Question 1 of 30

A company is most likely to use a Dutch auction when repurchasing shares:

Correct answer: B)
You chose: A)

A) in the open market.

B) with a tender offer.
C) by direct negotiation.
Points: 0 out of 1

Feedback:

In a tender offer, the company may either select a price or use a Dutch auction to determine the
lowest price at which it can repurchase the number of shares desired.

Question 2 of 30

The share price of Solar Automotive Industries is $50 per share. It has a book value of $500
million and 50 million shares outstanding. What is the book value per share (BVPS) after a
share repurchase of $10 million?

Correct answer: C)
You chose: A)

A) $10.00.
B) $10.12
C) $9.84.
Points: 0 out of 1

Feedback:

The share buyback is $10 million / $50 per share = 200,000 shares.
Remaining shares: 50 million - 200,000 = 49.8 million shares.

Solar Automotive Industries' current BVPS = $500 million / 50 million = $10.

Book value after repurchase: $500 million - $10 million = $490 million.
BVPS = $490 million / 49.8 million = $9.84.
BVPS decreased by $0.16.
Book value per share (BVPS) decreased because the share price is greater than the original
BVPS. If the share prices were less than the original BVPS, then the BVPS after the repurchase
would have increased.

Question 3 of 30

Francis Investment Inc's Board of Directors is considering repurchasing $30,000,000 worth of

common stock. Francis assumes that the stock can be repurchased at the market price of $50
per share. After much discussion Francis decides to borrow $30 million that it will use to
repurchase shares. Francis' Chief Financial Officer (CFO) has compiled the following
information regarding the repurchase of the firm's common stock:

· Share price at the time of buyback = $50

· Shares outstanding before buyback = 30,600,000

· EPS before buyback = $3.33

· Earnings yield = $3.33 / $50 = 6.7%

· After-tax cost of borrowing = 4%

· Planned buyback = 600,000 shares

Based on the information above, after the repurchase of its common stock, Francis' EPS will be
closest to:

Correct answer: C)
You chose: B)

A) $3.39.
B) $3.41.
C) $3.36.
Points: 0 out of 1

Feedback:

Total earnings = $3.33 × 30,600,000 = $101,898,000

Since the after-tax cost of borrowing of 4% is less than the 6.7% earnings yield (E/P) of the
shares, the share repurchase will increase Francis's EPS.

Question 4 of 30

A periodic payment to shareholders in the form of additional shares of stock instead of cash is
a:

Correct answer: B)
You chose: B)

A) stock repurchase
B) stock dividend
C) dividend reinvestment plan
Points: 1 out of 1

Feedback:
Stock dividends are dividends paid out in new shares of stock instead of cash. Unlike stock
dividends, dividend reinvestment plans are at the discretion of individual shareholders. In the
case of stock repurchases, the company is buying back shares so the number of shares in the
investment public's hands is declining.

Question 5 of 30

Ignoring tax consequences, given a choice between a cash dividend and a share repurchase of
the same amount, a rational investor would:

Correct answer: C)
You chose: A)

A) prefer a cash dividend to a share repurchase.

B) prefer a share repurchase to a cash dividend.
C) be indifferent between a cash dividend and a share repurchase.
Points: 0 out of 1

Feedback:

Both a cash dividend and a share repurchase for the same amount of cash leave shareholder
wealth unchanged if we ignore taxes. The value of a cash dividend per share plus the post-
dividend price per share equals the price per share after a share repurchase of the same amount.

Question 6 of 30

Shareholders selling shares between the ex-dividend date and date of record:

Correct answer: B)
You chose: A)

A) forfeit the dividend, with the proceeds going to the buyer.

B) receive the dividend.
C) forfeit the dividend, with the proceeds staying with the company.
Points: 0 out of 1

Feedback:

The date of record is the date on which the shareholders of record are designated to receive the
dividend. The ex-dividend date is the cut-off date for receiving the dividend. Shares sold after
the ex-dividend date are sold without claim to the dividend, even if they are sold prior to the
date of record. The dividend would be paid to the holder as of the close of trading on the day
prior to the ex-dividend date.

