis.B) sensitivity analysis.C) an operating leverage application.D) soft rationing.E) hard rationing.53) Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:A) financial rejection.B) project rejection.C) soft rationing.D) marginal rationing.E) capital rationing.54) The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:A) marginal spending.B) capital preservation.C) soft rationing.D) hard rationing.E) marginal rationing.55) PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:A) financial deferral.B) financial allocation.C) capital allocation.D) marginal rationing.E) hard rationing.56) Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions. All requests represent positive net present value projects. All projects are independent. Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests. Management is following a practice known as:A) scenario analysis.B) sensitivity analysis.C) leveraging.D) hard rationing.E) soft rationing.57) The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is:A) operating at the accounting break-even point.B) operating at the financial break-even point.C) facing hard rationing.D) operating with zero leverage.E) operating at maximum capacity.58) New Town Instruments is analyzing a proposed project. The company expects to sell 1,600 units, ±3 percent. The expected variable cost per unit is $220 and the expected fixed costs are $438,000. Cost estimates are considered accurate within a ±2 percent range. The depreciation expense is $64,000. The sales price is estimated at $647 per unit, ±2 percent. What is the sales revenue under the worst-case scenario?A) $1,086,825B) $896,201C) $984,061D) $1,014,496E) $932,01759) Precise Machinery is analyzing a proposed project that is expected to have sales of 2,450 units, ±8 percent. The expected variable cost per unit is $246 and the expected fixed costs are $309,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $106,000. The sales price is estimated at $599 per unit, ±2 percent. What is the amount of the total costs per unit under the worst-case scenario?A) $448.58B) $404.16C) $366.67D) $338.23E) $394.5860) Precise Machinery is analyzing a proposed project. The company expects to sell 7,500 units, ±10 percent. The expected variable cost per unit is $314 and the expected fixed costs are $647,000. Cost estimates are considered accurate within a ±4 percent range. The depreciation expense is $187,000. The sales price is estimated at $849 per unit, give or take 2 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $850. What is the operating cash flow based on this analysis?A) $2,703,940B) $2,293,089C) $1,986,675D) $2,354,874E) $2,284,83761) The Creamery is analyzing a project with expected sales of 5,700 units, ±5 percent. The expected variable cost per unit is $168 and the expected fixed costs are $424,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $156,000. The sales price is estimated at $339 per unit, ±5 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis with fixed costs of $425,000. What is the OCF given this analysis?A) $416,511B) $385,350C) $467,023D) $394,874E) $421,30062) HiLo Mfg. is analyzing a project with anticipated sales of 12,500 units, ±2 percent. The variable cost per unit is $13, ± 2 percent, and the expected fixed costs are $237,000, ±1 percent.The sales price is estimated at $69 a unit, ±3 percent. The depreciation expense is $68,000 and the tax rate is 22 percent. What is the earnings before interest and taxes under the base-case scenario?A) $368,500B) $421,000C) $395,000D) $414,900E) $427,50063) Assume a project has a sales quantity of 7,400 units, ±6 percent and a sales price of $59 a unit, ±1 percent. The expected variable cost per unit is $13, ±3 percent, and the expected fixed costs are $214,000, ±2 percent. The depreciation expense is $63,000 and the tax rate is 23 percent. What is the operating cash flow under the best-case scenario?A) $136,759B) $118,470C) $145,705D) $134,208E) $124,22064) Windows and More is reviewing a project with sales of 6,200 units, ±2 percent, at a sales price of $29, ±1 percent, per unit. The expected variable cost per unit is $11, ±3 percent, and the expected fixed costs are $87,000, ±1 percent. The depreciation expense is $68,000 and the tax rate is 21 percent. What is the net income under the worst-case scenario?A) −$38,578B) −$39,713C) $15,846D) –$28,704E) $4,69665) Stellar Plastics is analyzing a proposed project with annual depreciation of $28,750 and a tax rate of 23 percent. The company expects to sell 16,500 units, ±3 percent. The expected variable cost per unit is $1.87, ±1 percent, and the expected fixed costs are $24,900, ±1 percent. The sales price is estimated at $7.99 a unit, ±2 percent. What is the operating cash flow for a sensitivity analysis using total fixed costs of $26,000?A) $54,208B) $64,347C) $63,591D) $62,408E) $60,54066) Your company is reviewing a project with estimated labor costs of $14.68 per unit, estimated raw material costs of $43.18 a unit, and estimated fixed costs of $18,000 a month. Sales are projected at 15,500 units, ±5 percent, over the one-year life of the project. Cost estimates are accurate within a range of ±3 percent. What are the total variable costs for the best-case scenario?A) $869,925B) $861,560C) $913,421D) $951,960E) $891,96067) A project has base-case earnings before interest and taxes of $36,408, fixed costs of $42,700,a selling price of $24 a unit, and a sales quantity of 22,000 units. All estimates are accurate within ±2 percent. Depreciation is $16,700. What is the base-case variable cost per unit?A) $22.16B) $23.84C) $19.65D) $22.23E) $17.1868) Consider a 5-year project with an initial fixed asset investment of $324,000, straight-line depreciation to zero over the project's life, a zero salvage value, a selling price of $34, variable costs of $17, fixed costs of $189,700, a sales quantity of 94,000 units, and a tax rate of 21 percent. What is the sensitivity of OCF to changes in the sales price?A) $74,260 per $1 of salesB) $61,600 per $1 of salesC) $78,700 per $1 of salesD) $59,470 per $1 of salesE) $68,850 per $1 of sales69) You are considering a new product launch. The project will have an initial cost for fixed assets of $1,150,000, a three-year life, and no salvage value; depreciation is straight-line to zero. Sales are projected at 230 units per year, price per unit will be $7,500, variable cost per unit will be $3,900, and fixed costs will be $122,000 per year. The required return is 14.5 percent and the relevant tax rate is 24 percent. Based on your experience, you think the unit sales and price are accurate within a ±2 percent range while costs may vary by ±3 percent. What is the worst-case NPV?A) −$117,907B) $156,446C) −$78,517D) $162,134E) −$118,02070) Shoe Supply has decided to produce a new line of shoes that will have a selling price of $68 and a variable cost of $27 per pair. The company spent $187,000 for a marketing study that determined the company should sell 85,000 pairs of the new shoes each year for three years. The marketing study also determined that the company will lose sales of 24,000 pairs of its high-priced shoes that sell for $129 and have variable costs of $63 a pair. The company will also increase sales of its inexpensive shoes by 19,000 pairs. The inexpensive shoes sell for $39 and have variable costs of $15 per pair. The fixed costs each year will be $1.42 million. The company has also spent $1.29 million on research and development for the new shoes. The initial fixed asset requirement is $4.2 million and will be depreciated on a straight-line basis over the life of the project. The new shoes will also require an increase in net working capital of $447,000 that will be returned at the end of the project. Sales and cost projections have a ±2 percent range. The tax rate is 21 percent, and the cost of capital is 12 percent. What is the NPV for the new line of shoes assuming the base-case scenario?A) −$1,844,788B) −$806,318C) $102,311D) $687,415E) $520,90971) A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are projected at 31,000 units per year, the price per unit is $47, variable cost per unit is $23, and fixed costs are $842,900 per year. The tax rate is 23 percent and the required return is 11.5 percent. Suppose the projections given for price and quantity can vary by ±4 percent while variable and fixed cost estimates are accurate to within ±2 percent. What is the best-case NPV?A) $4,613B) −$67,008C) $127,511D) $82,409E) −$132,19472) A project has expected sales of 54,000 units, ±5 percent, variable cost per unit of $87, ±2 percent, fixed costs of $287,000, ±1 percent, and a sales price per unit of $219, ±2 percent. The depreciation expense is $47,000 and the tax rate is 23 percent. What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $85?A) $132B) $134C) $135D) $136E) $133。

Chapter 2—International Flow of Funds1. Recently, the U.S. experienced an annual balance of trade representing a ____.a. large surplus (exceeding $100 billion)b. small surplusc. level of zerod. deficit2. A high home inflation rate relative to other countries would ____ the home country's current accountbalance, other things equal. A high growth in the home income level relative to other countries would ____ the home country's current account balance, other things equal.a. increase; increaseb. increase; decreasec. decrease; decreased. decrease; increase3. If a country's government imposes a tariff on imported goods, that country's current account balancewill likely ____ (assuming no retaliation by other governments).a. decreaseb. increasec. remain unaffectedd. either A or C are possible4. ____ purchases more U.S. exports than the other countries listed here.a. Italyb. Spainc. Mexicod. Canada5. An increase in the current account deficit will place ____ pressure on the home currency value, otherthings equal.a. upwardb. downwardc. nod. upward or downward (depending on the size of the deficit)6. If the home currency begins to appreciate against other currencies, this should ____ the currentaccount balance, other things equal (assume that substitutes are readily available in the countries, and that the prices charged by firms remain the same).a. increaseb. have no impact onc. reduced. all of the above are equally possible7. The International Financial Corporation was established to:a. enhance development solely in Asia through grants.b. enhance economic development through non-subsidized loans (at market interest rates).c. enhance economic development through low-interest rate loans (below-market rates).d. enhance economic development of the private sector through investment in stock ofcorporations.8. The World Bank was established to:a. enhance development solely in Asia through grants.b. enhance economic development through non-subsidized loans (at market interest rates).c. enhance economic development through low-interest rate loans (below-market rates).d. enhance economic development of the private sector through investment in stock ofcorporations.9. The International Development Association was established to:a. enhance development solely in Asia through grants.b. enhance economic development through non-subsidized loans (at market interest rates).c. enhance economic development through low-interest rate loans (below-market rates).d. enhance economic development of the private sector through investment in stock ofcorporations.10. Which of the following would likely have the least direct influence on a country's current account?a. inflation.b. national income.c. exchange rates.d. tariffs.e. a tax on income earned from foreign stocks.11. The "J curve" effect describes:a. the continuous long-term inverse relationship between a country's current account balanceand the country's growth in gross national product.b. the short-run tendency for a country's balance of trade to deteriorate even while itscurrency is depreciating.c. the tendency for exporters to initially reduce the price of goods when their own currencyappreciates.d. the reaction of a country's currency to initially depreciate after the country's inflation ratedeclines.12. An increase in the use of quotas is expected to:a. reduce the country's current account balance, if other governments do not retaliate.b. increase the country's current account balance, if other governments do not retaliate.c. have no impact on the country's current account balance unless other governmentsretaliate.d. increase the volume of a country's trade with other countries.13. The U.S. typically has a balance of trade surplus in its trade with ____.a. Chinab. Japanc. A and Bd. none of the above14. The North American Free Trade Agreement (NAFTA) increased restrictions on:a. trade between Canada and Mexico.b. trade between Canada and the U.S.c. direct foreign investment in Mexico by U.S. firms.d. none of the above.15. According to the text, international trade (exports plus imports combined) as a percentage of GDP is:a. higher in the U.S. than in European countries.b. lower in the U.S. than in European countries.c. higher in the U.S. than in about half the European countries, and lower in the U.S. than theothers.d. about the same in the U.S. as in European countries.16. The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions bygovernments on direct foreign investment have generally ___ over time.a. increased; increasedb. increased; decreasedc. decreased; decreasedd. decreased; increased17. Which of the following countries purchases the largest amount of exports by U.S. firms?a. Mexicob. Japanc. Canadad. France18. The primary component of the current account is the:a. balance of trade.b. balance of money market flows.c. balance of capital market flows.d. unilateral transfers.19. As a result of the European Union, restrictions on exports between ____ were reduced or eliminated.a. member countries and the U.S.b. member countriesc. member countries and European non-membersd. none of the above20. Over the last several years, international trade has generally:a. increased for most major countries.b. decreased for most major countries.c. stayed about constant for most major countries.d. increased for about half the major countries and decreased for the others.21. Which is not a concern about the North American Free Trade Agreement (NAFTA)?a. its impact on U.S. inflation.b. its impact on U.S. unemployment.c. lower environmental standards in Mexico.d. different health laws for workers in Mexico.22. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:a. increased trade restrictions outside of North America.b. lower trade restrictions around the world.c. uniform environmental standards around the world.d. uniform worker health laws.23. Which of the following is mentioned in the text as a possible means by which the government mayattempt to improve its balance of trade position (increase its exports or reduce its imports).a. It could attempt to reduce its home currency's value.b. The government could require firms to engage in outsourcing.c. The government could require that its local firms pursue outsourcing.d. All of the above are mentioned.24. The demand for U.S. exports tends to increase when:a. economic growth in foreign countries decreases.b. the currencies of foreign countries strengthen against the dollar.c. U.S. inflation rises.d. none of the above.25. "Dumping" is used in the text to represent the:a. exporting of goods that do not meet quality standards.b. sales of junk bonds to foreign countries.c. removal of foreign subsidiaries by the host government.d. exporting of goods at prices below cost.26. ____ is (are) income received by investors on foreign investments in financial assets (securities).a. Portfolio incomeb. Direct foreign incomec. Unilateral transfersd. Factor income27. A weak home currency may not be a perfect solution to correct a balance of trade deficit because:a. it reduces the prices of imports paid by local companies.b. it increases the prices of exports by local companies.c. it prevents international trade transactions from being prearranged.d. foreign companies may reduce the prices of their products to stay competitive.28. Intracompany trade makes up approximately ____ percent of all international trade.a. 50b. 70c. 25d. 13e. 529. Like the International Monetary Fund (IMF), the ____ is composed of a collection of nations asmembers. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives.a. World Bankb. International Financial Corporation (IFC)c. World Trade Organization (WTO)d. International Development Association (IDA)e. Bank for International Settlements (BIS)30. The World Bank's Multilateral Investment Guarantee Agency (MIGA):a. offers various forms of export insurance.b. offers various forms of import insurance.c. offers various forms of exchange rate risk insurance.d. provides loans to developing countries.e. offers various forms of political risk insurance.31. Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation amongcountries with regard to international transactions and provides assistance to countries experiencing a financial crisis.a. World Bankb. International Financial Corporation (IFC)c. World Trade Organizationd. International Development Association (IDA)e. Bank for International Settlements (BIS)32. Direct foreign investment into the U.S. represents a ____.a. capital inflowb. trade inflowc. capital outflowd. trade outflow33. A balance of trade surplus indicates an excess of imports over exports.a. Trueb. False34. A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exportsto Britain and increase U.S. imports from Britain over time.a. Trueb. False35. The World Bank extends loans only to developed nations, while the International DevelopmentAssociation (IDA) extends loans only to developing nations.a. Trueb. False36. The World Bank frequently enters into cofinancing agreements. Under these agreements, financing isprovided by the World Bank and/or official aid agencies, export credit agencies, or commercial banks.a. Trueb. False37. The balance of payments is a measurement of all transactions between domestic and foreign residentsover a specified period of time.a. Trueb. False38. Changes in country ownership of long-term and short-term assets are measured in the balance ofpayments with the capital account.a. Trueb. False39. Portfolio investment represents transactions involving long-term financial assets (such as stocks andbonds) between countries that do not affect the transfer of control.a. Trueb. False40. The current account represents the investment in fixed assets in foreign countries that can be used toconduct business operations.a. Trueb. False41. Exporting of products by one country to other countries at prices below cost is called elasticity.a. Trueb. False42. Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil.a. Trueb. False43. The J curve effect is the initial worsening of the U.S. trade balance due to a weakening dollar becauseof established trade relationships that are not easily changed; as the dollar weakens, the dollar value of imports initially rises before the U.S. trade balance is improved.a. Trueb. False44. Portfolio investments represent transactions involving long-term financial assets (such as stocks andbonds) between countries that do not affect the transfer of control.a. Trueb. False45. Intracompany trade represents the exporting of products by one country to other countries below cost.a. Trueb. False46. A tariff is a maximum limit on imports.a. Trueb. False47. A country's net outflow of funds ____ affect its interest rates, and ____ affect its economic conditions.a. does; doesb. does; does notc. does not; does notd. does not; does48. The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S. balance ofpayments account.a. Trueb. False49. A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S. balance ofpayments account.a. Trueb. False50. Regarding the U.S. balance of payments, capital account items are relatively minor compared to thefinancial account items.a. Trueb. False51. In recent years, the U.S. has had a relatively (compared to other countries) ____ balance of trade ____with China.a. small; surplusb. large; surplusc. small; deficitd. large; deficit52. The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations betweenthe U.S., the Dominican Republic, and Central American countries.a. Trueb. False53. U.S. government officials would likely prefer that China devalue the yuan against the dollar.a. Trueb. False54. Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If theChinese yuan appreciates against the dollar, it should reduce the U.S. balance of trade deficit with China.a. Trueb. False55. Assume the U.S. has a balance of trade surplus with the country of Thor. When individuals in Thormanufacture CDs and DVDs that look almost exactly like the original product produced in the U.S.and other countries, they ____ the U.S. balance of trade surplus with Thor. This activity is called ____.a. reduce; flippingb. reduce; piratingc. increase; piratingd. increase; flipping56. Japan's annual interest rate has been relatively ____ compared to other countries for several years,because the supply of funds in its credit market has been very ____.a. low; smallb. high; smallc. low; larged. high; large57. Without the international capital flows, there would be ____ funding available in the U.S. across allrisk levels, and the cost of funding would be ____ regardless of the firm's risk level.a. more; lowerb. more; higherc. less; lowerd. less; higher58. The primary component of the capital account is the balance of trade.a. Trueb. False59. A balance of trade surplus indicates an excess of merchandise imports over merchandise exports.a. Trueb. False60. An American tourist visiting Germany and spending money there (for lodging, food, etc.) will reducethe U.S. current account deficit and reduce Germany's current account balance.a. Trueb. False61. A balance of trade deficit indicates an excess of imports over exports.a. Trueb. False62. The capital account reflects changes in country ownership of long-term (but not short-term) assets.a. Trueb. False63. Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries.a. Trueb. False64. A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports tothe U.K. and increase U.S. imports from the U.K.a. Trueb. False65. The World Bank extends loans only to developed nations, while the International DevelopmentAssociation (IDA) extends loans only to developing nations.a. Trueb. False66. The ____ is the difference between exports and imports.a. balance of tradeb. balance on goods and servicesc. balance of paymentsd. current accounte. capital account67. Which of the following will probably not result in an increase in a country's current account balance(assuming everything else constant)?a. A decrease in the country's rate of inflationb. A decrease in the country's national income levelc. An increase in government restrictions in the form of tariffs or quotasd. An appreciation of the country's currencye. All of the above will result in an increased current account balance.68. Which of the following factors probably does not directly affect a country's capital account and itscomponents?a. Inflationb. Interest ratesc. Withholding taxes on foreign incomed. Exchange rate movementse. All of the above will directly affect a country's capital account.69. The ____, an accord among 117 nations, called for lower tariffs around the world.a. General Agreement on Tariffs and Trade (GATT)b. North American Free Trade Agreement (NAFTA)c. Single European Act of 1987d. European Union Accorde. None of the above70. Which of the following is not likely to represent a strategy by the government of Country X to reduceits balance of trade deficit with Country Y?a. The government of Country X eliminates environmental restrictions.b. The government of Country X subsidizes firms in its country to facilitate dumping.c. The government of Country X provides tax breaks to firms in specific industries.d. The government of Country X removes a tariff on goods imported from Country Y.71. Which of the following statements is not true?a. Exporters commonly complain that they are being mistreated because the currency of theircountry is too weak.b. Outsourcing affects the balance of trade because it means that a service is purchased inanother country.c. Sometimes, trade policies are used to punish countries for various actions.d. Tariffs imposed by the EU have caused some friction between EU countries thatcommonly import products and other EU countries.e. All of the above are true.72. Which of the following would increase the current account of Country X? Country Y is Country X'ssole trading partner.a. Inflation increases in countries X and Y by comparable amounts.b. Country X's and Country Y's currencies depreciate by the same amount.c. Country X imposes tariffs on imports from Country Y, and Country Y retaliates byimposing an identical tax on X's exports.d. The central banks of Country X and Country Y reduce the money supply to increaseinterest rates.e. Country X imposes a quota on imports, and Country Y retaliates by imposing an identicalquota on X's exports.73. ____ represent aid, grants, and gifts from one country to another.a. Transfer paymentsb. Factor incomec. The balance of traded. The balance of paymentse. The capital account74. Which of the following is not a goal of the International Monetary Fund (IMF)?a. To promote cooperation among countries on international monetary issuesb. To promote stability in exchange ratesc. To enhance a country's long-term economic growth via the extension of structuraladjustment loansd. To promote free tradee. To promote free mobility of capital funds across countries75. According to the "J curve effect," a weakening of the U.S. dollar relative to its trading partners'currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance.a. decrease; increaseb. increase; decreasec. decrease; decreased. increase; increase。

Chapter 2 Overview of the Financial System2.1 Single Choice1) Every financial market performs the following function:A) It determines the level of interest rates.B) It allows common stock to be traded.C) It allows loans to be made.D) It channels funds from lenders-savers to borrowers-spenders.2) Financial markets have the basic function ofA) bringing together people with funds to lend and people who want to borrow funds.B) assuring that the swings in the business cycle are less pronounced.C) assuring that governments need never resort to printing money.D) both A and B of the above.E) both B and C of the above.3) Which of the following can be described as involving direct finance?A) A corporation's stock is traded in an over-the-counter market.B) People buy shares in a mutual fund.C) A pension fund manager buys commercial paper in the secondary market.D) An insurance company buys shares of common stock in the over-the-counter markets.E) None of the above.4) Which of the following can be described as involving direct finance?A) A corporation's stock is traded in an over-the-counter market.B) A corporation buys commercial paper issued by another corporation.C) A pension fund manager buys commercial paper from the issuing corporation.D) Both A and B of the above.E) Both B and C of the above.5) Which of the following can be described as involving indirect finance?A) A corporation takes out loans from a bank.B) People buy shares in a mutual fund.C) A corporation buys commercial paper in a secondary market.D) All of the above.E) Only A and B of the above.6) Which of the following can be described as involving indirect finance?A) A bank buys a U.S. Treasury bill from one of its depositors.B) A corporation buys commercial paper issued by another corporation.C) A pension fund manager buys commercial paper in the primary market.D) Both A and C of the above.7) Financial markets improve economic welfare becauseA) they allow funds to move from those without productive investment opportunities to those who have such opportunities.B) they allow consumers to time their purchases better.C) they weed out inefficient firms.D) they do all of the above.E) they do A and B of the above.8) A country whose financial markets function poorly is likely toA) efficiently allocate its capital resources.B) enjoy high productivity.C) experience economic hardship and financial crises.D) increase its standard of living.9) Which of the following are securities?A) A certificate of depositB) A share of Texaco common stockC) A Treasury billD) All of the aboveE) Only A and B of the above10) Which of the following statements about the characteristics of debt and equity are true?A) They both can be long-term financial instruments.B) They both involve a claim on the issuer's income.C) They both enable a corporation to raise funds.D) All of the above.E) Only A and B of the above.11) The money market is the market in which _________ are traded.A) new issues of securitiesB) previously issued securitiesC) short-term debt instrumentsD) long-term debt and equity instruments12) Long-term debt and equity instruments are traded in the _________ market.A) primaryB) secondaryC) capitalD) money13) Which of the following are primary markets?A) The New York Stock ExchangeB) The U.S. government bond marketC) The over-the-counter stock marketD) The options marketsE) None of the above14) Which of the following are secondary markets?A) The New York Stock ExchangeB) The U.S. government bond marketC) The over-the-counter stock marketD) The options marketsE) All of the above15) A corporation acquires new funds only when its securities are sold in theA) secondary market by an investment bank.B) primary market by an investment bank.C) secondary market by a stock exchange broker.D) secondary market by a commercial bank.16) Intermediaries who are agents of investors and match buyers with sellers of securities are calledA) investment bankers.B) traders.C) brokers.D) dealers.E) none of the above.17) Intermediaries who link buyers and sellers by buying