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Test Bank For Intermediate Financial Management, 11th Edition

Test Bank For Intermediate Financial Management, 11th Edition is your go-to resource for exam success, offering a deep dive into critical subjects with expert insights.

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    © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. iii CONTENTS PREFACE Overview of the Test Bank Debugging the Questions Answers to Questi ons and Solutions to Problems Computerized Test Banks Student Preparation for a Test Bank Exam Other Uses of the Test Bank Acknowledgments Correspondence TEST QUESTIONS Chapter 1: An Overview of Financial Management Chapter 2: Risk and Return: Part I Chapter 3: Risk and Return: Part II Chapter 4: Bond Valuation Chapter 5: Basic Stock Valuation Chapter 6: Financial Options Chapter 7: Accounting for Financial Management Chapter 8: Analysis of Financial Statements Chapter 9: Financial Planning and Forecasting Financial Statements Chapter 10: Determining the Cost of Capital Chapter 11: Corporate Value and Value - Based Management Chapter 12: Capital Budgeting: Decision Criteria Chapter 13: Capital Budgeting: Estimating Cash Flows and Analyzing Risk Chapter 14: Real Options

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    © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. iv Chapter 15: Capital Structure Decisions: Part I Chapter 16: Capital Structure Decisions: Part II Chapter 17: Distributions to Shareholders: Dividends and Repurchases Chapter 18: Initial Public Offerings, Investment Banking and Financial Restructuring Chapter 19: Lease Financing Chapter 20: Hybrid Financing: Preferred Stock, Warrants, and Convertibles Chapter 21: Working Capital Management Chapter 22: Providing and Obtaining Credit Chapter 23: Other Topics in Working Capital Management Chapter 24: Derivatives and Risk Management Chapter 25: Bankruptcy, Reorganization, and Liquidation Chapter 26: Mergers, LBOs, Divestitures, and Holding Companies Chapter 27: Multinational Financial Management Web Chapter 28: Time Value of Money Web Chapter 29: Basic Financial Tools Web Chapter 30: Pension Plan Management Web Chapter 31: Financial Management in Not - For - Profit Businesses

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    © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. v PREFACE This Test Bank is designed for use with the 1 1 th Edition of Intermediate Financial Management . Overview of the Test Bank When we first taught the intermediate finance course, our exams consisted entirely of open - ended problems and essay questions. However, as class sizes and demands on our time increased, we began experimenting with adding multiple choice questions to our exams to test specific skills, and with creating short in - class quizzes to cover reading assignments . Also, as textbook authors, we were receiv ing more and more requests from professors for a really first - rate test bank . Simultaneously, our publisher was working to improve their computer system for construct ing , machine grad ing , and automatically post ing test scores to a grade book . T oday , we are so well satisfied with the Test Bank , and with Cengage’s computerized grading system, that we would use some multiple choice questions in our exams even if our classes had only 25 students. Of course, t he questions and problems must be unambiguous (or very close to it ), because if students perceive the testing system as being even slightly unfair , this will lead to discontent . Also, t he test bank should contain a mix of easy, straightforward questions to test students’ basic knowledge of a broad range of topics , plus more difficult questions and problems to test the depth of their understanding . Th is T est B ank provide s a very large set of clear, unambiguous questions and problems , and Cengage’s computerized procedures ( as discussed below ) permits one to expand the problem set almost infinitely. The Test Bank is available in three forms: (1) A s a computerized test bank in ExamView ® ; ( 2 ) as Microsoft Word ® files which are available on the instructor companion site and the Instructor Resource CD (IRCD); and (3) as a printed test bank . With all three versions , relatively detailed answers are provided for all of the problems as well as for all question s that are not definitional in nature. Also, use of the ExamView ® or Microsoft Word ® files allows professors to edit our questions and/or add questions of their own. The Test Bank contains enough questions and problems to make up exams for six semesters without having to repeat questions . See the “Computerized Test Banks” section of this Preface for additional information about using the ExamView ® or Microsoft Word ® version of the Test Bank . If you look through the print Test Bank you will quickly see that each chapter begins with a set of True/False questions, arranged from easiest to hardest, the some conceptual multiple choice questions, again from easy to hard, and then a set of numerical problems, and finally the answers to the questions and problems. Also, each question or problem indicates the topic and relevant