Question 7 of 30

What is the impact on shareholder wealth of a share repurchase versus cash dividend of equal
amount when the tax treatment of the two alternatives is the same?

Correct answer: C)
You chose: A)

A) A share repurchase will sometimes lead to higher total shareholder wealth

than a cash dividend of an equal amount.
B) A share repurchase will always lead to higher total shareholder wealth than
a cash dividend of an equal amount.
C) A share repurchase is equivalent to a cash dividend of an equal amount, so
total shareholder wealth will be the same.
Points: 0 out of 1

Feedback:

Assuming that the tax treatment of a share repurchase and a cash dividend of equal amount is
the same, a share repurchase is equivalent to a cash dividend payment, and shareholder wealth
will be the same.

Question 8 of 30

Paying a cash dividend is most likely to result in:

Correct answer: B)
You chose: A)

A) the same impact on liquidity and leverage ratios as a stock dividend.

B) an increase in financial leverage ratios.
C) an increase in liquidity ratios.
Points: 0 out of 1

Feedback:
A cash dividend will increase leverage ratios such as debt-to-equity and debt-to-assets,
reflecting a decrease in the denominator. A cash dividend should decrease liquidity ratios such
as the current ratio and cash ratio, due to the decrease in cash in the numerator. Unlike a cash
dividend, a stock dividend or a stock split has no impact on liquidity or financial leverage
ratios.

Question 9 of 30

The cut-off date for receiving the dividend is known as the:

Correct answer: C)
You chose: A)

A) date of payment.
B) holder of record date.
C) ex-dividend date.
Points: 0 out of 1

Feedback:

The cut-off date for receiving the dividend is known as the ex-dividend date. The holder of
record date is the date on which the shareholders of record are designated. The date the checks
are mailed out is known as the date of payment.

Question 10 of 30

Pants R Us Inc.'s Board of Directors is considering repurchasing $30,000,000 worth of

common stock. Pants R Us assumes that the stock can be repurchased at the market price of
$50 per share. After much discussion Pants R Us decides to borrow $30 million that it will use
to repurchase shares. Pants R Us' Chief Investment Officer (CIO) has compiled the following
information regarding the repurchase of the firm's common stock:

· Share price at the time of buyback = $50

· Shares outstanding before buyback = 30,600,000

· EPS before buyback = $3.33

· Earnings yield = $3.33 / $50 = 6.7%

· After-tax cost of borrowing = 6.7%

· Planned buyback = 600,000 shares

Based on the information above, what will be Pants R Us' earnings per share (EPS) after the
repurchase of its common stock?

Correct answer: C)
You chose: B)

A) $3.40.
B) $3.28.
C) $3.33.
Points: 0 out of 1

Feedback:

Total earnings = $3.33 × 30,600,000 = $101,898,000

Since the after-tax cost of borrowing of 6.7%% is equal to the 6.7% earnings yield (E/P) of the
shares, the share repurchase has no effect on Pants R Us' EPS.

Question 11 of 30

Liquidating short-term assets and renegotiating debt agreements are best described as a firm's:

Correct answer: A)
You chose: A)

A) secondary sources of liquidity.

B) primary sources of liquidity.
C) pulls and drags on liquidity.
Points: 1 out of 1

Feedback:

Secondary sources of liquidity include liquidating short-term or long-lived assets, negotiating

debt agreements (i.e., renegotiating), or filing for bankruptcy and reorganizing the company.
Primary sources of liquidity are the sources of cash a company uses in its normal operations.
Pulls and drags on liquidity refer to factors that weaken a company's liquidity position.

Question 12 of 30

Compared to the prior year, Chart Industries has reported that its operating cycle has remained
relatively stable while its cash conversion cycle has decreased. The most likely explanation for
this is that the firm:

Correct answer: A)
You chose: A)

A) is relying more on its suppliers for short-term liquidity.