and selling securities at stated prices are calledA) investment bankers.B) traders.C) brokers.D) dealers.E) none of the above.18) An important financial institution that assists in the initial sale of securities in the primary market is theA) investment bank.B) commercial bank.C) stock exchange.D) brokerage house.19) Which of the following statements about financial markets and securities are true?A) Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange.B) A corporation acquires new funds only when its securities are sold in the primary market.C) Money market securities are usually more widely traded than longer-term securities and so tendto be more liquid.D) All of the above are true.E) Only A and B of the above are true.20) Which of the following statements about financial markets and securities are true?A) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants.B) A debt instrument is intermediate term if its maturity is less than one year.C) A debt instrument is long term if its maturity is ten years or longer.D) The maturity of a debt instrument is the time (term) that has elapsed since it was issued.21) Which of the following statements about financial markets and securities are true?A) Few common stocks are traded over-the-counter, although the over-the-counter markets have grown in recent years.B) A corporation acquires new funds only when its securities are sold in the primary market.C) Capital market securities are usually more widely traded than longer term securities and so tend to be more liquid.D) All of the above are true.E) Only A and B of the above are true.22) Which of the following markets is sometimes organized as an over-the-counter market?A) The stock marketB) The bond marketC) The foreign exchange marketD) The federal funds marketE) all of the above23) Bonds that are sold in a foreign country and are denominated in that country's currency are known asA) foreign bonds.B) Eurobonds.C) Eurocurrencies.D) Eurodollars.24) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known asA) foreign bonds.B) Eurobonds.C) Eurocurrencies.D) Eurodollars.25) Financial intermediariesA) exist because there are substantial information and transaction costs in the economy.B) improve the lot of the small saver.C) are involved in the process of indirect finance.D) do all of the above.E) do only A and B of the above.26) The main sources of financing for businesses, in order of importance, areA) financial intermediaries, issuing bonds, issuing stocks.B) issuing bonds, issuing stocks, financial intermediaries.C) issuing stocks, issuing bonds, financial intermediaries.D) issuing stocks, financial intermediaries, issuing bonds.27) The presence of transaction costs in financial markets explains, in part, whyA) financial intermediaries and indirect finance play such an important role in financial markets.B) equity and bond financing play such an important role in financial markets.C) corporations get more funds through equity financing than they get from financial intermediaries.D) direct financing is more important than indirect financing as a source of funds.28) Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage ofA) poorly informed consumers.B) standardization.C) economies of scale.D) their market power.29) The purpose of diversification is toA) reduce the volatility of a portfolio's return.B) raise the volatility of a portfolio's return.C) reduce the average return on a portfolio.D) raise the average return on a portfolio.30) An investor who puts all her funds into one asset _________ her portfolio's _________.A) increases; diversificationB) decreases; diversificationC) increases; average returnD) decreases; average return31) Through risk-sharing activities, a financial intermediary _________ its own risk and _________ the risks of its customers.A) reduces; increasesB) increases; reducesC) reduces; reducesD) increases; increases32) The presence of _________ in financial markets leads to adverse selection and moral hazardproblems that interfere with the efficient functioning of financial markets.A) noncollateralized riskB) free-ridingC) asymmetric informationD) costly state verification33) When the lender and the borrower have different amounts of information regarding a transaction, _________ is said to exist.A) asymmetric informationB) adverse selectionC) moral hazardD) fraud34) When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, _________ is said to exist.A) asymmetric informationB) adverse selectionC) moral hazardD) fraud35) When the borrower engages in activities that make it less likely that the loan will be repaid, _________ is said to exist.A) asymmetric informationB) adverse selectionC) moral hazardD) fraud36) The concept of adverse selection helps to explainA) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets.B) why indirect finance is more important than direct finance as a source of business finance.C) why direct finance is more important than indirect finance as a source of business finance.D) only A and B of the above.E) only A and C of the above.37) Adverse selection is a problem associated with equity and debt contracts arising fromA) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults.C) the borrower's lack of incentive to seek a loan for highly risky investments.D) none of the above.38) When the least desirable credit risks are the ones most likely to seek loans, lenders are subjectto theA) moral hazard problem.B) adverse selection problem.C) shirking problem.D) free-rider problem.E) principal-agent problem.39) Financial institutions expect thatA) moral hazard will occur, as the least desirable credit risks will be the ones most likely to seek out loans.B) opportunistic behavior will occur, as the least desirable credit risks will be the ones most likely to seek out loans.C) borrowers will commit moral hazard by taking on too much risk, and this is what drives financial institutions to take steps to limit moral hazard.D) none of the above will occur.40) Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due toA) moral hazard.B) adverse selection.C) bad luck.D) financial panics.41) In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is calledA) comparative informational disadvantage.B) asymmetric information.C) variant information.D) caveat venditor.42) The largest depository institution at the end of 2004 wasA) life insurance companies.B) pension funds.C) state retirement funds.D) none of the above.43) Which of the following financial intermediaries are depository institutions?A) A savings and loan associationB) A commercial bankC) A credit unionD) All of the aboveE) Only A and C of the above44) Which of the following is a contractual savings institution?A) A life insurance companyB) A credit unionC) A savings and loan associationD) A mutual fund45) Which of the following are not investment intermediaries?A) A life insurance companyB) A pension fundC) A mutual fundD) Only A and B of the above46) Which of the following are investment intermediaries?A) Finance companiesB) Mutual fundsC) Pension fundsD) All of the aboveE) Only A and B of the above47) The government regulates financial markets for three main reasons:A) to ensure soundness of the financial system, to improve control of monetary policy, and to increase the information available to investors.B) to improve control of monetary policy, to ensure that financial intermediaries earn a normal rate of return, and to increase the information available to investors.C) to ensure that financial intermediaries do not earn more than the normal rate of return, to ensure soundness of the financial system, and to improve control of monetary policy.D) to ensure soundness of financial intermediaries, to increase the information available to investors, and to prevent financial intermediaries from earning less than the normal rate of return.48) Which of the following government regulations has the chief purpose of improving control of the money supply?A) deposit insuranceB) restrictions on entry into banking or insuranceC) reserve requirementsD) restrictions on the assets financial intermediaries can hold49) Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as aA) bank holiday.B) financial panic.C) financial disintermediation.D) financial collapse.50) Foreign currencies that are deposited in banks outside the home country are known asA) foreign bonds.B) Eurobond.C) Eurocurrencies.D) Eurodollars.51) U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. are referred to asA) Eurodollars.B) Eurocurrencies.C) Eurobonds.D) foreign bonds.52) Banks providing depositors with checking accounts that enable them to pay their bills easily is known asA) liquidity services.B) asset transformation.C) risk sharing.D) transaction costs.53) A ________ is when one party in a financial contract has incentives to act in its own interest rather than in the interests of the other party.A) moral hazardB) riskC) conflict of interestD) financial panic54) Fire and casualty insurance companies are what type of intermediary?A) Contractual savings institutionB) Depository institutionsC) Investment intermediariesD) None of the above55) The country whose banks are the most restricted in the range of assets they may hold isA) Japan.B) Canada.C) Germany.D) the United States.答案：1-5：DAEBE 6-10:DECDD 11-15:CCEEB 16-20:CDADC 21-25:BEABD 26-30:AACAB 31-35:BCABC 36-40:DABCB 41-45:BDDAD 46-50:EACBC 51-55:AACAD。

【最新整理，下载后即可编辑】Case SolutionsFundamentals of Corporate FinanceRoss, Westerfield, and Jordan9th editionCHAPTER 1THE McGEE CAKE COMPANY1.The advantages to a LLC are: 1) Reduction of personal liability. A soleproprietor has unlimited liability, which can include the potential loss of all personal assets. 2) Taxes. Forming an LLC may mean that more expenses can be considered business expenses and be deducted from the company’s income. 3) Improved credibility. The business may have increased credibility in the business world compared to a sole proprietorship. 4) Ability to attract investment. Corporations, even LLCs, can raise capital through the sale of equity. 5) Continuous life. Sole proprietorships have a limited life, while corporations have a potentially perpetual life. 6) Transfer of ownership. It is easier to transfer ownership in a corporation through the sale of stock.The biggest disadvantage is the potential cost, although the cost of forminga LLC can be relatively small. There are also other potential costs, includingmore expansive record-keeping.2.Forming a corporation has the same advantages as forming a LLC, but thecosts are likely to be higher.3.As a small company, changing to a LLC is probably the most advantageousdecision at the current time. If the company grows, and Doc and Lyn are willing to sell more equity ownership, the company can reorganize as a corporation at a later date. Additionally, forming a LLC is likely to be less expensive than forming a corporation.CHAPTER 2CASH FLOWS AND FINANCIAL STATEMENTS AT SUNSET BOARDS Below are the financial statements that you are asked to prepare.1.The income statement for each year will look like this:Income statement2008 2009Sales $247,259 $301,392Cost of goods sold 126,038 159,143Selling & administrative 24,787 32,352Depreciation 35,581 40,217EBIT $60,853 $69,680Interest 7,735 8,866EBT $53,118 $60,814Taxes 10,624 12,163Net income $42,494 $48,651Dividends $21,247 $24,326Addition to retainedearnings 21,247 24,3262.The balance sheet for each year will be:Balance sheet as of Dec. 31, 2008C-26 CASE SOLUTIONSCash $18,187 Accounts payable $32,143 Accountsreceivable 12,887 Notes payable 14,651 Inventory 27,119 Current liabilities $46,794 Current assets $58,193Long-term debt $79,235 Net fixed assets $156,975 Owners' equity 89,139Total assets $215,168 Total liab. &equity $215,168In the first year, equity is not given. Therefore, we must calculate equity as a plug variable. Since total liabilities & equity is equal to total assets, equity can be calculated as:Equity = $215,168 – 46,794 – 79,235Equity = $89,139CHAPTER 2 C-5Balance sheet as of Dec. 31, 2009Cash $27,478 Accounts payable $36,404 Accountsreceivable 16,717 Notes payable 15,997 Inventory 37,216 Current liabilities $52,401 Current assets $81,411Long-term debt $91,195 Net fixed assets $191,250 Owners' equity 129,065Total assets $272,661 Total liab. &equity $272,661The owner’s equity for 2009 is the beginning of year owner’s equity, plus the addition to retained earnings, plus the new equity, so:Equity = $89,139 + 24,326 + 15,600Equity = $129,065ing the OCF equation:OCF = EBIT + Depreciation – TaxesThe OCF for each year is:OCF2008 = $60,853 + 35,581 – 10,624OCF2008 = $85,180OCF2009 = $69,680 + 40,217 – 12,163OCF2009 = $97,734C-26 CASE SOLUTIONS4.To calculate the cash flow from assets, we need to find the capital spendingand change in net working capital. The capital spending for the year was: Capital spendingEnding net fixed assets $191,250– Beginning net fixedassets 156,975+ Depreciation 40,217Net capital spending $74,492And the change in net working capital was:Change in net working capitalEnding NWC $29,010– Beginning NWC 11,399Change in NWC $17,611CHAPTER 2 C-5 So, the cash flow from assets was:Cash flow from assetsOperating cash flow $97,734– Net capital spending 74,492– Change in NWC 17,611Cash flow from assets $ 5,6315.The cash flow to creditors was:Cash flow to creditorsInterest paid $8,866– Net new borrowing 11,960Cash flow to creditors –$3,0946.The cash flow to stockholders was:Cash flow tostockholdersDividends paid $24,326– Net new equityraised 15,600Cash flow tostockholders $8,726Answers to questions1.The firm had positive earnings in an accounting sense (NI > 0) and hadpositive cash flow from operations. The firm invested $17,611 in new netC-26 CASE SOLUTIONSworking capital and $74,492 in new fixed assets. The firm gave $5,631 to its stakeholders. It raised $3,094 from bondholders, and paid $8,726 to stockholders.2.The expansion plans may be a little risky. The company does have a positivecash flow, but a large portion of the operating cash flow is already going to capital spending. The company has had to raise capital from creditors and stockholders for its current operations. So, the expansion plans may be too aggressive at this time. On the other hand, companies do need capital to grow. Before investing or loaning the company money, you would want to know where the current capital spending is going, and why the company is spending so much in this area already.CHAPTER 3RATIOS ANALYSIS AT S&S AIR1.The calculations for the ratios listed are:Current ratio = $2,186,520 / $2,919,000Current ratio = 0.75 timesQuick ratio = ($2,186,250 – 1,037,120) / $2,919,000Quick ratio = 0.39 timesCash ratio = $441,000 / $2,919,000Cash ratio = 0.15 timesTotal asset turnover = $30,499,420 / $18,308,920Total asset turnover = 1.67 timesInventory turnover = $22,224,580 / $1,037,120Inventory turnover = 21.43 timesReceivables turnover = $30,499,420 / $708,400Receivables turnover = 43.05 timesTotal debt ratio = ($18,308,920 – 10,069,920) / $18,308,920 Total debt ratio = 0.45 timesDebt-equity ratio = ($2,919,000 + 5,320,000) / $10,069,920C-26 CASE SOLUTIONSDebt-equity ratio = 0.82 timesEquity multiplier = $18,308,920 / $10,069,920Equity multiplier = 1.82 timesTimes interest earned = $3,040,660 / $478,240Times interest earned = 6.36 timesCash coverage = ($3,040,660 + 1,366,680) / $478,420 Cash coverage = 9.22 timesProfit margin = $1,537,452 / $30,499,420Profit margin = 5.04%Return on assets = $1,537,452 / $18,308,920Return on assets = 8.40%Return on equity = $1,537,452 / $10,069,920Return on equity = 15.27%CHAPTER 3 C-11 2. Boeing is probably not a good aspirant company. Even though bothcompanies manufacture airplanes, S&S Air manufactures small airplanes, while Boeing manufactures large, commercial aircraft. These are two different markets. Additionally, Boeing is heavily involved in the defense industry, as well as Boeing Capital, which finances airplanes.Bombardier is a Canadian company that builds business jets, short-range airliners and fire-fighting amphibious aircraft and also provides defense-related services. It is the third largest commercial aircraft manufacturer in the world. Embraer is a Brazilian manufacturer than manufactures commercial, military, and corporate airplanes. Additionally, the Brazilian government is a part owner of the company. Bombardier and Embraer are probably not good aspirant companies because of the diverse range of products and manufacture of larger aircraft.Cirrus is the world's second largest manufacturer of single-engine, piston-powered aircraft. Its SR22 is the world's best selling plane in its class. The company is noted for its innovative small aircraft and is a good aspirant company.Cessna is a well known manufacturer of small airplanes. The company produces business jets, freight- and passenger-hauling utility Caravans, personal and small-business single engine pistons. It may be a good aspirant company, however, its products could be considered too broad and diversified since S&S Air produces only small personal airplanes.3. S&S is below the median industry ratios for the current and cash ratios.This implies the company has less liquidity than the industry in general.However, both ratios are above the lower quartile, so there are companiesC-26 CASE SOLUTIONSin the industry with lower liquidity ratios than S&S Air. The company may have more predictable cash flows, or more access to short-term borrowing.If you created an Inventory to Current liabilities ratio, S&S Air would havea ratio that is lower than the industry median. The current ratio is below theindustry median, while the quick ratio is above the industry median. This implies that S&S Air has less inventory to current liabilities than the industry median. S&S Air has less inventory than the industry median, but more accounts receivable than the industry since the cash ratio is lower than the industry median.The turnover ratios are all higher than the industry median; in fact, all three turnover ratios are above the upper quartile. This may mean that S&S Air is more efficient than the industry.The financial leverage ratios are all below the industry median, but above the lower quartile. S&S Air generally has less debt than comparable companies, but still within the normal range.The profit margin, ROA, and ROE are all slightly below the industry median, however, not dramatically lower. The company may want to examine its costs structure to determine if costs can be reduced, or price can be increased.Overall, S&S Air’s performance seems good, although the liquidity ratios indicate that a closer look may be needed in this area.CHAPTER 3 C-11 Below is a list of possible reasons it may be good or bad that each ratio is higher or lower than the industry. Note that the list is not exhaustive, but merely one possible explanation for each ratio.Ratio Good BadCurrent ratio Better at managingcurrent accounts. May be having liquidity problems.Quick ratio Better at managingcurrent accounts. May be having liquidity problems.Cash ratio Better at managingcurrent accounts. May be having liquidity problems.Total asset turnover Better at utilizing assets. Assets may be older anddepreciated, requiringextensive investmentsoon.Inventory turnover Better at inventorymanagement, possibly dueto better procedures.Could be experiencinginventory shortages.Receivables turnover Better at collectingreceivables.May have credit termsthat are too strict.Decreasing receivablesturnover may increasesales.Total debt ratio Less debt than industrymedian means thecompany is less likely toexperience creditproblems. Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE.Debt-equity Less debt than industry Increasing the amount ofC-26 CASE SOLUTIONSratio median means thecompany is less likely toexperience creditproblems. debt can increase shareholder returns. Especially notice that it will increase ROE.Equity multiplier Less debt than industrymedian means thecompany is less likely toexperience creditproblems.Increasing the amount ofdebt can increaseshareholder returns.Especially notice that itwill increase ROE.TIE Higher quality materialscould be increasing costs. The company may have more difficulty meeting interest payments in a downturn.Cash coverage Less debt than industrymedian means thecompany is less likely toexperience creditproblems. Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE.Profit margin The PM is slightly belowthe industry median. Itcould be a result of higherquality materials or bettermanufacturing. Company may be having trouble controlling costs.ROA Company may have newerassets than the industry. Company may have newer assets than the industry.ROE Lower profit margin maybe a result of higherquality. Profit margin and EM are lower than industry, which results in the lower ROE.CHAPTER 4PLANNING FOR GROWTH AT S&S AIR1.To calculate the internal growth rate, we first need to find the ROA and theretention ratio, so:ROA = NI / TAROA = $1,537,452 / $18,309,920ROA = .0840 or 8.40%b = Addition to RE / NIb = $977,452 / $1,537,452b = 0.64Now we can use the internal growth rate equation to get:Internal growth rate = (ROA × b) / [1 – (ROA × b)]Internal growth rate = [0.0840(.64)] / [1 – 0.0840(.64)]Internal growth rate = .0564 or 5.64%To find the sustainable growth rate, we need the ROE, which is:ROE = NI / TEROE = $1,537,452 / $10,069,920ROE = .1527 or 15.27%C-26 CASE SOLUTIONSUsing the retention ratio we previously calculated, the sustainable growth rate is:Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]Sustainable growth rate = [0.1527(.64)] / [1 – 0.1527(.64)]Sustainable growth rate = .1075 or 10.75%The internal growth rate is the growth rate the company can achieve with no outside financing of any sort. The sustainable growth rate is the growth rate the company can achieve by raising outside debt based on its retained earnings and current capital structure.CHAPTER 4 C-21 2.Pro forma financial statements for next year at a 12 percent growth rate are:Income statementSales $ 34,159,35COGS 24,891,530 Other expenses 4,331,600 Depreciation 1,366,680EBIT $ 3,569,541Interest 478,240Taxable income $ 3,091,301Taxes (40%) 1,236,520Net income $ 1,854,78Dividends $ 675,583C-26 CASE SOLUTIONSAdd to RE 1,179,197Balance sheetAssets Liabilities & EquityCurrent Assets Current LiabilitiesCash $ 493,92AccountsPayable $ 995,680Accounts rec. 793,408 Notes Payable 2,030,000 Inventory 1,161,574 Total CL $ 3,025,680 Total CA $ 2,448,902Long-term debt $ 5,320,000ShareholderEquityCommon stock $ 350,000Fixed assets Retainedearnings 10,899,117Net PP&E $ 18,057,088 Total Equity $ 11,249,117Total Assets $ 20,505,990 Total L&E $ 19,594,787CHAPTER 4 C-21 So, the EFN is:EFN = Total assets – Total liabilities and equityEFN = $20,505,990 – 19,594,797EFN = $911,193The company can grow at this rate by changing the way it operates. For example, if profit margin increases, say by reducing costs, the ROE increases, it will increase the sustainable growth rate. In general, as long as the company increases the profit margin, total asset turnover, or equity multiplier, the higher growth rate is possible. Note however, that changing any one of these will have the effect of changing the pro forma financial statements.C-26 CASE SOLUTIONS3.Now we are assuming the company can only build in amounts of $5 million.We will assume that the company will go ahead with the fixed asset acquisition. To estimate the new depreciation charge, we will find the current depreciation as a percentage of fixed assets, then, apply this percentage to the new fixed assets. The depreciation as a percentage of assets this year was:Depreciation percentage = $1,366,680 / $16,122,400Depreciation percentage = .0848 or 8.48%The new level of fixed assets with the $5 million purchase will be:New fixed assets = $16,122,400 + 5,000,000 = $21,122,400So, the pro forma depreciation will be:Pro forma depreciation = .0848($21,122,400)Pro forma depreciation = $1,790,525We will use this amount in the pro forma income statement. So, the pro forma income statement will be:Income statementSales $ 34,159,35COGS 24,891,530 Other expensesCHAPTER 4 C-214,331,600Depreciation 1,790,525EBIT $ 3,145,696Interest 478,240Taxable income $ 2,667,456Taxes (40%) 1,066,982Net income $ 1,600,473Dividends $ 582,955Add to RE 1,017,519C-26 CASE SOLUTIONSThe pro forma balance sheet will remain the same except for the fixed asset and equity accounts. The fixed asset account will increase by $5 million, rather than the growth rate of sales.Balance sheetAssets Liabilities & EquityCurrent Assets Current LiabilitiesCash $ 493,92AccountsPayable $ 995,680Accounts rec. 793,408 Notes Payable 2,030,000 Inventory 1,161,574 Total CL $ 3,025,680 Total CA $ 2,448,902Long-term debt $ 5,320,000ShareholderEquityCommon stock $ 350,000Fixed assets Retainedearnings 10,737,439Net PP&E $ 21,122,400 Total Equity $ 11,087,439Total Assets $ 23,571,302 Total L&E $ 19,433,119CHAPTER 4 C-21 So, the EFN is:EFN = Total assets – Total liabilities and equityEFN = $23,581,302 – 19,433,119EFN = $4,138,184Since the fixed assets have increased at a faster percentage than sales, the capacity utilization for next year will decrease.CHAPTER 6THE MBA DECISION1. Age is obviously an important factor. The younger an individual is, the moretime there is for the (hopefully) increased salary to offset the cost of the decision to return to school for an MBA. The cost includes both the explicit costs such as tuition, as well as the opportunity cost of the lost salary.2. Perhaps the most important nonquantifiable factors would be whether ornot he is married and if he has any children. With a spouse and/or children, he may be less inclined to return for an MBA since his family may be less amenable to the time and money constraints imposed by classes. Other factors would include his willingness and desire to pursue an MBA, job satisfaction, and how important the prestige of a job is to him, regardless of the salary.3.He has three choices: remain at his current job, pursue a Wilton MBA, orpursue a Mt. Perry MBA. In this analysis, room and board costs are irrelevant since presumably they will be the same whether he attends college or keeps his current job. We need to find the aftertax value of each, so:Remain at current job:Aftertax salary = $55,000(1 – .26) = $40,700CHAPTER 6 C-27 His salary will grow at 3 percent per year, so the present value of his aftertax salary is:PV = C {1 – [(1 + g)/(1 + r)]t} / (r–g)]PV = $40,700{[1 – [(1 +.065)/(1 + .03)]38} / (.065 – .03)PV = $836,227.34Wilton MBA:Costs:Total direct costs = $63,000 + 2,500 + 3,000 = $68,500PV of direct costs = $68,500 + 68,500 / (1.065) = $132,819.25PV of indirect costs (lost salary) = $40,700 / (1.065) + $40,700(1 + .03) / (1 + .065)2 = $75,176.00Salary:PV of aftertax bonus paid in 2 years = $15,000(1 –.31) / 1.0652= $9,125.17Aftertax salary = $98,000(1 – .31) = $67,620C-26 CASE SOLUTIONSHis salary will grow at 4 percent per year. We must also remember that he will now only work for 36 years, so the present value of his aftertax salary is: PV = C {1 – [(1 + g)/(1 + r)]t} / (r–g)]PV = $67,620{[1 – [(1 +.065)/(1 + .04)]36} / (.065 – .04)PV = $1,554,663.22Since the first salary payment will be received three years from today, so we need to discount this for two years to find the value today, which will be: PV = $1,544,663.22 / 1.0652PV = $1,370,683.26So, the total value of a Wilton MBA is:Value = –$75,160 – 132,819.25 + 9,125.17 + 1,370,683.26 =$1,171,813.18Mount Perry MBA:Costs:Total direct costs = $78,000 + 3,500 + 3,000 = $86,500. Note, this is also the PV of the direct costs since they are all paid today.PV of indirect costs (lost salary) = $40,700 / (1.065) = $38,215.96Salary:CHAPTER 6 C-27 PV of aftertax bonus paid in 1 year = $10,000(1 – .29) / 1.065 = $6,666.67 Aftertax salary = $81,000(1 – .29) = $57,510His salary will grow at 3.5 percent per year. We must also remember that he will now only work for 37 years, so the present value of his aftertax salary is: PV = C {1 – [(1 + g)/(1 + r)]t} / (r–g)]PV = $57,510{[1 – [(1 +.065)/(1 + .035)]37} / (.065 – .035)PV = $1,250,991.81Since the first salary payment will be received two years from today, so we need to discount this for one year to find the value today, which will be:PV = $1,250,991.81 / 1.065PV = $1,174,640.20So, the total value of a Mount Perry MBA is:Value = –$86,500 – 38,215.96 + 6,666.67 + 1,174,640.20 = $1,056,590.90C-26 CASE SOLUTIONS4.He is somewhat correct. Calculating the future value of each decision willresult in the option with the highest present value having the highest future value. Thus, a future value analysis will result in the same decision. However, his statement that a future value analysis is the correct method is wrong since a present value analysis will give the correct answer as well.5. To find the salary offer he would need to make the Wilton MBA asfinancially attractive as the as the current job, we need to take the PV of his current job, add the costs of attending Wilton, and the PV of the bonus on an aftertax basis. So, the necessary PV to make the Wilton MBA the same as his current job will be:PV = $836,227.34 + 132,819.25 + 75,176.00 – 9,125.17 = $1,035,097.42This PV will make his current job exactly equal to the Wilton MBA on a financial basis. Since his salary will still be a growing annuity, the aftertax salary needed is:PV = C {1 – [(1 + g)/(1 + r)]t} / (r–g)]$1,035,097.42 = C {[1 – [(1 +.065)/(1 + .04)]36} / (.065 – .04)C = $45,021.51This is the aftertax salary. So, the pretax salary must be:Pretax salary = $45,021.51 / (1 – .31) = $65,248.576.The cost (interest rate) of the decision depends on the riskiness of the use offunds, not the source of the funds. Therefore, whether he can pay cash orCHAPTER 6 C-27 must borrow is irrelevant. This is an important concept which will be discussed further in capital budgeting and the cost of capital in later chapters.CHAPTER 7FINANCING S&S AIR’S EXPANSION