QN1. Which of the following must be satisfied to support a classification as a finance lease?
1. Ownership is transferred by the end of the lease term.
2. The lease contains a bargain purchase option.
3. The lease term is for the major part of an asset’s useful life.
4. The present value of the minimum lease payments are substantially more or equal to the asset’s fair value.
a) 1 and 2
b) 1, 2 and 3
c) Any of the four criteria
d) All of the four criteria
Answer: d) All of the four criteriaAnswer
QN2. Efforts Ltd negotiated a lease on the following terms: the term of the lease was 5 years; the estimated useful life of the leased equipment was 10 years; the purchase price was $ 60,000; and the annual lease payment was $ 5,000. This lease should be classified as:
a) An Operating Lease
b) A Finance Lease
c) Sale and Lease Back
d) Leveraged Lease
Answer: a) An Operating LeaseAnswer
QN3. The lease analysis should compare the cost of leasing to the
a. Cost of owning using debt.
b. Cost of owning using equity.
c. After-tax cost of debt to measure the effect of leasing on the cost of equity.
d. Average cost of all fixed charges.
e. Cost of owning using the weighted average cost of capital for the firm.
Answer: e. Cost of owning using the weighted average cost of capital for the firm.Answer
QN4. Operating leases usually have terms that include
a. Maintenance of the equipment.
b. Only partial amortization.
c. Cancellation clauses.
d. All of the above.
e. Only answers ‘a’. and ‘c.’ above.+
Answer: e. Only answers ‘a’. and ‘c.’ above.+Answer
QN5. Which of the following statements about listing on a stock exchange is most correct?
a. Listing is a decision of more significance to a firm than going public.
b. Any firm can be listed on the NYSE as long as it pays the listing fee.
c. Listing provides a company with some “free” advertising, and status as a listed company may enhance the firm’s prestige.
d. Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC.
e. Statements’ b’ and ‘c’ are both correct.
Answer: d. Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC.Answer
QN6. Which of the following refers to mezzanine financing
a) Debt
b) Equity
c) Hybrid of Debt and Equity
d) Use of internal funds
Answer: c) Hybrid of Debt and EquityAnswer
QN7. The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:
a) A series of corporate scandals involving Enron, WorldCom, Global Crossing, Tyco and numerous others.
b) Dramatic rise in the US trade deficit.
c) Charges of excessive compensation to top corporate executives.
d) Rising complaints by investors and security analysts over the financial accounting for stock options.
Answer: a) A series of corporate scandals involving Enron, WorldCom, Global Crossing, Tyco and numerous others.Answer
QN8. A company’s ………. is (are) potentially the most effective instrument of good corporate governance.
a) Common stock shareholders
b) Board of directors
c) Top executive officers
Answer: b) Board of directorsAnswer
QN9. The focal point of financial management in a firm is:
a) The number and types of products or services provided by the firm.
b) The minimization of the amount of taxes paid by the firm.
c) The creation of value for shareholders.
d) The dollars profits earned by the firm.
Answer: c) The creation of value for shareholders.Answer
QN10. The long-run objective of financial management is to:
a) Maximize earnings per share.
b) Maximize the value of the firm’s common stock.
c) Maximize return on investment.
d) Maximize market share.
Answer: b) Maximize the value of the firm’s common stock.Answer
QN11. ___of an investment bank.
a. Citigroup is an example
b. Merrill Lynch is an example
c. Goldman is an example
d. B and C are each examples
e. Each of the above is an example
Answer: e. Each of the above is an exampleAnswer
QN12. ___are financial assets.
a. Bonds
b. Machines
c. Stocks
d. A and C
e. A, B and C
Answer: d. A and CAnswer
QN13. Firms that specialize in helping companies raise capital by selling securities are called:
a. Commercial banks
b. Investment Banks
c. Savings Banks
d. Credit Unions
e. All of the above.
Answer: b. Investment BanksAnswer
QN14. The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of ________.
a. Credit enhancement
b. Securitization
c. Unbundling
d. Derivatives
e. None of the above
Answer: b. SecuritizationAnswer
QN15. Corporate shareholders are best protected from incompetent management decisions by
a. The ability to engage in proxy fights.
b. Management’s control of pecuniary rewards.
c. The ability to call shareholder meetings.
d. The threat of takeover by other firms.
e. One-share / one-vote election rules.
