Test Bank For Fundamentals Of Financial Management, 13th Edition

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iii© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a licensedistributed with a certain product or service or otherwise on a password-protected website for classroom use.CONTENTSPREFACEAboutThisEditionvAcknowledgmentsviCorrespondenceviiAACSBTagsviiiTESTQUESTIONSChapter1AnOverviewofFinancialManagement1Chapter2FinancialMarketsandInstitutions23Chapter3FinancialStatements,CashFlow,andTaxes33Chapter4AnalysisofFinancialStatements89Chapter5TimeValueofMoney135Chapter6InterestRates197Chapter7BondsandTheirValuation227Chapter8RiskandRatesofReturn263Chapter9StocksandTheirValuation313Chapter10TheCostofCapital351Chapter11TheBasicsofCapitalBudgeting389Chapter12CashFlowEstimationandRiskAnalysis437Chapter13RealOptionsandOtherTopicsinCapitalBudgeting475Chapter14CapitalStructureandLeverage495Chapter15DistributionstoShareholders:DividendsandShareRepurchases531

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iv© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a licensedistributed with a certain product or service or otherwise on a password-protected website for classroom use.Chapter16WorkingCapitalManagement559Chapter17FinancialPlanningandForecasting605Chapter18DerivativesandRiskManagement619Chapter19MultinationalFinancialManagement633Chapter20HybridFinancing:PreferredStock,Leasing,Warrants,andConvertibles653Chapter21MergersandAcquisitions679

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v© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a licensedistributed with a certain product or service or otherwise on a password-protected website for classroom use.PREFACEAbout This EditionThisTestBankisdesignedforusewiththe13thEditionofFundamentalsofFinancialManagement.Belowwe list key observations about the test bank basedonourexperienceintheintroductorycourse.1.Questionsandproblemshavebeenupdatedandrevisedasnecessaryduetotextrevisionsmadeinthisedition.2.The test bank is available inthreeforms:apaper book, a Word file,andacomputerizedtestbank(ExamView).TheExamViewversionisextremelypowerful yet easy to use, and it can algorithmically change the problems andanswersandthusgenerateanearlyunlimitednumberofversionsofeachproblem.1Forexample,acapitalbudgetingproblemmightgivestudentsinformation and require them to calculate an NPV. The algorithmic generatorwouldmakearandomchangeinavariabletocreateasmanyversionsasaninstructor desires. This feature can virtually eliminate the possibility ofcheating,anditcanalsobeusedtodevelopsampletestsforstudentpractice.23.All questions have just one correct and four incorrect answers.None oftheproblemshavethoseannoying“aandb,”or“noneoftheabove”responses,andthelikethatconfusestudentsandmakethemthink“trickquestion.”4.At the end of each major sectionin the text,there aresome straightforwardself-test questions and problems that deal with the material in the section.Theseareinadditiontotheend-of-chapterquestionsandproblems.Previously, we avoided including problems in the test bank that were similarin form and wording to those in the text--the test bank problems covered thesame material, but they looked different and frequently required a differentthoughtprocess.Forexample,inthetextwemight give students some dataand then require them to find the days sales outstanding, while in the testbank we might give them the DSO and ask them to determine the firm’s sales.Thus, many of the test bank problems required students to transform the DSOequationandthenusethetransformedversionto answer the question. Thisisa good way to see how well students understood the material, but it makestheproblemsrelativelydifficultanddifferentfromwhatstudentssawinthe text. The test bank still contains some of these “convoluted” problems,butnowithasalotmorestraightforwardandthereforeeasierproblems.5.Tohelpinstructorsmakeuptheirexams,weprovideamorecompletedescriptionofwhateachquestionorproblemisdesignedtotest.WedesignatedeachquestionorproblemasEASY,EASY/MEDIUM,MEDIUM,1Notethatthetrue/falseandmultiple-choiceconceptualquestionsinthetestbankdonothavethisfeature.2Wewrotethetestbankproblems,usedafinancialcalculatortogettheanswers,andthenusedExceltochecktheanswers.Next,wespecifiedrangesfortheinputsinthealgorithmicversionsandthensenteverythingofftobeputintoExamView.Alotofprogrammingwasrequiredtosetupthealgorithmicprocedure,andguesswherethisprogrammingwasactuallydone--Moscow!Whenweheardthis,wewereafraidthingswouldgetlostinthetranslation.AfterwereviewedtheRussianprogrammers’work,westartedworryingabouttheU.S.holdingitsownintheworldeconomy.Ourstudentsneedtokeeptheirnosestothegrindstone!