PLANS WITH A BOND ISSUEA rule of thumb with bond provisions is to determine who benefits by theprovision. If the company benefits, the bond will have a higher coupon rate.If the bondholders benefit, the bond will have a lower coupon rate.1. A bond with collateral will have a lower coupon rate. Bondholders have theclaim on the collateral, even in bankruptcy. Collateral provides an asset that bondholders can claim, which lowers their risk in default. The downside of collateral is that the company generally cannot sell the asset used as collateral, and they will generally have to keep the asset in good working order.2.The more senior the bond is, the lower the coupon rate. Senior bonds getfull payment in bankruptcy proceedings before subordinated bonds receive any payment. A potential problem may arise in that the bond covenant may restrict the company from issuing any future bonds senior to the current bonds.3. A sinking fund will reduce the coupon rate because it is a partial guaranteeto bondholders. The problem with a sinking fund is that the company must make the interim payments into a sinking fund or face default. This means the company must be able to generate these cash flows.4. A provision with a specific call date and prices would increase the couponrate. The call provision would only be used when it is to the company’s advantage, thus the bondholder’s disadvantage. The downside is theCHAPTER 7 C-29 higher coupon rate. The company benefits by being able to refinance at a lower rate if interest rates fall significantly, that is, enough to offset the call provision cost.5. A deferred call would reduce the coupon rate relative to a call provision witha deferred call. The bond will still have a higher rate relative to a plain vanillabond. The deferred call means that the company cannot call the bond for a specified period. This offers the bondholders protection for this period. The disadvantage of a deferred call is that the company cannot call the bond during the call protection period. Interest rates could potentially fall to the point where it would be beneficial for the company to call the bond, yet the company is unable to do so.6. A make-whole call provision should lower the coupon rate in comparison toa call provision with specific dates since the make-whole call repays thebondholder the present value of the future cash flows. However, a make-whole call provision should not affect the coupon rate in comparison to a plain vanilla bond. Since the bondholders are made whole, they should be indifferent between a plain vanilla bond and a make-whole bond. If a bond with a make-whole provision is called, bondholders receive the market value of the bond, which they can reinvest in another bond with similar characteristics. If we compare this to a bond with a specific call price, investors rarely receive the full market value of the future cash flows.CASE 3 C-30 7. A positive covenant would reduce the coupon rate. The presence of positivecovenants protects bondholders by forcing the company to undertake actions that benefit bondholders. Examples of positive covenants would be: the company must maintain audited financial statements; the company must maintain a minimum specified level of working capital or a minimum specified current ratio; the company must maintain any collateral in good working order. The negative side of positive covenants is that the company is restricted in its actions. The positive covenant may force the company into actions in the future that it would rather not undertake.8. A negative covenant would reduce the coupon rate. The presence ofnegative covenants protects bondholders from actions by the company that would harm the bondholders. Remember, the goal of a corporation is to maximize shareholder wealth. This says nothing about bondholders.Examples of negative covenants would be: the company cannot increase dividends, or at least increase beyond a specified level; the company cannot issue new bonds senior to the current bond issue; the company cannot sell any collateral. The downside of negative covenants is the restriction of the company’s actions.9.Even though the company is not public, a conversion feature would likelylower the coupon rate. The conversion feature would permit bondholders to benefit if the company does well and also goes public. The downside is that the company may be selling equity at a discounted price.10. The downside of a floating-rate coupon is that if interest rates rise, thecompany has to pay a higher interest rate. However, if interest rates fall, the company pays a lower interest rate.CHAPTER 8STOCK VALUATION AT RAGAN, INC.1.The total dividends paid by the company were $126,000. Since there are100,000 shares outstanding, the total earnings for the company were: Total earnings = 100,000($4.54) = $454,000This means the payout ratio was:Payout ratio = $126,000/$454,000 = 0.28So, the retention ratio was:Retention ratio = 1 – .28 = 0.72Using the retention ratio, the company’s growth rate is:g = ROE × b = 0.25*(.72) = .1806 or 18.06%The dividend per share paid this year was:= $63,000 / 50,000D= $1.26DNow we can find the stock price, which is:C-84 CASE SOLUTIONSP 0 = D 1 / (R – g )P 0 = $1.26(1.1806) / (.20 – .1806)P 0 = $76.752.Since Expert HVAC had a write off which affected its earnings per share, we need to recalculate the industry EPS. So, the industry EPS is:Industry EPS = ($0.79 + 1.38 + 1.06) / 3 = $1.08Using this industry EPS, the industry payout ratio is:Industry payout ratio = $0.40/$1.08 = .3715 or 37.15%So, the industry retention ratio isIndustry retention ratio = 1 – .3715 = .6285 or 62.85%。

CHAPTER 2CONCEPTUAL FRAMEWORK UNDERLYINGFINANCIAL ACCOUNTINGCHAPTER LEARNING OBJECTIVES1. Describe the usefulness of a conceptual framework.2. Describe efforts to construct a conceptual framework.3. Understand the objective of financial reporting.4. Identify the qualitative characteristics of accounting information.5. Define the basic elements of financial statements.6. Describe the basic assumptions of accounting.7. Explain the application of the basic principles of accounting.8. Describe the impact that constraints have on reporting accounting information.Test Bank for Intermediate Accounting: IFRS Edition2 - 2TRUE-FALSE—Conceptual1. The conceptual framework for accounting has been discovered through empirical research.2. A conceptual framework is a coherent system of interrelated objectives and fundamentalsthat can lead to consistent standards.3. The International Accounting Standards Board (IASB) uses a conceptual framework basedon individual concepts developed by each member of the standard-setting body.4. A soundly developed conceptual framework enables the International Accounting StandardsBoard (IASB) to issue more useful and consistent pronouncements over time.5. A soundly developed conceptual framework enables the International Accounting StandardsBoard (IASB) to quickly solve new and emerging practical problems by referencing basic theory.6. The IASB has issued a conceptual framework that is broadly consistent with that of theUnited States.7. The International Accounting Standards Board’s (IASB’s) Conceptual Framework includessupplementary information.8. The International Accounting Standards Board’s (IASB’s) Conceptual Framework includesthe elements of financial statements.9. The 2nd level of the IASB’s conceptual framework provides the qualitative characteristicsthat make accounting information useful and the elements of financial statements.10. One of the challenges in developing a common conceptual framework will be to agree onhow the framework should be organized since the FASB and IASB conceptual frameworks are organized in very different ways.11. The first level of the conceptual framework identifies the recognition and measurementconcepts used in establishing accounting standards.12. Decision usefulness is the underlying theme of the conceptual framework.13. Users of financial statements are assumed to have no knowledge of business and financialaccounting matters by financial statement preparers.14. The foundation of the International Accounting Standards Board’s (IASB’s) ConceptualFramework is found on the third level of the Framework and includes assumptions, principles, and constraints.15. An implicit assumption of the International Accounting Standards Board’s (IASB’s)Conceptual Framework is that users need to be experts in business and financial accounting matters to understand the information contained in financial statements.16. Relevance and reliability are the two primary qualities that make accounting informationuseful for decision making.Conceptual Framework Underlying Financial Accounting 2 - 3 17. The idea of consistency does not mean that companies cannot switch from one accountingmethod to another.18. Timeliness and neutrality are two ingredients of relevance.19. Verifiability and predictive value are two ingredients of reliability.20. The second level of the International Accounting Standards Board’s (IASB’s) ConceptualFramework serves as a bridge between the “why” of accounting and the “how” of accounting.21. In the International Accounting Standards Board’s (IASB’s) Conceptual Framew ork,qualitative characteristics are considered either relevant or prudent.22. In the International Accounting Standards Board’s (IASB’s) Conceptual Framework,qualitative characteristics distinguish better information from inferior information for decision-making purposes.23. In the International Accounting Standards Board’s (IASB’s) Conceptual Framework, anenhancing qualitative characteristic is predictive value.24. In the International Accounting Standards Board’s (IASB’s) Conceptual Framework,aningredient of a fundamental qualitative characteristic is understandability.25. To be a faithful representation as described by the International Accounting StandardsBoard’s (IASB’s) Conceptual Framework, information must be confirmatory.26. An enhancing quality as described by the International Accounting Standards Board’s(IASB’s) Conceptual Framework is comparability.27. Moon, Inc. applies different accounting treatments to similar events from period to period.Moon, Inc. is violating verifiability as described by the International Accounting Standards Board’s (IASB’s) Conceptual Framework.28. The International Accounting Standards Board’s (IASB) definition of retained earnings is“the residual interest in the assets of the entity after deducting all its liabilities.”29. The historical cost principle would be of limited usefulness if not for the going concernassumption.30. The economic entity assumption means that economic activity can be identified with aparticular legal entity.31. Materiality is one of the basic assumptions of accounting used by the InternationalAccounting Standards Board (IASB).32. Periodicity is one of the basic assumptions of accounting used by the InternationalAccounting Standards Board (IASB).33. Timeliness is one of the basic assumptions of accounting used by the InternationalAccounting Standards Board (IASB).Test Bank for Intermediate Accounting: IFRS Edition2 - 434. The periodicity basic assumptions of accounting (used by the International AccountingStandards Board) makes depreciation and amortization policies justifiable and appropriate.35. The IASB conceptual framework specifically identifies accrual basis accounting as one of itsfundamental assumptions.36. One of two assumptions made by the IASB conceptual framework is that the reporting entityis a going concern.37. The expense recognition principle states that debits must equal credits in each transaction.38. Revenues are realizable when assets received or held are readily convertible into cash orclaims to cash.39. Supplementary information may include details or amounts that present a differentperspective from that adopted in the financial statements.40. Companies consider only quantitative factors in determining whether an item is material.41. The International Accounting Standards Board has given companies the option of using fairvalue to report financial liabilities.42. Under International Financial Reporting Standards (IFRS) product costs are charged off inthe immediate period and period costs may be carried into future periods.43. Under International Financial Reporting Standards (IFRS) notes to the financial statementsmust qualify as an element.44. Under International Financial Reporting Standards (IFRS) supplementary information maybe information that is high in relevance but low in reliability.45. The cost-benefit constraint included in the International Accounting Standards Board’sconceptual framework states that financial information should be free from cost to users of the information.46. Th e International Accounting Standards Board’s (IASB) rule for materiality is any item under5% of net income is considered immaterial.47. The International Accounting Standards Board’s (IASB) conceptual framework includes theconcept of prudence or conservatism which means when in doubt, choose the solution that will be least likely to overstate assets or income and/or understate liabilities or expenses.48. Under International Financial Reporting Standards (IFRS) companies must consider bothquantitative and qualitative factors in determining whether an item is material.49. Under International Financial Reporting Standards (IFRS) companies need not reportimmaterial items within the body of the financial statements, but must disclose them in the notes or supplementary information that accompany the financial statements.50. The conceptual framework underlying U.S. GAAP is similar to that underlying IFRS.Conceptual Framework Underlying Financial Accounting 2 - 5MULTIPLE CHOICE—Conceptual51. A soundly developed conceptual framework of concepts and objectives shoulda. increase financial statement users' understanding of and confidence in financialreporting.b. enhance comparability among companies' financial statements.c. allow new and emerging practical problems to be more quickly solved.d. all of these.52. Which of the following (a-c) are not true concerning a conceptual framework in account-ing?a. It should be a basis for standard-setting.b. It should allow practical problems to be solved more quickly by reference to it.c. It should be based on fundamental truths that are derived from the laws of nature.d. All of the above (a-c) are true.53. What is a purpose of having a conceptual framework?a. To enable the profession to more quickly solve emerging practical problems.b. To provide a foundation from which to build more useful standards.c. Neither a nor b.d. Both a and b.S54. Which of the following is not a benefit associated with the FASB Conceptual Framework Project?a. A conceptual framework should increase financial statement users' understanding ofand confidence in financial reporting.b. Practical problems should be more quickly solvable by reference to an existingconceptual framework.c. A coherent set of accounting standards and