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    © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. vi section number within the chapter. The T/F questions provide a broad coverage of all the topics in the chapter , and we use them to ensure that students have a basic knowledge of all the assigned topics. The conceptual multiple choice questions test students ’ knowledge at a deeper level , and the numerical problems cover all of the quantitative aspects of the chapter. Finally, we provide worked - out solutions to all problems , plus explanations for T/F and conceptual questions where the answers are not obvious to anyone who has studied the chapter . 1 The assigned difficulty level is somewhat subjective, and the perceived difficulty level will also depend on what was emphasized in class and in review sessions. Therefore, we recommend that instructor s consider our assigned level as a starting point but then make up their own minds after looking over the questions and answers. Also, difficulty depend s on what information students have access to when they are taking the exam. We provide formula sheets so students won’t spend too much time memoriz ing things that they could easily look up in the real world . W ithout those sheets, the exams would definitely be harder. Also, we generally give timed exams , where students have the formula sheet , a calculator , and a set amount of time to take the exam . 2 If the exams are given online, students can look things up and also work on problems until they get a solution that matches one of the indicated answers, so scores will be higher. We thought about indicating approximately how long it would take to answer the various questions , but we decided that due to the differences noted above , this might do more harm than good. Instructors should, therefore, look at the questions and our worked - out solutions and then decide for themselves how long it will take their students to take the exam . Generally, the harder questions and problems will require the most time. For larger classes, w e always make up an exam, have one or more student assistants take it, and then make adjustments until it seems feasible for a two - hour exam. Further, we give exams at night . We schedule them for two hours, and we try to make them end on schedule. However, if it is obvious early on that the exam is too long for even our best students, we will extend the time for an extra 15 or 20 minutes . Debugging the Questions The questions and problems have all been used in class . We tried to make them unambiguous , and we also tried to make sure that they are generic in the sense that they can be answered on the basis 1 The question number is actually a Word end note reference, and the end note itself contains details regarding the answer to the question. This ensures that the answers follow the questions if they are cut and pasted or otherwise shuffled around. 2 Our students all use financial calculators for in - class exams and either calculators or Excel for online quizzes and exams. We don’t worry about students storing a lot of material in their calculators or laptops for use on the exams . Indeed, entering such information is actually a good way to study, and most of our questions can’t be answered from snippets of information anyway.

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    © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. vii of material found in the text rather than requiring instructor - specific information. Obviously, we took care to ensure that they are accurate, and that the correct answer is listed in the set of possible answers. Indeed, the "quality control" procedures used for the Test Bank were at least as strenuous as those for the text per se. Still, because of the severe consequences of giving an exam that contains errors, we would never give an exam without first taking it, and in a large class we try to have several teaching assistants also take it, both to check for errors and to get an idea of how long it will take. 3 Answers to Questions and Solutions to Problems No explanation is needed for most of the T/F questions and some of the conceptual multiple choice questions — one answer is correct and the others are false, and students who have read the text carefully can identify the correct answers. However, a few of the T/Fs and many of the conceptual multiple choice questions are a bit subtle and require critical thinking, and some students might not see why the indicated answer correct. We post the answers, and they are in sufficient detail so that students don’t have to ask us why the ir answers were wrong. Computerized Test Banks As noted above, t he Test Bank comes as a printed book , as Microsoft Word ® file s that are available on the IRCD or from the book’s companion site, and as a computerized test bank in ExamView ® . Note that the ExamView ® Test Bank is only available on a standalone CD - ROM, and not on the IRCD or companion website. Adopters can order the IRCD or the ExamView ® CD - ROM through their local Cengage Learning sales representative or directly by calling Cengage Learning Customer Service at 1 - 800 - 354 - 9706, emailing higheredcs@cengage.com , or visiting www.cengage.com/contact . I f you plan to use the ExamView ® Test Bank to create a number of exams, the product is well worth the time that it takes to learn the software — it really is good. One powerful feature of ExamView ® is that the t est b ank questions may be exported to Blackboard ® , WebCT ® , or Angel ® course management system s . Once the questions are in a pool , the process of creating web - based test s or homework assignment s is very straightforward. If you are familiar with Microsoft Word ® and do not want to invest the time needed to learn how to use ExamView ® , then you can use the Microsoft Word ® files. With the appropriate chapter 3 In a small class, if a student asks about a question and it becomes clear that it is ambiguous, we one can simply announce to the class how it should be interpreted. This is much more difficult in a large class, especially if it is being given in different rooms. It’s also more difficult in online testing situations. Since classes are getting larger and larger, and online testing is increasing, test bank accuracy is increasingly important.

