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Test Bank For Fundamentals Of Financial Management, 13th Edition

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    iii © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. CONTENTS PREFACE About This Edition v Acknowledgments v i Correspondence v i i AACSB Tags vi i i TEST QUESTIONS Chapter 1 An Overview of Financial Management 1 Chapter 2 Financial Markets and Institutions 23 Chapter 3 Financial Statements, Cash Flow, and Taxes 33 Chapter 4 Analysis of Financial Statements 89 Chapter 5 Time Value of Money 135 Chapter 6 Interest Rates 197 Chapter 7 Bonds and Their Valuation 227 Chapter 8 Risk and Rates of Return 263 Chapter 9 Stocks and Their Valuation 313 Chapter 10 The Cost of Capital 351 Chapter 1 1 The Basics of Capital Budgeting 389 Chapter 1 2 Cash Flow E stimation and Risk Analysis 437 Chapter 1 3 Real Options and Other Topics in Capital Budgeting 475 Chapter 14 Capital Structure and Leverage 495 Chapter 1 5 Distributions to Shareholders: Dividends and Share Repurchases 531

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    iv © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. Chapter 1 6 Working Capital Management 559 C hapter 1 7 Financial Planning and Forecasting 605 Chapter 18 Derivatives and Risk Management 619 Chapter 1 9 Multina tional Financial Management 633 Chapter 20 Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles 653 Chapter 21 Mergers and Acquisitions 679

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    v © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. PREFACE About This Edition This Test Bank is designed for use with the 13 th Edition of Fundame ntals of Financial Management . Below we list key observations about the te s t bank based on our experience in the introductory course. 1. Questions and problems have been updated and revised as necessary due to text revisions made in this edition. 2. The test bank is available in three forms: a paper book, a Word file, and a computerized test bank (ExamView). The ExamView version is extremely powerful yet easy to use, and it can algorithmically change the problems and answers and thus generate a nearly unlimited number of versions of each problem. 1 For example, a capital budgeting problem might give students information and require them to calculate an NPV. The algorithmic generator would make a random change in a variable to create as many versions as an instructor desires. This feature can virtually eliminate the possibility of cheating, and it can also be used to develop sample tests for student practice. 2 3. A ll questions have just one correct and four incorrect answers. None of the problems have those annoying “a and b,” or “none of the above” responses , and the like that confuse students and make them think “trick question.” 4. A t the end of each major section in the text , there are some straightforward self - test questions and problems that deal with the material in the section. These are in addition to the end - of - chapter questions and problems. Previously, we avoided including problems in the test bank that were similar in form and wording to those in the text -- the test bank problems covered the same material, but they looked different and frequently required a different thought process. For example, in the text we might give students some data and then require them to find the days sales outstanding, while in the test bank 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 DSO equation and then use the transformed version to answer the question. This is a good way to see how well students understood the material, but it ma kes the problems relatively difficult and different from what students saw in the text. The test bank still contains some of these “convoluted” problems, but now it has a lot more straightforward and therefore easier problems. 5. To help instructors make up their exams, we provide a more complete description of what each question or problem is designed to test. We designate d each question or problem as EASY, EASY/MEDIUM, MEDIUM, 1 Note that the true/false and multiple - choice conceptual questions in the test bank do not have this feature. 2 We wrote the test bank problems, used a financial calculator to get the answers, and then used Excel to check the answers. Next, we specified ranges for the inputs in the algorithmic versions and then sent everything off to be put into ExamView . A lot of programming was required to set up the algorithmic procedure, and guess where thi s programming was actually done -- Moscow! When we heard this, we were afraid things would get lost in the translation. After we reviewed the Russian programmers’ work, we started worrying about the U.S. holding its own in the world economy. Our students need to keep their noses to the grindstone!

