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Financial Management: Borrowing, Collecting, and Interest

-. Often even shareholders and bondholders find themselves with conflicting interests, but such conflicts are lessened by the bondholders through:

a. a cooperative agreement signed by the shareholders and the lenders.
b. limiting the amount of funds bondholders will lend.
c. loan agreements that restrict the borrowing company from undertaking excessive risk.
d. offering the lenders a share of the profit.

-. Examples of unsystematic risk include:

a. inflation.
b. interest rates.
c. local strikes.
d. recession.

-If a firm's return to its equity shareholders is 10 percent, the cost to borrow incrementally is also 10 percent, and its marginal corporate tax rate is 34 percent, then it would be wiser to borrow because:

a. borrowing at an after-tax cost of debt that is below the return on equity capital will enhance shareholder's returns.
b. shareholders will avoid putting in additional capital.
c. borrowing is always less of an effort than raising additional equity capital.
d. all of the above.

-. If a bond with a quoted price of 79 1/8 paid $40 interest semiannually, its current yield would be stated as:

a. 8.0%.
b. 4.0%.
c. 5.05%.
d. 10.11 %.

-. For a share of stock in a new company with no dividends anticipated for the next three years, a projected dividend in year 4 (D4) of $2.00, a projected constant growth rate of 5 percent beginning in year 5 (gc) and a required rate of return (k) of 10 percent, the estimated selling price of the stock is:

a. $30.05.
b. $20.00.
c. $40.00.
d. $28.69.

-. The income statement is intended to inform the reader of:

a. the financial condition of the firm at anyone point in time.
b. how much money has been earned by the firm during an accounting period.
c. how much income has been distributed by the firm to its shareholders.
d. the cash profit earned by the firm over a given period of time

-. The balance sheet is intended to present the firm's assets in the order of their liquidity or convertibility to cash, while at the same time presenting amounts owed by the firm to its claimants in the order of satisfaction of the claims. Thus, working capital or net working capital can be referred to as:

a. the firm's total assets minus the firm's liabilities coming due within one accounting cycle (or typically 12 months).
b. the firm's current assets minus the firm's total liabilities.
c. the firm's cash minus the firm's current liabilities.
d. the firm's current assets minus the firm's current liabilities.

-. Interest is defined as the:

a. rate of return earned on all investments.
b. rate of return earned on a debt investment.
c. rate of return earned on an equity investment.
d. rate of return earned, during a one-year period, that relates to both stock and bonds.

-. The role of the corporate financial manager can be viewed as:

a. planning, monitoring, or otherwise managing the disbursements of cash.
b. being an intermediary between the financial markets and the firm's operations.
c. maximizing the process of obtaining funds with the least cost associated with them.
d. continual surveillance of wasteful and nonproductive projects.

-. Nearly all preferred stock comes with the right to receive arrearage dividends before common shareholders receive their dividends, in the event that the preferred dividends have been passed. Such a feature is referred to as:

a. the preference feature.
b. the liquidation preference.
c. the cumulative feature.
d. voting preference.


Solution Summary

The solution explains the answers to various questions of financial management