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    © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. viii file retrieved, screen down to the first question to be taken from that chapter, copy the question (do not cut the question as this will alter the original test bank file) except for the first line that contain s the answer, open a blank Word document, and paste the question in to the blank document. Repeat this process for all the questions you want on the exam. Be sure not to copy the problem’s header row with the answer — it’s embarrassing to include the answer with the question ! 4 In a very large class, the exam will be all multiple choice and we generally use 20 questions on an exam . For smaller classes, we mix multiple choice and free - response questions. When constructing the multiple choice portion, it takes us about 30 minutes to do the cutting and pasting to construct an exam once the questions have been selected. Student Preparation for a Test Bank Exam There are far more questions and problems in the Test Bank than at the ends of the chapters, so some of the items in the bank are different from those at the end of the chapters . Therefore, if a student goes cold into an exam taken from the Test Bank , he or she might be thrown for a loop even if they worked all of the end - of - chapter problems . T he end - of - chapter problems we re designed primarily to help students learn the material, including how it is used in practice, whereas the test bank questions are designed to test how much knowledge the y have attained. Also, some of the test bank questions are convoluted, meaning that students must work backwards, from what would normally be the answer to what would normally be an input. This requires transform ing equations from the form given in the text to one that solves for a different value. Also, students generally do not have severe time constraints when they work on the end - of - chapter problems, and this makes the test bank questions seem more dif ficult. With all this in mind, we included a number of test - bank - type questions into the Study Guide . Our students tell us that working through the Study Guide is particularly useful in getting ready for the exams. The Study Guide can be ordered through your local bookstore for student purchase, or students can purchase these directly from Cengage via www.cengagebrain.com . 4 The font may change when the question is pasted into the blank Word document. This can be corrected by selecting "Replace" from the "Edit" pull - down menu, clicking on “more” and then the "Format" button at the bottom of the "Dialog" box and clicking on "Font". Select "Times New Roman" as the "Find Font", and then click "OK". Click in the "Replace With" field, and then click the "Format" button again. Click "Font", and then select "Courier New" and "Size 10" before clicking "OK". Then click "Find Next" button. When the text is highlighted, click "Replace All". Word makes the change for all text in "Times New Roman." Because the problem “numbers” are actually endnote indicators, they will automatically renumber as you add, delete, or move problems in your exam. If they appear as Roman numerals instead of Arabic numbers, select “Insert” from the Word menu, then “Reference,” then “Footnote.” Select “Endnotes” in the dialog box and choose the format for numbers. When printing the exam, be sure not to include the section of Endnotes at the end of the exam because these include the worked - out solutions.