B) has improved its inventory turnover.
C) is paying its bills for raw materials more rapidly.
Points: 1 out of 1
Feedback:

The cash conversion cycle is its operating cycle minus its average days payables outstanding.
Therefore, the firm's average days payables must have increased, a clear indication that the firm
is relying more heavily on credit from its suppliers. Improved inventory turnover would tend to
decrease both the operating and cash conversion cycles. Relaxed credit policies would tend to
increase the firm's operating cycle as receivables turnover would tend to decrease.

Question 13 of 30

A 30-day bank certificate of deposit has a holding period yield of 1%. What is the annual yield
of this CD on a bond-equivalent basis?

Correct answer: B)
You chose: A)

A) 12.00%.
B) 12.17%.
C) 11.83%.
Points: 0 out of 1

Feedback:

The bond-equivalent yield is calculated as the holding period yield times (365 / number of days
in the holding period). BEY = 1% × (365/30) = 12.17%.

Question 14 of 30

Which of the following is NOT a limitation to financial ratio analysis?

Correct answer: B)
You chose: B)

A) The need to use judgment.

B) A firm that operates in only one industry.
C) Differences in international accounting practices.
Points: 1 out of 1

Feedback:
If a firm operates in multiple industries, this would limit the value of financial ratio analysis by
making it difficult to find comparable industry ratios.

Question 15 of 30

A firm has average days of receivables outstanding of 22 compared to an industry average of

29 days. An analyst would most likely conclude that the firm:

Correct answer: A)
You chose: C)

A) may have credit policies that are too strict.

B) has better credit controls than its peer companies.
C) has a lower cash conversion cycle than its peer companies.
Points: 0 out of 1

Feedback:

The firm's average days of receivables should be close to the industry average. A significantly
lower average days receivables outstanding, compared to its peers, is an indication that the
firm's credit policy may be too strict and that sales are being lost to peers because of this. We
can not assume that stricter credit controls than the average for the industry are "better." We
cannot conclude that credit sales are less, they may be more, but just made on stricter terms.
The average days of receivables are only one component of the cash conversion cycle.

Question 16 of 30

Which of the following sources of liquidity is the most reliable?

Correct answer: A)
You chose: C)

A) Revolving line of credit.

B) Uncommitted line of credit.
C) Committed line of credit.
Points: 0 out of 1

Feedback:
A revolving line of credit is typically for a longer term than an uncommitted or committed line
of credit and thus is considered a more reliable source of liquidity. With an uncommitted line of
credit, the issuing bank may refuse to lend if conditions of the firm change. An overdraft line of
credit is similar to a committed line of credit agreement between banks and firms outside of the
U.S. Both committed and revolving lines of credit can be verified and can be listed in the
footnotes to a firm's financial statements as sources of liquidity.

Question 17 of 30

With respect to inventory management,:

Correct answer: B)
You chose: B)

A) a decrease in a firm's days of inventory on hand indicates better inventory

management and can lead to increased profits.
B) an increase in days of inventory on hand can be the result of either good or
poor inventory management.
C) a firm with inventory turnover higher than the industry average can be
expected to have better profitability as a result.
Points: 1 out of 1

Feedback:

An increase in inventory could indicate poor sales and an accumulation of obsolete items or
could be the result of a conscious effort to have adequate supplies to avoid losses from not
having items to satisfy customer orders (stock outs). Higher-than-average inventory turnover
could indicate better inventory management or could indicate that a less than optimal inventory
is being maintained by the company.

Question 18 of 30

A firm records the following cash flows on the same day: $250 million from debt proceeds;
$100 million funds transferred to a subsidiary; $125 million in interest payments; and $30
million in tax payments. The net daily cash position:

Correct answer: C)
You chose: B)

A) improved.
B) remained the same.
 C) worsened.
Points: 0 out of 1

Feedback:

Improving a firm's net daily requires more inflows than outflows. Debt proceeds are cash
inflows while funds transferred to a subsidiary, interest and dividend payments, and tax
payments are outflows. The net cash change for the day is $250 - $100 - $125 - $30 = -$5
million.