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vi© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a licensedistributed with a certain product or service or otherwise on a password-protected website for classroom use.MEDIUM/HARD,or HARD, and then arrangedthem from easy to hard, andthenbytopicwithineachdifficultycategory.Timerequirements vary depending onthe type of calculator students use, what was stressed in class, and whetherstudents are allowed to use a formula sheet.However, as a general rule theeasyitemscanbeworkedin2to3minutesandthemediumonesin3to4minutes.Instructorscanlookatoursolutions to get a better idea of howlongitwilltaketheirspecificstudentstowork the various problems.Inaddition, AACSB “tags”are included oneach topic line.These tags indicategeneralandspecificskillsrequiredtoanswer each question.A listing ofthe AACSB tags is shown at the end of the preface.This can be useful in theaccreditationprocess.6.VirtuallyallofourstudentsatFloridausefinancial calculators, and wealsoallowthemtousetheformulasprovidedinAppendix C of the text.Westronglyrecommendthatstudentsbeallowedtouse a formula sheet, andwetellthemthatatthebeginningofthecourse.Otherwise,theyspendtoomuchtimetryingtomemorizeformulas;timethatwouldbebetterspenttrying to understand themeaning of different results.Note, though, that ifstudentsdonotusefinancialcalculatorsand/orformulasheets,thequestionsandespeciallytheproblemswilldefacto be more difficult thanweindicateandrequiremoretimeforstudentsto solve.Instructors needtoconsiderthiswhendevelopingtheirexamsfromthetestbank.7.ExamViewpermitsinstructorstomakeupexamsthatcontainsomeofourquestions and problemsalong withsome items of their own.We generally use10T/Formultiple-choiceconceptualquestionsand10multiple-choiceproblems,withmosttakenfromthetestbankbutafewnewonesbasedonthingsthatcameupinclassorrecenteventsreportedinthenews.Thenumberofitemsinatestobviouslydependsonhowlongstudentshavetotakethetestandthedifficultyleveloftheitemsthatareused.8.Insmallclasses,itmightbepreferabletogivenonmultiple-choice exams.It is easy to use conceptual questions and numerical problems from the testbank to make up such an exam--just delete the set of answers and ask for anessay answer or a worked-out problem solution.Unfortunately, the class sizeintheintroductorycourseatFloridararelymakesthisfeasible.9.SeveralyearsagowedevelopedanExcelgradingprocedure that a number ofprofessorsstilluse.Theprogramautomatically averages students’ grades,anditproducesaweightedaverage(wegenerallyweightthemidterms30%each and the final 40%).This program also allows us to specify a mean gradeforeachexamsuchthatthegradedistribution results in a specified GPA.Forexample,ifwewanttheclassGPAtobe2.7, which at Florida is a C+,the model will produce that result.The Excel program also makes it easy tosortbystudents’gradestoobtainalistingof students in rank order andto sort by social security number(or some other identifier) to post gradeswithoutnames.Sinceotherinstructorsmayfindthemodeluseful,wehaveincludeditintheInstructors’Sectionofthebook’swebsite.AcknowledgmentsFirst,wewouldliketothankProfessorJimKeys(FloridaInternationalUniversity),ProfessorOliverSchnusenberg(UniversityofNorthFlorida),ProfessorCraigTapley(UniversityofFlorida),andChrisBuzzardfortheirassistancewiththepreviousedition’salgorithmictestbank.DanaAberwald

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vii© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a licensedistributed with a certain product or service or otherwise on a password-protected website for classroom use.Clarkworkedcloselywithusto ensure that changes in this edition of the textandupdateswere integrated into the13thedition Test Bank.Susan Whitman tookcareofthetypingandproofing;hercareanddedicationismuchappreciated.Finally, we really appreciate the work done by theCengage Learningstaff and theRussianswhoputourupdatesand revisionsinto the algorithmic system.Whoeversaidittakesteamworktoproduceagoodproductsurelyknewwhattheyweretalkingabout!CorrespondenceWe would very much appreciate hearing from test bank users--what difficulties areyouhaving,andwhatcanwedotoimproveit?Ifyouhaveanycomplaintsorsuggestions,pleaseletushearfromyou.EugeneF.BrighamJoelF.Houston4723NW53rdAve.,SuiteAGainesville,FL32653(352)392-7546e-mailaddress:fundamentals@joelhouston.comNovember2011