Answer: d. The threat of takeover by other firms.Answer
QN16. Financial assets ______
a. Directly contribute to the country’s productive capacity
b. Indirectly contribute to the country’s productive capacity
c. Contribute to the country’s productive capacity both directly and indirectly
d. Do not contribute to the country’s productive capacity either directly or indirectly
e. Are of no value to anyone
Answer: b. Indirectly contribute to the country’s productive capacityAnswer
QN17. Investment bankers perform the following role(s ______
a. Market new stock and bond issues for firms
b. Provide advice to the firms as to market conditions, price, etc
c. Design securities with desirable properties
d. All of the above
e. None of the above
Answer: d. All of the aboveAnswer
QN18. Theoretically, takeovers should result in _____.
a. Improved management
b. Increased stock price
c. Increased benefits to existing management of taken over firm
d. A and B
e. A, B, and C
Answer: d. A and BAnswer
QN19. Important trends changing the contemporary investment environment are :
a. Globalization.
b. Securitization.
c. Information and computer networks.
d. Financial engineering.
e. all of the above
Answer: e. all of the aboveAnswer
QN20. Higher operating leverage is related to the use of additional ____.
a. Fixed costs
b. Variable costs
c. Debt financing
d. Common equity financing
Answer: a. Fixed costsAnswer
QN21. ____ lease is a long-term lease that is not cancelable and its life often matches the useful life of the asset.
a. A financial
b. An operating
c. A net
d. None of the above answers are correct.
Answer: a. A financialAnswer
QN22. ____ lease refers to a short-term lease that is often cancelable. For example, a lease for office space represents this type of lease where the lease life is less than the useful life of the asset.
a. A financial
b. An operating
c. A net
d. None of the above answers are correct.
Answer: b. An operatingAnswer
QN23. Which of the following is not a type of financial lease arrangement?
a. Sale and leaseback
b. Indirect leasing
c. Leveraged leasing
d. All of the above answers are types of financial lease arrangements.
Answer: b. Indirect leasingAnswer
QN24. Which of the following statements is most correct as it relates to the recording of a capital lease?
a. The current fair market value of the asset being leased
b. The current fair market value of the asset being leased less the expected residual value
c. The present value of the minimum lease payments over the lease period
d. The present value of the maximum lease payments over the lease period
Answer: c. The present value of the minimum lease payments over the lease periodAnswer
QN25. A ____ is generally considered debt that is originally scheduled to be repaid between 1 to 10 years under a formal loan agreement and is usually amortized (principal and interest are paid) in equal periodic installments.
a. Term loan
b. Revolving credit agreement
c. Medium-term note
d. Commitment fee
Answer: a. Term loanAnswer
QN26. A ____ is charged by the lender to hold credit open for the borrower. For example, if the firm only uses $100,000 of a $200,000 limit, then the firm might pay the lender $500 for the unused limit in addition to the interest on the amount borrowed.
a. Term loan
b. Revolving credit agreement
c. Medium-term note
d. Commitment fee
Answer: d. Commitment feeAnswer
QN27. ____ lease is a lease where the lessee maintains and insures the leased asset rather than the lessor in a full-service lease.
e. A financial
a. An operating
b. A net
c. None of the above answers are correct.
Answer: b. A netAnswer
QN28. Your firm currently has a current ratio of 1.90 on $9.5 million of current assets. You are changing the financing mix of your firm and plan on converting financing of $1,000,000 in a 6-month loan into a 5-year term loan. The purpose of this move is to finance a more permanent portion of inventories with a longer maturity alternative. If the firm issues the term loan, new restrictive covenants will require that the current ratio remain at or above 2.00. Should the firm make this change or is there some obvious problem caused by this proposed change?
a. Yes
b. No, don’t make the change; otherwise, the firm will be immediately violating the new restrictive covenant.
c. No, don’t make the change; this type of restrictive covenant is not common on a term-loan, and you should first try to have this covenant removed.
d. None of the above answers are correct.
Answer: a. YesAnswer
QN29. A ____ represents any restriction imposed on a borrower by a lender and would be part of the loan agreement.
a. Negative pledge clause
b. Covenant
c. Loan agreement
d. General routine provision
Answer: b. CovenantAnswer
QN30. A ____ is a continuously offered debt instrument that is designed to fill the gap between commercial paper and long-term bonds with maturities currently ranging from 9 months to 30 years and has gained favor from the existence of shelf registration.
a. Term loan
b. Revolving credit agreement
c. Medium-term note
d. Commitment fee
Answer: c. Medium-term noteAnswer
QN31. A ____ forbids the future pledging or mortgaging of any of the borrower’s assets.
a. Negative pledge clause
b. Covenant
c. Loan agreement
d. General routine provision
Answer: a. Negative pledge clauseAnswer
QN32. For a company subject to the alternative minimum tax (AMT), ____ is a “tax preference item,” whereas ____ is not. Such a company may prefer to ____.
