1. Which of the following statement is most correct?
a. Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and has remained unaltered since that time.
b. Federal bankruptcy law deals only with corporation bankruptcies. Municipal and personal bankruptcy is governed solely by state laws.
c. All bankruptcy petitions are filed by creditors seeking to protect their claims on firms in financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm's management.
d. Chapters 11 and 7 are the most important bankruptcy chapters for financial management purposes. If a reorganization plan cannot be worked out under Chapter 11, then the company will be liquidated as prescribed in Chapter 7 of the Act.
e. "Restructuring" a firm's debt can involve forgiving a certain portion of the debt but does not involve changing the debt's maturity or its contractual interest rate.
2. One objective of risk management is to reduce the volatility of a company's cash flows.
3. Which of the following statements is most correct?
a. The tax preference theory states that, all else equal, investors prefer stocks that pay low dividends because retained earnings can lead to capital gains that are taxed preferentially.
b. An increase in the cost of equity capital (rs) when a company announces an increase in its dividend per share would be consistent with the bird-in-the-hand theory.
c. An increase in the stock price when a company decreases its dividend is consistent with the signaling theory.
d. A dividend policy that involves paying a consistent percentage of net income is the best policy if the "clientele effect" is correct.
e. Both statements a and d are correct.
4. Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.
5. Others things held constant, which of the following will cause an increase in working capital?
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock issue.
e. Missing inventory is written off against retained earnings.
6. Which of the following are given as reasons for the high level of merger activity in the U.S. during the 1980s?
a. Synergistic benefits arising from mergers.
b. Reduction in competition resulting from mergers.
c. Attempts to stabilize earnings by diversifying.
d. All of the above.
e. Both a and c above.
7. Which of the following are reasons why companies move into international operations?
a. To take advantage of lower production costs in regions of inexpensive labor.
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.
8. When considering the risk of foreign investment, higher risk could arise from exchange rate risk and political risk while lower risk might result from international diversification.
9. As a firm's sales grow its current asset accounts tend to increase. For instance, as sales increase the firm's inventories increase and its level of accounts payable will increase. Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase.
10. Which of the following statements is most correct?
a. The bird-in-the-hand theory would predict that companies could decrease their cost of equity financing by raising their dividend payout.
b. The clientele effect can explain why firms often change their dividend policies.
c. One advantage of adopting a residual distribution policy (with all distributions in the form of dividends) is that it makes it easier for corporations to maintain dividend clienteles.
d. Answers a and c are correct.
e. None of the answers above is correct.
11. If a firm has a large percentage of accounts over 30 days old, it is a sign that the firm's receivables management needs to be reviewed and improved.
12. The firm's business risk is largely determined by the financial characteristics of its industry.
13. Which of the following statements is most correct?
a. The primary test of feasibility in reorganization is whether every claimant agrees with the reorganization plan.
b. The basic doctrine of fairness states that all debt holders must be treated equally.
c. Since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the "public interest" is not a relevant concern.
d. While the firm is in bankruptcy, the existing management is always allowed to remain in control of the firm, though the court monitors its actions closely.
e. To a large extent, the decision to dissolve a firm through liquidation or to keep it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually.
14. Which of the following statement is most correct?
a. If a company increases its current liabilities by $1,000 and simultaneously increases its inventories by $1,000, its current ratio must rise.
b. If a company increases its current liabilities by $1,000 and simultaneously increases its inventories by $1,000, its quick ratio must fall.
c. A company's quick ratio may never exceed its current ratio.
d. Answers b and c are correct.
e. None of the answers above is correct.
15. Which of the following would increase the likelihood that a company would increase its debt ratio in its capital structure?
a. An increase in costs incurred when filing for bankruptcy.
b. An increase in the corporate tax rate.
c. An increase in the personal tax rate.
d. A decrease in the firm's business risk.
e. Statements b and d are correct.