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viii© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a licensedistributed with a certain product or service or otherwise on a password-protected website for classroom use.AACSB TagsAACSB Tier 1 TagsACommunicationsabilitiesBEthicalunderstandingandreasoningCAnalyticskillsDUseofinformationtechnologyEMulticulturalunderstandingFReflectivethinkingFinance-Specific Tier 2 TagsGStudentswillacquireanunderstandingofstocksandbonds.HStudentswillacquireknowledgeoffinancialmarkets,institutions,andinterestrates.IStudentswillacquireknowledgeofcapitalbudgetingandthecostofcapital.JStudentswillacquireanunderstandingofthetimevalueofmoney.KStudentswillacquireknowledgeoffinancialstatements,financialanalysis,financialforecasting,andcashflows.LStudentswilllayoutafinanceapplicationinacomputerspreadsheet.MStudentswillunderstand and be able to articulate the goals of the firm,theroleofthefinance function in the enterprise’s organization, and asananalystusingpublicinformation.NStudentswillacquireanunderstandingofriskandreturn.OStudentswillacquireanunderstandingofinvestmentsandhybridfinancing.PStudentswillacquireanunderstandingofderivativemarkets.QStudentswillacquireanunderstandingofcapitalstructure.RStudentswillacquireanunderstandingofdividendpolicy.SStudentswillacquireanunderstandingofworkingcapitalmanagement.TStudentswillacquireanunderstandingofinternationalfinancialmanagement.UStudentswillacquireanunderstandingofmergersandacquisitionsanalysis.

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Chapter 1: OverviewTrue/FalsePage1© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permittedin a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.(DifficultyLevels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/Fstatements are used in multiple-choice questions.See the preface for information on the AACSBletter indicators (F, M, etc.) on the subject lines.Multiple Choice: True/False(1-1) Role offinanceFMAnswer: aEASY1.In most corporations, theCFOranks under the CEO.a.Trueb.False(1-1) Role of financeFMAnswer: bEASY2.The Chairman of theBoard must also betheCEO.a.Trueb.False(1-1) Role of financeFMAnswer: aEASY3.The board of directors is the highest ranking body in a corporation, andthe chairman of theboard is thehighestrankingindividual.The CEOgenerally works under the board and itschairman, and the board generallyhas the authority to remove the CEO under certain conditions.The CEO,however, cannot remove the board, but he or she can endeavor to have theboard voted out anda new board voted in should a conflict arise.It ispossible for a person to simultaneouslyserve as CEO and chairman of theboard, though many corporate control experts believe it is bad to vestboth offices in thesame person.a.Trueb.False(1-3) Forms of organizationFMAnswer: aEASY4.Partnerships and proprietorships generally have a tax advantage overcorporations.a.Trueb.False(1-3) Forms of organizationFMAnswer: bEASY5.A disadvantage of the corporate form oforganization is that corporatestockholders are more exposed to personal liabilities in the event ofbankruptcy than areinvestors in a typical partnership.a.Trueb.FalseCHAPTER 1AN OVERVIEW OF FINANCIAL MANAGEMENT

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Page2True/FalseChapter 1: Overview© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permittedin a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Chapter 1: OverviewTrue/FalsePage3© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permittedin a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.(1-3) Forms of organizationFMAnswer: bEASY6.An advantage of thecorporate form of organization is that corporationsare generally less highly regulated than proprietorships andpartnerships.a.Trueb.False(1-3) Forms of organizationFMAnswer: aEASY7.Some partners in a partnership may havedifferent rights, privileges, andresponsibilities than other partners.a.Trueb.False(1-3)Forms of organizationFMAnswer:bEASY8.One advantage of the corporate form of organization is thatit avoidsdouble taxation.a.Trueb.False(1-3) Forms of organizationFMAnswer: aEASY9.It is generally harder to transfer one’s ownership interestin apartnership than ina corporation.a.Trueb.False(1-3) Forms of organizationFMAnswer: aEASY10.One danger of starting a proprietorshipis that you may be exposed topersonal liability if the business goesbankrupt.This problem would beavoided if you formed a corporation to operate the business.a.Trueb.False(1-3) Forms of organizationFMAnswer: aEASY11.If a corporation elects to be taxed as an S corporation, then it canavoid the corporatetax.However, its stockholders will have to paypersonal taxes on the firm's net income.a.Trueb.False(1-3) Forms of organizationFMAnswer: bEASY12.If a corporation elects to be taxed as an S corporation, then both it andits stockholders can avoid all Federal taxes.This provision was putinto the Federal Tax Code in order to encourage the formation of smallbusinesses.a.Trueb.False