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    vi © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. MEDIUM/HARD, or HARD, and then arrange d them from easy to hard, and then by topic within each difficulty category. Time requirements vary depending on the type of calculator students use, what was stressed in class, and whether students are allowed to use a formula sheet. However, as a general rule the easy items can be worked in 2 to 3 minutes and the medium ones in 3 to 4 minutes. Instructors can look at our solution s to get a better idea of how long it will take their specific students to work the various problems. In addition, AACSB “tags” are included on each topic line. These tags indicate general and specific skills required to answer each question. A listing of the AACSB tags is shown at the end of the preface. This can be useful in the accreditation process. 6. Virtually all of our students at Florida use financial calculators, and we also allow them to use the formulas provided in Appendix C of the text. We strongly recommend that students be allowed to use a formula sheet, and we tell them that at the beginning of the course . O therwise , they spend too much time trying to memorize formulas ; time that would be better spent trying to understand the meaning of different results. Note, though, that if students do not use financial calculators and/or formula sheets, the questions and especially the problems will de facto be more difficult than we indicate and require more time for students to solve. Instructors need to consider this when developing their exams from the test bank . 7. ExamView permit s instructors to make up exams that contain some of our questions and problems along with some items of their own. We generally use 10 T/F or multiple - choice conceptual questions and 10 multiple - choice problems, with most taken from the test bank but a few new ones based on things that came up in class or recent events reported in the news. The number of items in a test obviously depends on how long students have to take the test and the difficulty level of the items that are used. 8. In small classes, it might be preferable to give nonmultiple - choice exams. It is easy to use conceptual questions and numerical problems from the te st bank to make up such an exam -- just delete the set of answers and ask for an essay answer or a worked - out problem solution. Unfortunately, the class size in the intro ductory cou rse at Florida rarely makes this feasible. 9. S everal years ago we developed an Excel grading procedure that a number of professors still use. The program automatically averages students’ grades, and it produces a weighted average (we generally weight the midterms 30 % each and the final 40 % ). This program also allows us to specify a mean grade for each exam such that the grade distribution results in a specified GPA. For example, if we want the class GPA to be 2.7, which at Florida is a C+, the model will produce that result. The Excel program also makes it easy to sort by students’ grades to obtain a listing o f students in rank order and to sort by social security number (or some other identifier) to post grades without names. Since other instructors may find the model useful, we have included it in the Instructors’ Section of the book’s website. Acknowledgments First, we would like to thank Professor Jim Keys (Florida International University) , Professor Oliver Schnusenberg (University of North Florida), Professor Craig Tapley (University of Florida), and Chris Buzzard for their assistance with the previous edition’s algorithmic test bank . Dana Aberwald

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    vii © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. Clark worked closely with us to ensure that changes in this edition of the text and updates were integrated into the 13 th edition Test Bank. Susan Whitman took care of the typing and proofing ; her care and dedication is much appreciated. Finally, we really appreciate the work done by the Cengage Learning staff and the Russians who put our updates and revisions into the algorithmic system. Whoever said it takes teamwork to produce a good product surely knew what they were talking about! Correspondence We would very much appreciate hearing from test bank users -- what difficulties are you having, and what can we do to improve it? If you have any complaints or suggestions, please let us hear from you. Eugene F. Brigham Joel F. Houston 4723 NW 53 rd Ave., Suite A Gainesville, FL 326 53 (352)392 - 7546 e - mail address: fundamentals @joelhouston.com November 20 1 1

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    viii © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. AACSB Tags AACSB Tier 1 Tags A Communications abilities B Ethical understanding and reasoning C Analytic skills D Use of information technology E Multicultural understanding F Reflective thinking Finance - Specific Tier 2 Tags G Students will acquire an understanding of stocks and bonds. H Students will acquire knowledge of financial markets, institutions, and interest rates. I Students will acquire knowledge of capital budgeting and the cost of capital. J Students will acquire an understanding of the time value of money. K Students will acquire knowledge of financial statements, financial analysis, financial forecasting, and cash flows. L Students will lay out a finance application in a computer spreadsheet. M Students will understand and be able to articulate the goals of the firm, the role of the finance function in the enterprise’s organization, and as an analyst using public information. N Students will acquire an understanding of risk and return. O Students will acquire an understanding of investments and hybrid financing. P Students will acquire an understanding of derivative markets. Q Students will acquire an understanding of capital structure. R Students will acquire an understanding of dividend policy. S Students will acquire an understanding of working capital management. T Students will acquire an understanding of international financial management. U Students will acquire an understanding of mergers and acquisitions analysis.