Question 19 of 30

Pfluger Company's accounts payable department receives an invoice from a vendor with terms
of 2/10 net 30. If Pfluger pays the invoice on its due date, the cost of trade credit is closest to:

Correct answer: A)
You chose: A)

A) 44.6%.
B) 27.9%.
C) 43.5%.
Points: 1 out of 1

Feedback:

"2/10 net 30" is a discount of 2% of the invoice amount for payment within 10 days, with full
payment due in 30 days. Cost of trade credit on day 30 =

Question 20 of 30

Which of the following is least likely an indicator of a firm's liquidity?

Correct answer: C)
You chose: A)
 A) Cash as a percentage of sales.
B) Inventory turnover.
C) Amount of credit sales.
Points: 0 out of 1

Feedback:

No inferences about liquidity are warranted based on this measure. A firm may have higher
credit sales than another simply because it has more sales overall. Cash as a proportion of sales
and inventory turnover are indicators of liquidity.

Question 21 of 30

The audit committee for a firm is most likely to represent shareowners' interests if:

Correct answer: A)
You chose: C)

A) shareowners vote to approve external auditors nominated by the audit

committee.
B) the majority of the audit committee members also hold positions within the
firm.
C) the external auditor submits its auditing reports to the firm's chief financial
officer.
Points: 0 out of 1

Feedback:

Giving shareholders the ability to approve an external auditor allows them to evaluate the
external auditor and express their opinion regarding whether the auditor serves their interests.
The external auditor should report to the audit committee, not the firm's management, to avoid
management influence. Audit committee members should be independent so that their interests
are aligned with shareowners and not management.

Question 22 of 30

Which of the following firms is most likely to have a board of directors that considers the best
interest of all shareholders?
Correct answer: C)
You chose: A)

A) Neither firms with different classes of common equity with supermajority

rights given to one class, nor firms that assign a single vote to each share.
B) Firms that assign a single vote to each share, and firms with different
classes of common equity with supermajority rights given to one class.
C) Firms that assign a single vote to each share, but not firms with different
classes of common equity with supermajority rights given to one class.
Points: 0 out of 1

Feedback:

Firms that assign one vote to each share are more likely to have a board that considers the best
interest of all shareholders. Firms with dual classes of common equity where supermajority
rights are given to one class are likely to have boards that focus on the interests of the
supermajority shareholders.

Question 23 of 30

Which of the following policies regarding shareowner rights for equity investors is most likely
detrimental to the shareowners' interests?

Correct answer: C)
You chose: A)

A) Shareowners are permitted to vote either by paper ballot or a proxy voting

service.
B) The company uses a third-party entity to tabulate shareowner votes.
C) Shareowners can approve changes to the corporate structure only with a
supermajority vote.
Points: 0 out of 1

Feedback:

Provisions that require a supermajority can even make changes strongly supported by
shareowners more difficult to enact.

Question 24 of 30
Investors have a duty to determine whether the board has properly established committees of
independent board members to help carry out various board functions. Which of the following
statements about the "audit committee" is least accurate?

Correct answer: C)
You chose: A)

A) The audit committee should ensure that the independent auditors have
authority over the audit of the entire corporate group, which includes foreign
subs and affiliates.
B) The audit committee should ensure that the audit is conducted consistent
with generally accepted auditing standards (GAAS).
C) Firm management is responsible for hiring and supervising the independent
external auditors, but the audit committee has strict oversight
responsibilities.
Points: 0 out of 1

Feedback:

The audit committee is responsible for hiring and supervising the independent external auditors,
in order to ensure that the auditors' priorities are consistent with the best interests of
shareholders. Both remaining statements are correct.

Question 25 of 30

Shareholder-sponsored resolutions are something investors can consider in order to be "heard".

These resolutions do have implications for investors. Which of the following statements
regarding shareholder-sponsored resolutions is least accurate?