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    © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ix We always put some of our old exams in a "Course Pack" which students can purchase from an off - campus copy center to get a n idea of what the exams will be like. Finally, we go over some test - type questions in our pre - exam review sessions. Other Uses of the Test Bank The primary use of the Test Bank is to make up objective exams for use in large classes where it is simply not feasible to grade papers in the traditional way , or to supplement free - response questions with skill - specific questions . However, the questions can be used for several other purposes: 1. To make up a “ regular , ” non - multiple choice, exam. It is easy to use the questions and problems to make up a n open - ended exam -- just delete the set of answers and ask for an essay answer or a worked - out solution to a problem . 2. For additional problems. We draw from the Test Bank to make up problems that our TAs use in their pre - exam review sessions. One could also use them for make - up exams, extra - credit work, and the like. 3. To create new multiple - choice test questions. The computerized versions of the Test Bank make it easy to create new problems and questions. For example, four " false " true/false questions can be combined with one " true " question to make a "which of the following is correct " multiple - choice question, or statements in different multiple - choice questions can be shuffled to create new questions. Similarly, data in the problems, such as years to maturity, coupon rates, growth rates, betas, et cetera, can be changed, and wording can be altered, to expand the Test Bank to an almost unlimited size. . Acknowledgments We would like to thank Professors Craig Tapley and Joel Houston for permitting us to use some of their old exam questions, and for giving us many insights into the whole examination process, especially with large classes and in online programs. We would also like to thank Steve Bouchard and Chris Buzzard, who helped us develop and debug the test questions. We also appreciate the help we got from a whole host of TAs and graduate students, over many years. Dana Clark did her usual good job of riding herd on all of us, and Susan Whitman, and Amelia Bell did a great job of getting the final manuscript ready.

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    © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. x Correspondence We would very much appreciate hearing from test bank users — please tell us of any difficulties you are having, and make suggestions for improv ing things. P lease address your correspondence to Phillip Daves at the address given below. Eugene F. Brigham Phillip R. Daves University of Florida pdaves @utk.edu Finance Department, SMC 429 University of Tennessee Knoxville, TN 37996 - 0540 March 2012

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    © 201 3 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL ENVIRONMENT Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines. True/False Easy: (1.2) Firm organization F M Answer: b EASY 1 . The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners. a. True b. False (1.2) Firm organization F M Answer: b EASY 2 . The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not. a. True b. False (1.2) Partnership F M Answer: a EASY 3 . There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size. a. True b. False (1.2) Proprietorship F M Answer: a EASY 4 . Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts. a. True b. False

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    © 201 3 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 2 True/False Chapter 1 : Overview (1.2) Limited liability F M Answer: a EASY 5 . One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value. a. True b. False (1.3) Value maximization F M Answer: b EASY 6 . If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth. a. True b. False (1.4) Financial intermediaries F M Answer: a EASY 7 . If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary . a. True b. False (1. 8 ) Financial markets F H Answer: b EASY 8 . If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction. a. True b. False (1. 8 ) Financial markets F H Answer: a EASY 9 . Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction. a. True b. False (1.1 1 ) Stock market transactions F H Answer: a EASY 10 . One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of shares of the stocks in which they specialize, buying when investors want to sell and selling when they want to buy. They change the bid and ask prices of the securities so as to keep supply and demand in balance. a. True b. False

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    © 201 3 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 1 : Overview Conceptual Questions Page 3 Medium: (1.2) Partnership F M Answer: b MEDIUM 11 . The disadvantages associated with a proprietorship are similar to those under a partnership. One exception relates to the more formal nature of the partnership agreement and the commitment of all partners' personal assets. As a result, partnerships do not have difficulty raising large amounts of capital. a. True b. False (1.2) Proprietorship F M Answer: a MEDIUM 12 . The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business. a. True b. False Multiple Choice: Conceptual Easy: (1.2) Firm organization C M Answer: d EASY 13 . Which of the following statements is CORRECT? a. One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt. b. Sole proprietorships are subject to more regulations than corporations. c. In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner. d. Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones. e. Corporations of all types are subject to the corporate income tax.

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    © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 4 Conceptual Questions Chapter 1: Overview (1.2) Firm organization C M Answer: a EASY 14 . Which of the following statements is CORRECT? a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. b. It is generally easier to transfer one’s ownership interest in a partnership than in a corporation. c. One of the advantages of the corporate form of organization is that it avoids double taxation. d. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.” e. Corporations of all types are subject to the corporate income tax. (1.2) Firm organization C M Answer: d EASY 15 . Which of the following statements is CORRECT? a. It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required. b. Corporations face fewer regulations than sole proprietorships. c. One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level. d. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership. e. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business. (1.2) Firm organization C M Answer: c EASY 16 . Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements is CORRECT? a. Assuming Cheers is profitable, less of its income will be subject to federal income taxes. b. Cheers will now be subject to fewer regulations. c. Cheers’ shareholders (the ex - partners) will now be exposed to less liability. d. Cheers’ investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. e. Cheers will find it more difficult to raise additional capital.

