Financial Management

31. Which of the following constitutes an internal source of funds:

  1. corporate bonds
  2. common stock
  3. commercial paper
  4. retained earnings and amortization cash flow
Correct answer: (D)
retained earnings and amortization cash flow

32. It would be fair to say that securities markets in the future:

  1. will become more competitive as an international market system develops
  2. will be less efficient
  3. will be more highly segregated than they are today
  4. will be less automated than today's markets
Correct answer: (A)
will become more competitive as an international market system develops

33. The spread may best be defined as:

  1. the compensation due the lead underwriter
  2. the total compensation for those participating in the distribution process
  3. the price finally paid by the public for the shares
  4. the proceeds from the distribution received by the firm
Correct answer: (B)
the total compensation for those participating in the distribution process

34. Private placement involves selling securities directly to:

  1. insurance companies
  2. pension funds
  3. wealthy individuals
  4. all of the above are correct
Correct answer: (D)
all of the above are correct

35. Debt that is not secured by specific assets is called:

  1. an indenture
  2. a debenture
  3. a mortgage agreement
  4. common stock
Correct answer: (B)
a debenture

36. In a lease versus borrow to purchase decision the appropriate discount rate, except for the salvage value, is:

  1. the cost of capital
  2. the aftertax cost of debt
  3. the cost of equity capital
  4. the cost of the debt
Correct answer: (B)
the aftertax cost of debt

37. Preferred equity has all of the following characteristics except:

  1. fixed dividends
  2. the cumulative right to annual dividends
  3. precedence over common stock dividends
  4. residual claim to income
Correct answer: (D)
residual claim to income

38. Under the marginal principle of retained earnings:

  1. the firm must compare what it can earn with what shareholders could earn on funds if they were distributed
  2. all funds above and beyond retained earnings are paid to shareholders
  3. funds not paid to creditors and preferred shareholders belong to common shareholders
  4. all projects are financed internally
Correct answer: (A)
the firm must compare what it can earn with what shareholders could earn on funds if they were distributed

39. A stock dividend:

  1. represents a distribution of additional shares to common shareholders
  2. differs from a stock split largely in size
  3. normally has no real value to the investor
  4. all of the above are correct
Correct answer: (D)
all of the above are correct

40. A convertible security is:

  1. convertible into cash at the option of the holder
  2. a bond or share of preferred, convertible into common at the firm's option
  3. a bond or share of preferred, convertible into common at the holders' option
  4. a security convertible into a debenture at the holder's option
Correct answer: (C)
a bond or share of preferred, convertible into common at the holders' option
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