rules should result.d. Business entities will need far less assistance from accountants because the financialreporting process will be quite easy to apply.Test Bank for Intermediate Accounting: IFRS Edition2 - 655. A soundly developed conceptual framework enables the International AccountingStandards Board (IASB) toI. Issue more useful and consistent pronouncements over time.II. More quickly solve new and emerging practical problems by referencing basic theory.a. I only.b. II only.c. Both I and II.d. Neither I nor II.56. In the conceptual framework for financial reporting, what provides "the why"--the goalsand purposes of accounting?a. Measurement and recognition concepts such as assumptions, principles, andconstraintsb. Qualitative characteristics of accounting informationc. Elements of financial statementsd. Objective of financial reporting57. The underlying theme of the conceptual framework isa. decision usefulness.b. understandability.c. reliability.d. comparability.58. What is the objective of financial reporting as indicated in the conceptual framework?a. provide information that is useful to those making investing and credit decisions.b. provide information that is useful to management.c. provide information about those investing in the entity.d. All of the above.59. The International Accounting Standards Board’s (IASB’s) Conceptual Framework includesall of the following except:a. Objective of financial reporting.b. Supplementary informationc. Elements of financial statements.d. Qualitative characteristics of accounting information.60. The second level in the International Accounting Standards Board’s (IASB’s) ConceptualFrameworka. Identifies the objective of financial reporting.b. Identifies recognition, measurement, and disclosure concepts used in establishing andapplying accounting standards.c. Provides the elements of financial statements.d. Includes assumptions, principles, and constraints.Conceptual Framework Underlying Financial Accounting 2 - 7 61. The objective of financial reporting in the Internatio nal Accounting Standards Board’s(IASB’s) Conceptual Frameworka. Is the foundation for the Framework.b. Includes the qualitative characteristics that make accounting information useful.c. Is found on the third level of the Framework.d. All of the choices are correct regarding the objective of financial reporting.62. An implicit assumption of the International Accounting Standards Board’s (IASB’s)Conceptual Framework is thata. Information must be decision-useful to all potential users of financial reporting.b. General-purpose financial reporting is the primary source of information for users offinancial reporting.c. Users need reasonable knowledge of business and financial accounting matters tounderstand the information contained in financial statements.d. All of the choices are correct.63. The overriding criterion by which accounting information can be judged is that ofa. usefulness for decision making.b. freedom from bias.c. timeliness.d. comparability.64. Which of the following is a fundamental quality of useful accounting information?a. Comparability.b. Relevance.c. Consistency.d. Materiality.65. Which of the following is a fundamental quality of useful accounting information?a. Conservatism.b. Comparability.c. Faithful representation.d. Consistency.66. What is meant by comparability when discussing financial accounting information?a. Information has predictive or feedback value.b. Information is reasonably free from error.c. Information that is measured and reported in a similar fashion across companies.d. Information is timely.67. What is meant by consistency when discussing financial accounting information?a. Information that is measured and reported in a similar fashion across points in time.b. Information is timely.c. Information is measured similarly across the industry.d. Information is verifiable.Test Bank for Intermediate Accounting: IFRS Edition2 - 868. Which of the following is an ingredient of relevance?a. Completeness.b. Representational faithfulness.c. Neutrality.d. Predictive value.69. Which of the following is an ingredient of faithful representation?a. Predictive value.b. Timeliness.c. Neutrality.d. Feedback value.70. Changing the method of inventory valuation should be reported in the financial statementsunder what qualitative characteristic of accounting information?a. Understandability.b. Verifiability.c. Timeliness.d. Comparability.71. Company A issuing its annual financial reports within one month of the end of the year isan example of which enhancing quality of accounting information?a. Neutrality.b. Timeliness.c. Predictive value.d. Representational faithfulness.72. What is the quality of information that enables users to better forecast future operations?a. Reliability.b. Materiality.c. Comparability.d. Relevance.73. Which of the following ingredients of fundamental qualities is part of faithful representation?a. Neutrality.b. Productive value.c. Confirmatory value.d. Timeliness.74. Decision makers vary widely in the types of decisions they make, the methods of decisionmaking they employ, the information they already possess or can obtain from other sources, and their ability to process information. Consequently, for information to be useful there must be a linkage between these users and the decisions they make. This link isa. relevance.b. reliability.c. understandability.d. materiality.Conceptual Framework Underlying Financial Accounting 2 - 9 75. The two fundamental qualities that make accounting information useful for decisionmaking area. comparability and consistency.b. materiality and timeliness.c. relevance and faithful representation.d. reliability and comparability.76. Accounting information is considered to be relevant when ita. can be depended on to represent the economic conditions and events that it isintended to represent.b. is capable of making a difference in a decision.c. is understandable by reasonably informed users of accounting information.d. is verifiable and neutral.77. The quality of information that gives assurance that it is reasonably free of error and biasa. relevance.b. faithful representation.c. verifiability.d. neutrality.78. Financial information does not demonstrate consistency whena. firms in the same industry use different accounting methods to account for the sametype of transaction.b. a company changes its estimate of the salvage value of a fixed asset.c. a company fails to adjust its financial statements for changes in the value of themeasuring unit.d. none of these.79. When information about two different enterprises has been prepared and presented in asimilar manner, the information exhibits the characteristic ofa. relevance.b. reliability.c. consistency.d. none of these.80. The second level of the International Accounting Standards Board’s (IASB’s) ConceptualFrameworka. provides conceptual building blocks that explain the qualitative characteristics ofaccounting information.b. defines the elements of financial statements.c. serves as a bridge between the “why” of accounting and the “how” of accounting.d. all of the choices are correct.81. In the Intern ational Accounting Standards Board’s (IASB’s) Conceptual Framework,qualitative characteristicsa. Are considered either fundamental or enhancing.b. Contribute to the decision-usefulness of financial reporting information.c. Distinguish better information from inferior information for decision-making purposes.d. All of the choices are correct.Test Bank for Intermediate Accounting: IFRS Edition2 - 1082. In the International Accounting Standards Board’s (IASB’s) Conceptual Framework, anenhancing qualitative characteristic isa. Predictive value.b. Free from error.c. Timeliness.d. Confirmatory value.83. In the International Accounting Standards Board’s (IASB’s) Conceptual Framework, aningredient of a fundamental qualitative characteristic isa. Neutrality.b. Verifiability.c. Timeliness.d. Understandability.84. In the International A ccounting Standards Board’s (IASB’s) Conceptual Framework, afundamental qualitative characteristic isa. Materiality.b. Faithful representation.c. Decision usefulness.d. Neutrality.85. To be a faithful representation as described by the International Accounting StandardsBoard’s (IASB’s) Conceptual Framework, information must be all of the following except:a. Complete.b. Free from error.c. Confirmatory.d. Neutral.86. Enhancing qualities as described by the International Accounting Standards Board’s(IASB’s) Conceptua l Framework, include all of the following except:a. Comparability.b. Neutrality.c. Understandability.d. Verifiability.87. Erin Company applies the same accounting treatment to similar events from period toperiod. Erin Company is exhibiting which of the following qualities as described by the International Accounting Standards Board’s (IASB’s) Conceptual Framework?a. Verifiability.b. Consistency.c. Predictive value.d. All of the choices are correct.S88. According to the IASB Conceptual Framework, the elements−assets, liabilities, and equity−describe amounts of resources and claims to resources at/during aMoment in Time Period of Timea. Yes Nob. Yes Yesc. No Yesd. No No89. Which of the following is not a basic element of financial statements?a. Assets.b. Statement of financial position.c. Equity.d. Income.90. Which of the following basic elements of financial statements is not associated with thestatement of financial position?a. Income.b. Equity.c. Liability.d. Asset.91. Issuance of common stock for cash affects which basic element of financial statements?a. Revenues.b. Losses.c. Liabilities.d. Equity.92. The International Accounting Standards Board (IASB) defines five interrelated elements offinancial statements. Which of the following is not one of those elements?a. Asset.b. Income.c. Equity.d. All of the choices are elements defined by the IASB.93. The International Accounting Standards Board (IASB) defines one of the 5 elements asfollows: “the residual interest in the assets of the entity after deducting all its liabilities”Which element matches this description?a. Retained earnings.b. Income.c. Equity.d. All of the choices match this definition.94. Which of the following is not a basic assumption underlying the financial accountingstructure?a. Economic entity assumption.b. Going concern assumption.c. Periodicity assumption.d. Historical cost assumption.95. Which basic assumption is illustrated when a firm reports financial results on an annualbasis?a. Economic entity assumption.b. Going concern assumption.c. Periodicity assumption.d. Monetary unit assumption.96. Which basic assumption may not be followed when a firm in bankruptcy reports financialresults?a. Economic entity assumption.b. Going concern assumption.c. Periodicity assumption.d. Monetary unit assumption.97. Which accounting assumption or principle is being violated if a company provides financialreports in connection with a new product introduction?a. Economic entity.b. Periodicity.c. Revenue recognition.d. Full disclosure.S98. Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy?a. Monetary unit assumption.b. Periodicity assumption.c. Going-concern assumption.d. Economic entity assumption.S99. During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept ofObjectivity Periodicitya. No Nob. Yes Noc. No Yesd. Yes Yes100. Under current IFRS, inflation is ignored in accounting due to thea. economic entity assumption.b. going concern assumption.c. monetary unit assumption.d. periodicity assumption.101. The economic entity assumptiona. is inapplicable to unincorporated businesses.b. recognizes the legal aspects of business organizations.c. requires periodic income measurement.d. is applicable to all forms of business organizations.102. Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of thea. economic entity assumption.b. relevance characteristic.c. comparability characteristic.d. neutrality characteristic.103. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?a. Cost/benefit constraintb. Periodicity assumptionc. Materiality constraintd. Expense recognition principle104. The assumption that a business enterprise will not be sold or liquidated in the near future is known as thea. economic entity assumption.b. monetary unit assumption.c. materiality assumption.d. none of these.105. Which of the following is an implication of the going concern assumption?a. The historical cost principle is credible.b. Depreciation and amortization policies are justifiable and appropriate.c. The current-noncurrent classification of assets and liabilities is justifiable and signify-cant.d. All of these.106. The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include all of the following except:a. Going concern.b. Periodicity.c. Accrual basis.d. Materiality.107. The basic assumptions of accounting used by the International Accounting Standards Board (IASB) includea. Neutrality.b. Periodicity.c. Understandability.d. Materiality.108. The basic assumptions of accounting used by the International Accounting Standards Board (IASB) includea. Monetary unit.b. Decision usefulnessc. Timeliness.d. All of the choices are basic assumptions of accounting.109. Which of the following basic assumptions of accounting (used by the International Accounting Standards Board) makes depreciation and amortization policies justifiable and appropriate?a. Periodicity.b. Decision usefulnessc. Monetary unit.d. Going concern.110. Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are morea. verifiable.b. relevant.c. indicative of the entity's purchasing power.d. conservative.111. Valuing assets at their liquidation values rather than their cost is inconsistent with thea. periodicity assumption.b. matching principle.c. materiality constraint.d. historical cost principle.112. Revenue is generally recognized when a sale occurs. This statement describes thea. consistency characteristic.b. matching principle.c. revenue recognition principle.d. relevance characteristic.113. Generally, revenue from sales should be recognized at a point whena. management decides it is appropriate to do so.b. the product is available for sale to the ultimate consumer.c. the entire amount receivable has been collected from the customer and there remainsno further warranty liability.d. none of these.114. Revenue generally should be recognizeda. at the end of production.b. at the time of cash collection.c. when realized.d. when a sale occurs.115. Which of the following is not a time when revenue may be recognized?a. At time of saleb. At receipt of cashc. During productiond. All of these are possible times of revenue recognition.116. The Allowance for Doubtful Accounts, which appears as a deduction from Accounts Receivable on a statement of financial position and which is based on an estimate of bad debts, is an application of thea. consistency characteristic.b. expense recognition principle.c. materiality constraint.d. revenue recognition principle.117. The accounting principle of expense recognition is best demonstrated bya. not recognizing any expense unless some revenue is realized.b. associating effort (expense) with accomplishment (revenue).c. recognizing prepaid rent received as revenue.d. establishing an Appropriation for Contingencies account.118. Application of the full disclosure principlea. is theoretically desirable but not practical because the costs of complete disclosureexceed the benefits.b. is violated when important financial information is buried in the notes to the financialstatements.c. is demonstrated by the use of supplementary information presenting the effects ofchanging prices.d. requires that the financial statements be consistent and comparable.119. Which of the following is an argument against using historical cost in accounting?a. Fair values are more relevant.b. Historical costs are based on an exchange transaction.c. Historical costs are reliable.d. Fair values are subjective.120. When is revenue generally recognized?a. When cash is received.b. When the warranty expires.c. When production is completed.d. When the sale occurs.121. Which of the following are the two components of the revenue recognition principle?a. Cash is received and the amount is material.b. It is probable that future economic benefits will flow to the company and it is possibleto reliably measure the amount.c. Production is complete and there is an active market for the product.d. Cash is realized or realizable and production is complete.122. Which of the following practices may not be an acceptable deviation from recognizing revenue at the point of sale?a. Upon receipt of cash.b. During production.c. Upon receipt of order.d. End of production.。

