Financial Management

201. Long term lease obligations are treated as:

  1. items in the footnotes of the financial statements
  2. solely as an expense items on the income statement
  3. in a manner similar to debt on the balance sheet
  4. as an asset to the firm
Correct answer: (C)
in a manner similar to debt on the balance sheet

202. All of the following are advantages of rights offerings except:

  1. the position of current shareholders is protected
  2. a rights offering provides the firm with a built-in securities market
  3. more interest may be generated in the market
  4. the dollar value of rights traded on exchanges is very high
Correct answer: (D)
the dollar value of rights traded on exchanges is very high

203. In terms of increasing risk to the investor, the proper ranking would be:

  1. common stock, preferred stock, secured debt
  2. long-term government debt, subordinated debt, common stock
  3. long-term government debt, secured debt, preferred stock
  4. secured debt, common stock, preferred stock
Correct answer: (B)
long-term government debt, subordinated debt, common stock

204. The directors of a small, closely held corporation may be reluctant to pay dividends at all because:

  1. the dividends will be taxed at a higher rate
  2. they fear diluting the cash position of the firms
  3. they haven't the means to do a complete funds flow analysis
  4. they fear a shareholder proxy battle
Correct answer: (B)
they fear diluting the cash position of the firms

205. A corporation will typically pay the highest dividends in:

  1. Development-Stage I
  2. Growth-Stage II
  3. Expansion-Stage III
  4. Maturity-Stage IV
Correct answer: (D)
Maturity-Stage IV

206. Derivatives are contracts that:

  1. allow the holder to buy/sell a given commodity
  2. are sold only in established financial markets
  3. usually expose the holder to increased risk
  4. completely remove risk in financial and economic transactions
Correct answer: (A)
allow the holder to buy/sell a given commodity

207. A convertible security has:

  1. an upside limitation, but no floor value
  2. no upside limitation, but a floor value
  3. more sensitivity to interest rate movements than regular bonds of equal maturity
  4. a single, fixed yield under all scenario
Correct answer: (B)
no upside limitation, but a floor value

208. The minimum value of a warrant is equal to:

  1. warrant price-intrinsic value
  2. intrinsic value-warrant price
  3. (market value of common stock-warrant exercise price) X number of shares per warrant
  4. the speculative premium
Correct answer: (C)
(market value of common stock-warrant exercise price) X number of shares per warrant

209. Perhaps the greatest management motive for a merger is:

  1. the synergistic effect
  2. new product acquisition
  3. the portfolio effect
  4. tax loss carry-forwards
Correct answer: (A)
the synergistic effect

210. The market for corporate control:

  1. effectively forces managers to strive to maximize shareholder wealth
  2. is best run through a holding company
  3. is a separate market for arbitrageurs
  4. emphasizes the portfolio effect
Correct answer: (A)
effectively forces managers to strive to maximize shareholder wealth
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