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Page4True/FalseChapter 1: Overview© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permittedin a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Chapter 1: OverviewTrue/FalsePage5© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permittedin a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.(1-3) Forms of organizationFMAnswer: bEASY13.It is generally less expensive to form a corporation than aproprietorship because, with a proprietorship, extensive legal documentsare required.a.Trueb.False(1-3) Forms of organizationFMAnswer: aEASY14.The more capital a firm is likely to require, the greater the probabilitythat it will be organized as a corporation.a.Trueb.False(1-3) Forms of organizationFMAnswer: bEASY15.One disadvantage offorming a corporation rather than a partnership isthat this makes it more difficult for the firm’s investors to transfertheir ownership interests.a.Trueb.False(1-3) Forms of organizationFMAnswer: aEASY16.Organizing as a corporation makes it easier for the firm toraisecapital.This is because corporations'stockholders are not subject topersonal liabilities if the firm goes bankrupt and also because it iseasier to transfer shares of stock thanpartnership interests.a.Trueb.False(1-4)Shareholder valueFMAnswer: bEASY17.In order to maximize its shareholders' value, a firm's management mustattempt to maximizethe expected EPS.a.Trueb.False(1-4)Shareholder valueFMAnswer: bEASY18.In order to maximize its shareholders' value, a firm's management mustattempt to maximizethe stock price on a specific target date.a.Trueb.False(1-5) Intrinsic valuesFGMAnswer: aEASY19.In order to maximize its shareholders' value, a firm's management mustattempt to maximizethe stock price in the long run, or thestock's“intrinsic value.”a.Trueb.False

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Page6True/FalseChapter 1: Overview© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permittedin a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Chapter 1: OverviewTrue/FalsePage7© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permittedin a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.(1-5) Intrinsic valuesFMAnswer: bEASY20.If management operates in a manner designed to maximize thefirm'sexpected profits for the current year, this will also maximize thestockholders' wealth as of the current year.a.Trueb.False(1-6) Important trendsEFMAnswer: aEASY21.Globalization of business has been facilitated by improvements ininformation technology.a.Trueb.False(1-7) Business ethicsBFMAnswer: aEASY22.As a result offinancial scandals occurring during the pastdecade, therehas been a strong push to improve business ethics.a.Trueb.False(1-7)Business ethicsBFMAnswer: bEASY23.There are many types of unethical business behavior.One example iswhere executives provide information that they know is incorrect to banksand to stockholders.It is illegal to provide such information to banks,but it is not illegal to provide it to stockholders becausethey are theowners of the firm,not outsiders.a.Trueb.False(1-5) Intrinsic valuesFGAnswer: aMEDIUM24.A stock's market price would equal its intrinsic value if all investorshad all the information that is available about the stock.In this casethe stock's market price would equal its intrinsic value.a.Trueb.False(1-5) Intrinsic valuesFGAnswer: bMEDIUM25.If a stock's marketprice is above its intrinsic value, then the stockcan be thought of as being undervalued,and it would be a good buy.a.Trueb.False(1-5) Intrinsic valuesFGAnswer: bMEDIUM26.If a stock's intrinsic value is greaterthan its market price, then thestock is overvaluedand should be sold.a.Trueb.False

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Page8True/FalseChapter 1: Overview© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permittedin a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Chapter 1: OverviewTrue/FalsePage9© 2013Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permittedin a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.(1-5) Intrinsic valuesFGAnswer: bMEDIUM27.For a stock to be in equilibrium as thebook defines it, its market priceshould exceed its intrinsic value.a.Trueb.False(1-5) Intrinsic valuesFGAnswer: aMEDIUM28.The term“marginal investor”means an investor who is active in themarket and would tend to buy a stock ifits price fell and sell it if itrose, barring any new information coming out about the stock.It is the“marginal investor”who determines the actual stock price.a.Trueb.False(1-7) Business ethicsBFMAnswer: bMEDIUM29.If a lower level person in a firm does something illegal, like“cookingthe books”to understate costs and thereby increase profitsabove thecorrect profitsbecause he or she was told to do so by a superior, thelower level person cannot be prosecutedbut the superior can beprosecuted.a.Trueb.False(1-7) Business ethicsBFGAnswer: aMEDIUM30.If someone deliberately understates costs and thereby increases profits,this can cause the price of the stock to rise above its intrinsic value.The stock price will probably fall in the future.Also, those whoparticipated in thefraud can be prosecuted, and the firm itself can bepenalized.a.Trueb.False(1-8) ConflictsB F MAnswer: bMEDIUM31.Managers always attempt to maximize thelong-run value of their firms'stocks, or the stocks' intrinsic values.This is exactly whatstockholders desire.Thus, conflicts between stockholders and managersare not possible.However, there can be conflicts between stockholdersand bondholders.a.Trueb.False(1-8)ConflictsFMAnswer: aMEDIUM32.A hostile takeover is said to occur when another corporation or group ofinvestors gains voting control over a firm and replaces theold managers.If the old managerswere managing the firm inefficiently, then hostiletakeovers can improve the economy.However, hostile takeovers arecontroversial, and legislative actions have been taken to make them moredifficult to undertake.

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