Correct answer: A)
You chose: B)

A) The ability shareholders have to propose needed changes in a firm can

serve to erode shareholder value.
B) The right to propose initiatives for consideration at the firm's annual meeting
is one way for shareholders to send a message that they are dissatisfied
with the way the board is handling one or more firm matters.
C) The right to propose initiatives for consideration at the firm's annual meeting
is one way for shareholders to send a message that they are dissatisfied
with the way management is handling one or more firm matters.
Points: 0 out of 1

Feedback:

The ability to bring issues in front of the board and/or management can serve to prevent erosion
of shareholder value.

Question 26 of 30

All of the following practices constitute good corporate governance, EXCEPT:

Correct answer: C)
You chose: B)

A) there are proper procedures and controls covering management's day-to-

day operations and the firm acts lawfully in dealings with shareholders.
B) the board of directors protects shareholder interests, and the shareholders
have a voice in governance.
C) the firm's financial, operating, and governance activities are reported to
shareholders in a fair, accurate, and timely manner, and management acts
independent of the board of directors.
Points: 0 out of 1

Feedback:

The board of directors must be able to act independent of management, not vice versa. Both of
the remaining practices are examples of good corporate governance.

Question 27 of 30

Which of the following actions would most likely have a positive influence on shareholder
value?

Correct answer: B)
You chose: A)

A) Adopting a poison pill.

B) Only one class of common equity has been issued.
C) Executive board members regularly attend the board meetings.
Points: 0 out of 1
Feedback:

Firms with dual classes of equity can have a negative effect on shareholder value as the
shareholder may have inferior voting rights. Takeover measures such as poison pills, golden
parachutes, and greenmail typically have a negative effect on shareholder value. Annual
elections are preferred for board members as it increases accountability. Executive board
members regularly attending the meetings can potentially prevent free discussion among the
independent members.

Question 28 of 30

Rochelle Dixon is delivering a presentation on best practices for corporate governance. Two of
her recommendations are as follows:

Statement 1: To avoid the potential for harming shareholders' interests by wasting company
resources, the Board of Directors should get management's approval before it hires outside
consultants.

Statement 2: The more members a Board of Directors has, the more likely it is to represent
shareholders' interests fairly.

Are Dixon's statements CORRECT?

Correct answer: B)
You chose: B)

A) Statement 1 Statement 2
Incorrect Correct

B) Statement 1 Statement 2
Incorrect Incorrect

C) Statement 1 Statement 2
Correct Correct

Points: 1 out of 1

Feedback:

Both statements are incorrect. An independent board should have the ability to seek specialized
advice by hiring outside consultants without management approval. The size of the board
should be appropriate for the facts and circumstances of the firm; having more members does
not imply that the board will be more independent if the additional members are aligned closely
with management or are less well qualified.

Question 29 of 30

Hugh Markov is the chairman of the board and chief executive officer of Bailey Company.
Markov also serves on the board of directors of Koala Company, which is a key supplier to
Bailey. For which of these two companies does Markov's service most likely contribute to
board Independence?

Correct answer: A)
You chose: B)

A) Neither of these companies.

B) Both of these companies.
C) Only one of these companies.
Points: 0 out of 1

Feedback:

For a board of directors to be independent, it should not include the firm's own management or
members who are aligned with an important customer or supplier.

Question 30 of 30

Which of the following statements regarding company takeover defenses is

CORRECT?

Correct answer: B)
You chose: B)

A) A firm's proxy is the most likely place to find information about present takeover
defenses.
B) Newly created anti-takeover provisions may or may not require stakeholder
authorization/approval.
C) The firm's annual report contains pertinent details concerning takeover
defenses.
Points: 1 out of 1
Feedback:

These provisions may or may not require such approval. In either case, the firm may
have to, at a minimum, provide information to its shareholders about any amendments
to existing takeover defenses. A firm's articles of organization are the most likely
places to locate information about present takeover defenses.