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    Chapter 1: Overview True/False Page 1 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. (Difficulty Levels : Easy, Easy/Medium, Medium, Medium/Hard, and Hard) N ote that there is an overlap between the T/F and multiple - choice questions, as some of the T/F statements are used in multiple - choice questions. S ee the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines. Multiple Choice: True/False (1 - 1) Role of finance F M Answer: a EASY 1 . In most corporations, the CFO ranks under the CEO. a. True b. False (1 - 1) Role of finance F M Answer: b EASY 2 . The Chairman of the Board must also be the CEO. a. True b. False (1 - 1) Role of finance F M Answer: a EASY 3 . The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person. a. True b. False (1 - 3) Forms of organization F M Answer: a EASY 4 . Partnerships and proprietorships generally have a tax advantage over corporations. a. True b. False (1 - 3) Forms of organization F M Answer: b EASY 5 . A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership. a. True b. False CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT

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    Page 2 True/False Chapter 1: Overview © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in 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: Overview True/False Page 3 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. (1 - 3) Forms of organization F M Answer: b EASY 6 . An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships. a. True b. False (1 - 3) Forms of organization F M Answer: a EASY 7 . Some partners in a partnership may have different rights, privileges, and responsibilities than other partners. a. True b. False (1 - 3) Forms of organization F M Answer: b EASY 8 . One advantage of the corporate form of organization is that it avoids double taxation. a. True b. False (1 - 3) Forms of organization F M Answer: a EASY 9 . It is generally harder to transfer one’s ownership interest in a partnership than in a corporation. a. True b. False (1 - 3) Forms of organization F M Answer: a EASY 10 . One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business. a. True b. False (1 - 3) Forms of organization F M Answer: a EASY 11 . If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income. a. True b. False (1 - 3) Forms of organization F M Answer: b EASY 12 . If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses. a. True b. False

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    Page 4 True/False Chapter 1: Overview © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in 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: Overview True/False Page 5 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. (1 - 3) Forms of organization F M Answer: b EASY 13 . It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. a. True b. False (1 - 3) Forms of organization F M Answer: a EASY 14 . The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation. a. True b. False (1 - 3) Forms of organization F M Answer: b EASY 15 . One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm’s investors to transfer their ownership interests. a. True b. False (1 - 3) Forms of organization F M Answer: a EASY 16 . Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests. a. True b. False (1 - 4) Shareholder value F M Answer: b EASY 17 . In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS. a. True b. Fals e (1 - 4) Shareholder value F M Answer: b EASY 18 . In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date. a. True b. False (1 - 5) Intrinsic values F G M Answer: a EASY 19 . In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's “ intrinsic value . ” a. True b. False

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    Page 6 True/False Chapter 1: Overview © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in 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: Overview True/False Page 7 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. (1 - 5) Intrinsic values F M Answer: b EASY 20 . If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year. a. True b. False (1 - 6) Important trends E F M Answer: a EASY 21 . Globalization of business has been facilitated by improvements in information technology . a. True b. False (1 - 7) Business ethics B F M Answer: a EASY 22 . As a result of financial scandals occurring during the past decade , there has been a strong push to improve business ethics. a. True b. False (1 - 7) Business ethics B F M Answer: b EASY 23 . There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is not illegal to provide it to stockholders because they are the owners of the firm, not outsiders. a. True b. False (1 - 5 ) Intrinsic values F G Answer: a MEDIUM 24 . A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value. a. True b. False (1 - 5) Intrinsic values F G Answer: b MEDIUM 25 . If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy. a. True b. False (1 - 5 ) Intrinsic values F G A nswer: b MEDIUM 26 . If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold. a. True b. False

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    Page 8 True/False Chapter 1: Overview © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in 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: Overview True/False Page 9 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license distributed with a certain product or service or otherwise on a password - protected website for classroom use. (1 - 5) Intr insic values F G Answer: b MEDIUM 27 . For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value. a. True b. False (1 - 5 ) Intrinsic values F G Answer: a MEDIUM 28 . The term “ marginal investor ” means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose, barring any new information coming out about the stock. It is the “marginal investor” who determines the actual stock price. a. True b. False (1 - 7 ) Business ethics B F M Answer: b MEDIUM 29 . If a lower level person in a firm does something illegal, like “ cooking the books ” to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior , the lower level person cannot be prosecuted but the superior can be prosecuted. a. True b. False (1 - 7 ) Business ethics B F G Answer: a MEDIUM 30 . 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 who participated in the fraud can be prosecuted, and the firm itself can be penalized. a. True b. False (1 - 8) Conflicts B F M Answer: b MEDIUM 31 . Managers always attempt to maximize the long - run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible. However, there can be conflicts between stockholders and bondholders. a. True b. False (1 - 8) Conflicts F M Answer: a MEDIUM 32 . A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve the economy. However, hostile takeovers are controversial, and legislative actions have been taken to make them more difficult to undertake.

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