a. A lease payment; accelerated depreciation; lease
b. Accelerated depreciation; a lease payment; purchase
c. A lease payment; accelerated depreciation; lease
d. Accelerated Depreciation; A Lease Payment; Lease
Answer: d. Accelerated Depreciation; A Lease Payment; LeaseAnswer
QN33. A ____ allows the borrower to have credit up to some maximum amount over a specific period, but the notes are usually 90 days and allow the company to renew or borrow additionally.
a. Term loan
b. Revolving credit agreement
c. Medium-term note
d. Commitment fee
Answer: b. Revolving credit agreementAnswer
QN34. Your firm currently has a current ratio of 2.10 on $5 million of current liabilities. You are financing a $500,000 machine (fixed asset) and $500,000 of additional inventories with a 5-year term loan. Alternatively, the firm can finance the additions with a 6-month loan that they will need to get approval to renew every six months. Existing restrictive covenants require that the current ratio remain at or above 2.00. Which alternative will keep the current ratio above 2.00?
a. 5-year term loan.
b. Six-month loan that is renewed.
c. Neither of the loans will keep the current ratio above 2.00.
d. Both of the loans would keep the current ratio above 2.00.
Answer: a. 5-year term loan.Answer
QN35. With a capital lease, the amount recorded on the asset side of the balance sheet is ____.
a. The current fair market value of the asset being leased
b. The current fair market value of the asset being leased less the expected residual value
c. The present value of the minimum lease payments over the lease period
d. The present value of the maximum lease payments over the lease period
Answer: c. The present value of the minimum lease payments over the lease periodAnswer
QN36. Which of the following statements is most correct as it relates to the recording of a capital lease?
a. The capital lease is shown on the lessee’s balance sheet as an asset and amortized over the asset’s useful life.
b. The capital lease is listed as an asset on the lessor’s balance sheet and amortized over lease term.
c. A capital lease is listed as an asset on the lessee’s balance sheet and must be amortized over the lease period.
d. A capital lease is listed as an asset on the lessee’s balance sheet and must be amortized over the asset’s useful life.
Answer: c. A capital lease is listed as an asset on the lessee’s balance sheet and must be amortized over the lease period.Answer
QN37. A ____ specifies all of the terms of a loan and the obligations of the borrower.
a. Negative pledge clause
b. Covenant
c. Loan agreement
d. General routine provision
Answer: c. Loan agreementAnswer
QN38. A special purpose vehicle (SPV) raises money by selling ____ where interest and principal payments are provided by cash flows from a discrete pool of assets.
a. Equipment trust certificates
b. Special purpose securities
c. Pooled certificates
d. Asset-backed securities
Answer: d. Asset-backed securitiesAnswer
QN39. ____ is a long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt; while a/(an) ____ bond issue is secured by the issuer’s property.
a. A subordinated debenture; mortgage
b. A debenture; subordinated debenture
c. A junk bond; income
d. An income bond; junk
Answer: a. A subordinated debenture; mortgageAnswer
QN40. Which of the following statements concerning the rights of common shareholders is correct, or most accurate?
a. Common shareholders are entitled to a share of the company’s current earnings in cash.
b. Common shareholders are entitled to elect the board of directors under a majority-rule voting system.
c. Because of their preemptive right, common shareholders are entitled to always subscribe to new common stock so that they can maintain their pro rata interest in the company.
d. Voting by common shareholders can be done either in person at the shareholders’ annual meeting or by proxy.
Answer: d. Voting by common shareholders can be done either in person at the shareholders’ annual meeting or by proxy.Answer
QN41. ___is a long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt; while a/(an) ____ bond issue is secured by the issuer’s property.
a. A subordinated debenture; mortgage
b. A debenture; subordinated debenture
c. A junk bond; income
d. An income bond; junk
Answer: a. A subordinated debenture; mortgageAnswer
QN41. Which of the following statements concerning the rights of common shareholders is correct, or most accurate?
(a). Common shareholders are entitled to a share of the company’s current earnings in cash.
(b). Common shareholders are entitled to elect the board of directors under a majority-rule voting system.
(c). Because of their preemptive right, common shareholders are entitled to always subscribe to new common stock so that they can maintain their pro rata interest in the company.
(d). Voting by common shareholders can be done either in person at the shareholders’ annual meeting or by proxy.
Answer: (d). Voting by common shareholders can be done either in person at the shareholders’ annual meeting or by proxy.Answer