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    © 201 3 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 1 : Overview Conceptual Questions Page 5 (1.2) Firm organization C M Answer: a EASY 17 . Which of the following statements is CORRECT? a. It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship. b. Corporate shareholders are exposed to unlimited liability. c. Corporations generally face fewer regulations than sole proprietorships. d. Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation. e. Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship. (1.2) Corporate form of organization C M Answer: c EASY 18 . Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership? a. Corporations generally find it relatively difficult to raise large amounts of capital. b. Less of a corporation’s income is generally subjected to taxes than would be true if the firm were a partnership. c. Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization. d. Corporate investors are exposed to unlimited liability. e. Corporations generally face relatively few regulations. (1.4) Financial transactions C H Answer: c EASY 19 . You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction? a. This is an example of an exchange of physical assets. b. This is an example of a primary market transaction. c. This is an example of a direct transfer of capital. d. This is an example of a money market transaction. e. This is an example of a derivatives market transaction

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    © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 6 Conceptual Questions Chapter 1: Overview (1. 7 ) Hedge funds C O Answer: e EASY 21 . Which of the following statements is CORRECT? a. I n Europe and Asia h edge funds are legal , but they are not permitted to operate in the United States. b. Hedge funds have more in common with commercial banks than with any other type of financial institution. c. Hedge funds have more in common with investment banks than with any other type of financial institution. d. In the United States h edge funds are legal, but in Europe and Asia they are not permitted to operate. e. The justification for the "light" regulation of hedge funds is that only “sophisticated” investors with high net worths and high incomes are permitted to invest in these funds, and such investors supposedly can do the necessary “due diligence” on their own rather than have it done by the SEC or some other regulator. (1. 8 ) Money markets C O Answer: d EASY 22 . Money markets are markets for a. Foreign stocks. b. Consumer automobile loans. c. U.S. stocks. d. Short - term debt securities. e. Long - term bonds. (1. 6 ) Interest rates C H Answer: a EASY 20 . Which of the following statements is CORRECT? a. If expected inflation increases, interest rates are likely to increase. b. If individuals in general increase the percentage of their income that they save, interest rates are likely to increase. c. If companies have fewer good investment opportunities, interest rates are likely to increase. d. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. e. Interest rates on long - term bonds are more volatile than rates on short - term debt securities like T - bills.

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    © 201 3 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 1 : Overview Conceptual Questions Page 7 (1. 8 ) Financial markets C H Answer: b EASY 23 . Which of the following is a primary market transaction? a. You sell 200 shares of Johnson & Johnson stock on the NYSE through your broker. b. Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker. c. You buy 200 shares of Johnson & Johnson stock from your younger brother. Y ou just give him cash and he gives you the stock -- t he trade is not made through a broker . d. One financial institution buys 200,000 shares of Johnson & Johnson stock from another institution. An investment banker arranges the transaction. e. You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of Johnson & Johnson shares on the NYSE. (1. 8 ) Financial markets C H Answer: e EASY 24 . Which of the following statements is CORRECT? a. If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction. b. If you purchased 100 shares of Apple stock from your sister - in - law, this would be an example of a primary market transaction. c. The IPO market is a subset of the secondary market. d. Only institutions, and not individuals, can participate in derivatives market transactions. e. As they are generally defined, money market transactions involve debt securities with maturities of less than one year. (1. 8 ) Financial markets C H Answer: c EASY 25 . You recently sold 200 shares of Apple stock to your brother . T he transfer was made through a broker, and the trade occurred on the NYSE. This is an example of: a. A futures market transaction. b. A primary market transaction. c. A secondary market transaction. d. A money market transaction. e. An over - the - counter market transaction.

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