CORPORATE OWNERSHIP AROUND THE WORLDRafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer*October 1998Abstract.We present data on ownership structures of large corporations in 27 wealthy economies, making an effort to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to the Berle and Means image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions or other widely held corporations is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management.* Harvard University. We are grateful to Alexander Aganin, Carlos Berdejo-Izquierdo, David Grossman, Bernardo Lopez-Morton, Tatiana Nenova, Ekaterina Trizlova and David Witkin for help with assembling the data, to Lucian Bebchuk, Marco Becht, Mihir Desai, Oliver Hart, Louis Kaplow, René Stulz, Robert Vishny, Luigi Zingales, and two anonymous referees for advice, and to the NSF for financial support.In their 1932 classic, “The Modern Corporation and Private Property,” Adolph Berle and Gardiner Means called attention to the prevalence of widely held corporations in the United States, in which ownership of capital was dispersed between small shareholders, yet control was concentrated in the hands of managers. For at least two generations, their book fixed the image of the modern corporation as one run by professional managers unaccountable to shareholders. The book stimulated an enormous “managerialist” literature on the objectives of such managers, including the important work of Baumol (1959), Marris (1964), Penrose (1959), and Williamson (1964), as well as Galbraith’s (1967) popular and influential account. More recently, the modern field of corporate finance has developed around the same image of a widely held corporation, as can be seen in the central contributions of Jensen and Meckling (1976) or Grossman and Hart (1980). The Berle and Means image has clearly stuck.In recent years, several studies have begun to question the empirical validity of this image. Eisenberg (1976), Demsetz (1983), Demsetz and Lehn (1985), Shleifer and Vishny (1986), and Morck, Shleifer and Vishny (1988) have shown that, even among the largest American firms, there is a modest concentration of ownership. Holderness and Sheehan (1988) have found several hundred publicly-traded firms with majority (greater than 51 percent) shareholders in the United States. Holderness, Kroszner and Sheehan (1998) have moreover found that management ownership in the United States today is higher than it was when Berle and Means wrote their study.Studies of other rich countries discovered more significant concentration of ownership in Germany (Franks and Mayer (1994), Gorton and Schmid (1996)), Japan (Prowse (1992), Berglof and Perotti (1994)), Italy (Barca (1995)), and seven OECD countries (European CorporateGovernance Network (1997)). In developing economies, ownership is also heavily concentrated (La Porta et al. (1998a)). This research suggests not only that, in many countries, large corporations have large shareholders, but also that these shareholders are active in corporate governance (e.g., Kang and Shivdasani (1995), Yafeh and Yosha (1996)), in contrast to the Berle and Means idea that managers are unaccountable.1Thanks to this research, the Berle and Means image of the modern corporation has begun to show some wear. Still, we have relatively little systematic evidence on the ownership patterns of large publicly traded firms in different countries, and lack a comparative perspective on the relevance of the Berle and Means description of the firm. This paper attempts to provide some such evidence. Specifically, we look at the ownership structures of the twenty largest publicly traded firms in each of the 27 (generally richest) economies, as well as of some smaller firms so that we can keep size constant across countries. We focus on the largest firms in the richest economies precisely because, for these firms, the likelihood of widely-dispersed ownership is the greatest (this is indeed the case). Our principal contribution is to find wherever possible the identities of the ultimate owners of capital and of voting rights in firms, so when shares in a firm are owned by another company, we examine the ownership of that company, and so on.2 For most countries, this is the only way to understand the relationship between ownership and control. These data enable us to address, in a comparative perspective, four broad questions related to the Berle and Means thesis.First, how common are widely held firms in different countries, as opposed to firms that have owners with significant voting rights? Second, to the extent that firms have significant owners, who are they? Are they families, the government, financial institutions, or other --possibly widely held -- firms? How often do banks control companies -- a big issue in corporate finance in light of the extensive discussion of the German corporate governance model? Third, how do these owners maintain their power? Do they use shares with superior voting rights that enable them to exercise control with only limited ownership of capital? Alternatively, do they create complicated cross-ownership patterns to reduce the threat to their control? Or do they build pyramids, whereby they control firms through a chain of companies -- another form of separating ownership of capital and control? By answering these questions empirically, we hope to provide a comprehensive description of ownership patterns of large firms in rich countries.The fourth question we address is: what explains the differences between countries in their ownership patterns? Why, for example, is the Berle and Means image of a widely held firm so much more descriptive of the United States than of Mexico or Italy? Our earlier work (La Porta et al. (1997, 1998a)) suggests that the widely held Berle and Means corporation should be more common in countries with good legal protection of minority shareholders (which are often rich common law countries). In these countries, controlling shareholders have less fear of being expropriated themselves in the event that they ever lose control through a takeover or a market accumulation of shares by a raider, and so might be willing to cut their ownership of voting rights by selling shares to raise funds or to diversify. In contrast, in countries with poor protection of minorities, losing control involuntarily and thus becoming a minority shareholder may be such a costly proposition in terms of surrendering the private benefits of control that the controlling shareholders would do everything to keep control. They would hold more voting rights themselves, and have less interest is selling shares in the market.3 In view of this analysis, we assess the relationship between ownership concentration and minority shareholder protection interms of the voting rights of the principal shareholders rather than their cash flow rights.4 Relatedly, we evaluate the relationship between shareholder protection and the incidence of various control arrangements, including cross-shareholdings, differential voting rights and pyramids. The theory in this area is not completely developed, but some articles do help us think about the data. Grossman and Hart (1988) and Harris and Raviv (1988) suggest that deviations from one-share-one-vote should be larger when private benefits of control are higher, which must be the case in countries with poorer shareholder protection. Wolfenzon (1998) argues that pyramids should also be more common in countries with poor shareholder protection, because it is easier for controlling shareholders there to make minority shareholders in existing firms pay for starting up new firms as partial subsidiaries without fully sharing with these minorities the benefits of a new venture. Pyramids and multiple classes of stock are of course two different ways of separating cash flow and control rights in firms.The controlling shareholders face strong incentives to monitor managers and maximize profits when they retain substantial cash flow rights in addition to control. These incentives, emphasized by Jensen and Meckling (1976) and Shleifer and Vishny (1986), also restrain the diversion of corporate resources by the controlling shareholders, and enhance the value of minority shares.In our empirical work, we find that the Berle and Means corporation is far from universal, and is quite rare for some definitions of control. Similarly, the so-called German model of bank control through equity is uncommon. Instead, controlling shareholders -- usually the State or families -- are present in most large companies. These shareholders have control rights in firms in excess of their cash flow rights, largely through the use of pyramids, but they also participate inmanagement. The power of these controlling shareholders is evidently not checked by other large shareholders. The results suggest that the theory of corporate finance relevant for most countries should focus on the incentives and opportunities of controlling shareholders to both benefit and expropriate the minority shareholders.The next section of the paper describes our data, and presents a number of examples of ownership patterns in particular companies. Section II presents the basic results on the incidence of various ownership structures around the world. Section III concludes.I. Data.A. Construction of the DatabaseThis paper is based on a new database of ownership structures of companies from 27 countries. As we detail below, the data on corporate ownership are often difficult to assemble, and this limitation determines many of the choices we make. We generally use the richest countries based on 1993 per capita income, but exclude a number of them that do not have significant stock markets (e.g., Kuwait, United Arab Emirates, Saudi Arabia).5 For each country, we collect two samples of firms. The first sample consists of the top 20 firms ranked by market capitalization of common equity at the end of 1995 (with some exceptions detailed below). This sample runs into the objection that the largest companies in some countries are much larger than the largest companies in other countries. This is a particularly serious issue for a study of ownership because larger companies presumably have less concentrated ownership, and hence we should be careful that our measures of block ownership do not simply proxy for size. Accordingly, the second sample collects, whenever possible, the smallest 10 firms in each countrywith market capitalization of common equity of at least $500 million at the end of 1995. We call the first sample “large firms” and the second sample “medium firms.” For countries with small stock markets, the two samples intersect. Moreover, for six countries (Argentina, Austria, Ireland, New Zealand, Greece, and Portugal) we do not have 10 publicly traded firms with capitalizations above $500 million. Overall, we have 540 large firms in the large firm sample, and a total of 691 different firms (out of a possible maximum of 810).6There are a few further restrictions on these samples of companies. First, for both samples, we exclude all affiliates of foreign firms. A firm is defined as an affiliate of a foreign company if at least 50 percent of its votes are directly controlled by a single foreign corporate owner. In addition, we exclude banks and utilities from the sample of medium firms, to prevent the domination of this sample by these two industries. Finally, by construction, neither sample includes companies that are owned either wholly privately or wholly by the government, and therefore are not listed. This restriction biases our results toward finding fewer firms with significant government and family ownership than actually exist.As a rule, our companies come from WorldScope database. In four countries for which WorldScope coverage is limited (Argentina, Israel, Mexico, and the Netherlands), we use other sources (see Appendix A for data sources). We generally rely on annual reports, 20-F filings for companies with American Depositary Receipts (ADRs), proxy statements, and -- for several countries -- country-specific books that detail ownership structures of their companies. We also found the INTERNET to be very useful because many individual companies (e.g., in Scandinavia), as well as institutions (e.g., the Paris Bourse and The Financial Times) have Websites that contain information on ownership structures. Virtually all of our data are for 1995and 1996, though we have a few observations where the data come from the earlier years, and a few from 1997. Since ownership patterns tend to be relatively stable, the fact that the ownership data do not all come from the same year is not a big problem.For several countries, our standard procedures do not work because disclosure is so limited. For Greece and Mexico, we can not work with the 20 largest firms because we do not have enough ownership data. For Greece, we take the 20 largest corporations for which we could find ownership data (mostly in Bloomberg). For Mexico, we take the 20 largest firms that have ADRs. For Israel, we rely almost entirely on Lexis/Nexis and INTERNET sources. For Korea, different sources offer conflicting information on corporate ownership structures of chaebols. We were advised by Korean scholars that the best source for chaebols contains information as of 1984, so we use the more stale but reliable data.To describe control of companies, we generally look for all shareholders who control over 10 percent of the votes. The cutoff of 10 percent is used because (1) it provides a significant threshold of votes; and (2) most countries mandate disclosure of 10 percent, and usually even lower, ownership stakes. For most countries and companies, we have some information on smaller shareholdings, but focus only on shareholders who control over 10 percent of the votes. In many cases, the principal shareholders in our firms are themselves corporate entities and financial institutions. We then try to find the major shareholders in these entities, then the major shareholders in the major shareholders, and so on, until we find the ultimate controllers of the votes. In some cases, the ultimate controller is the State, a widely held financial institution, or a widely held corporation. In other cases, it is an individual or a family. We do not attempt to get inside families, and assume that every family owns and votes its shares collectively.B. Definitions of VariablesWe ask whether firms have substantial owners. We do not try to measure ownership concentration, because a theoretically appropriate measure requires a model of the interactions between large shareholders, which we do not have. Rather, we try to define owners in a variety of ways, summarized in Table I and discussed in this subsection. In the following subsection, we illustrate these definitions using several companies from our sample.Our definitions of ownership rely on voting rights rather than cash flow rights. Recall that Berle and Means want to know who controls the modern corporation: shareholders or managers. We too want to know whether corporations have shareholders with substantial voting rights, either directly or through a chain of holdings. This idea motivates our definitions.We divide firms into those that are widely held and those with ultimate owners. We allow for five types of ultimate owners: 1) a family or an individual, 2) the State, 3) a widely held financial institution such as a bank or an insurance company, 4) a widely held corporation, or 5) miscellaneous, such as a cooperative, a voting trust, or a group with no single controlling investor. State control is a separate category because it is a form of concentrated ownership in which the State uses firms to pursue political objectives, while the public pays for the losses (Shleifer and Vishny (1994)). We also give widely held corporations and widely held financial institutions separate categories as owners because it is unclear whether the firms they control should be thought of as widely held or having an ultimate owner. A firm controlled by a widely held corporation or financial institution can be thought of either as widely held since the management of the controlling entity is not itself accountable to an ultimate owner, or as controlled by that management. For these reasons (and because bank ownership is of independentinterest), we keep these categories separate.As a first cut, we say that a corporation has a controlling shareholder (ultimate owner) if this shareholder’s direct and indirect voting rights in the firm exceed 20 percent. A shareholder has x percent indirect control over firm A if: (1) it directly controls firm B which, in turn, directly controls x percent of the votes in firm A; or (2) it directly controls firm C which in turn controls firm B (or a sequence of firms leading to firm B each of which has control over the next one, i.e., they form a control chain), which directly controls x percent of the votes in firm A. Table I provides a more precise definition. The idea behind using 20 percent of the votes is that this is usually enough to have effective control of a firm. Indeed, below we present evidence that, in the majority of cases, our ultimate owners are also part of the management of the firm.In the simplest case, each sample firm would have an ultimate owner of the above five types. There may, alternatively, be a legal entity that has over 20 percent voting rights in our sample firm, which itself has a shareholder with over 20 percent of the votes, and so on. We classify all firms that do not have such a 20 percent chain of voting rights as widely held, and firms with such a chain as having owners. On this definition, if company B has 23 percent of the votes in company A, and individual C has 19 percent of the votes in B, we still call A controlled by a widely held corporation (unless C has additional indirect control in A -- see the discussion of Korea below). In addition to the definition of ultimate owners using this 20 percent of votes rule, we consider a second definition that relies on a chain of over 10 percent of voting rights.The above definitions give us a reasonably conservative way to answer the question: do firms have shareholders with a substantial amount of control, or ultimate owners? But this is not the only interesting aspect of ownership. To evaluate the potential for agency problems betweenultimate owners and minority shareholders, we also want to know whether the cash flow ownership rights of the controlling shareholders are substantially different from their voting rights. One way in which the ultimate owners can reduce their ownership below their control rights is by using shares with superior voting rights; another way is to organize the ownership structure of the firm in a pyramid. Finally, the ultimate owners might wish to solidify their control through cross-shareholdings: having the firm own shares in its shareholders.We describe the role of multiple classes of shares in the simplest possible way. For each firm in the sample, we ask what is the minimum percentage of its capital at par value that the immediate shareholder (who might be different from the ultimate owner) needs to own to have 20 percent of the voting rights under the existing structure of share types of that firm (as opposed to what might be allowed by law). For example, if a firm has 50 percent of its capital in the form of shares that have 100 percent of voting rights, and 50 percent in the form of non-voting shares, we would say that a shareholder must own at least 10 percent of capital (in the form of the first kind of shares) to have 20 percent of the votes. Note that we are only computing this measure for the firms in the sample; we do not capture a deviation from one-share-one-vote if a publicly held corporate shareholder in our sample firm itself has multiple classes of stock.We say that a firm’s ownership structure is a pyramid (on the 20 percent definition) if: (1) it has an ultimate owner, and (2) there is at least one publicly traded company between it and the ultimate owner in the chain of 20 percent voting rights. Thus if a publicly traded firm B has 43 percent of the votes in a sample firm A, and an individual C has 27 percent of the votes in firm B, we would say that C controls A, and that the ownership structure is a pyramid. But if B is 100 percent owned by C, we would still call C the ultimate owner, but would not call the ownershipstructure a pyramid. Pyramids require publicly traded intermediate companies. We also use a parallel definition of pyramids with 10 rather than 20 percent of voting rights.We say that there is cross-shareholding by sample firm A in its control chain if A owns any shares in its controlling shareholder or in the companies along that chain of control. So, if firm B has 20 percent of the votes in A, a publicly held firm C owns 20 percent of the votes in B, and A owns two percent of the votes in C, we would say that C is the ultimate owner of A, that A is owned through a pyramid, and that there is a cross-shareholding by A. On the other hand, if, instead of A owning two percent in C, it were the case that B owned two percent in C, we would not call this a cross-shareholding by A because B is not a firm in our sample. We do not look for cross-shareholdings by firm A in firms outside its control chain because of data limitations.We use some further measures of ownership, which are summarized in Table I, but introduce them later as we present our findings in Section II. First, we present some examples.C. Examples of Ownership StructuresTo describe the database and to illustrate our variables, we present several cases of ownership structures of individual companies, in roughly increasing order of complexity.Begin with the United States. The three most valuable firms in the US at the end of 1995, General Electric, AT & T, and Exxon, are all widely held. The fourth most valuable, Microsoft, has three large shareholders (Figure 1): the co-founders Bill Gates (with 23.7 percent of the votes as well as shares) and Paul Allen (with 9 percent), and Steven Ballmer (with 5 percent). We say that Microsoft has an ultimate owner on the 20 percent (as well as on the 10 percent) definition, namely Bill Gates, and is a family-owned firm. It is obviously not a pyramid, does not have cross-shareholdings, and it takes 20 percent of the capital to amass 20 percent of the votes.The fourth most valuable company in Canada is Barrick Gold, and it has a more complex ownership structure (Figure 2). Its founder, Chairman, and CEO is Peter Munk, who is also Chairman and CEO of a holding company called Horsham, that owns 16.3 percent of votes and capital in Barrick Gold. Mr. Munk controls the publicly-traded Horsham with 79.7 percent of its votes, but only 7.3 percent of capital. Even though Munk evidently controls Barrick, we say that Barrick Gold is widely held on the 20 percent definition of control, since Horsham only has 16.3 percent of the votes. On the 10 percent definition, Barrick Gold, has an ultimate owner, a family. Since Horsham is publicly traded, we call Barrick’s ownership structure a pyramid on the 10, but not the 20, percent definition. Finally, even though Horsham has multiple classes of stock, it takes 20 percent of Barrick’s capital to have 20 percent of the votes, and so the company has a one-share-one-vote structure.7The next example is Hutchison Whampoa, the third most valuable company in Hong Kong (Figure 3). It is 43.9 percent controlled by Cheung Kong Holdings, which happens to be the fifth largest publicly traded company in Hong Kong and is therefore also in our sample. In turn, the Li Ka Shing family owns 35 percent of Cheung Kong. Hutchison Whampoa and Cheung Kong are thus both family controlled companies, except the former is owned through a pyramid but the latter is not. Note that Li Ka Shing controls three of the 20 largest companies in Hong Kong (also the 11th largest Hong Kong Electric Holdings), a number that we keep track of. After the State-controlled NT & T, Toyota Motor is the most valuable company in Japan (Figure 4). Toyota has several non-trivial shareholders, but none of them is very large. Four of these shareholders (Sakura Bank, Mitsui Fire and Marine, Mitsui T & B, and Mitsui Life) are part ofthe Mitsui Group and together control 12.1 percent of both capital and votes in Toyota. This is a common situation in Japan, and we say that Toyota is widely held on the 20 percent definition, but “miscellaneous” on the 10 percent definition, because that is where we put business groups as well as voting trusts. There are no pyramids or deviations from one-share-one-vote here, but Toyota has cross-shareholdings in firms in the Mitsui Group.8Ownership in Japanese companies is straightforward relative to that in Korean ones, as the example of Korea’s second largest firm, Samsung Electronics (Figure 5), illustrates. Samsung’s founder, Lee Kun-Hee controls 8.3 percent of Samsung Electronics directly. But he also controls 15 percent of Samsung Life, which controls 8.7 percent of Samsung Electronics, as well as 14.1 percent of Cheil Jedang, which controls 3.2 percent of Samsung Electronics directly but also 11.5 percent of Samsung Life. Lee Kun-Hee has additional indirect stakes in Samsung Electronics as well. Because there are no 20 percent ownership chains, we call Samsung Electronics widely held on the 20 percent definition. But because between his direct holdings and holdings in Samsung Life Lee Kun-Hee controls over 10 percent of the votes in Samsung Electronics, it is a family-controlled firm on the 10 percent definition. It is also controlled through a pyramid on that definition because, for example, Samsung Life is publicly traded.Finally, to illustrate the really complicated cases, we consider ownership structure of five companies from Continental Europe. We begin with Germany, where the most valuable company is Allianz Insurance (Figure 6). Allianz is a one-share-one-vote company with several large shareholders, of whom the largest, with a 25 percent stake, is Munich Reinsurance, the third most valuable company in Germany. However, Allianz has cross-shareholdings in most of its large shareholders, including a 25 percent stake in Munich Reinsurance (Allianz also has a 22.5 percentstake in Dresdner Bank, which has a 10 percent stake in Munich Reinsurance). Allianz presents a difficult case: one could argue that it is widely held because it controls its controlling shareholder, that it is controlled by a widely held financial institution, or that it belongs in the “miscellaneous”category. We allocate it to the first category, while (happily) recognizing that there are only four such controversial cases in the sample, including Munich Reinsurance itself.The fourth largest company in Germany is Daimler Benz (Figure 7). It is 24.4 percent owned by Deutsche Bank, so its ultimate owner is a widely held financial institution (the largest shareholder in Deutsche Bank is Allianz, with five percent). Other shareholders of Daimler Benz form an enormous pyramid, but we would not call its ownership structure a pyramid because it does not involve publicly traded firms in the control chain and does not lead to the ultimate owner. While there are other over 10 percent shareholders, and chains of shareholders, in Daimler Benz, for the purposes of most of our analysis we only look at the largest shareholder, namely Deutsche Bank. Also, by looking only at the banks’ own equity ownership, we ignore the voting arrangements which enable Deutsche Bank and other German banks to vote the shares they hold in custody for their brokerage clients, thereby biasing our results in favor of Berle and Means.The fourth most valuable company in Sweden is ABB (Figure 8). Like five of the top ten most valuable companies in Sweden, ABB is controlled by the Wallenberg family, characteristically through a pyramid of companies that have shares with differential cash flow and voting rights. Incentive, the 17th most valuable company in Sweden, owns 24.3 percent of capital and has 32.8 percent of the votes in ABB. The Wallenberg Group owns 32.8 percent of the capital, but has 43.1 percent of the votes in Incentive. The Wallenberg Group is a voting。