Which one of the following statements concerning financial leverage is correct

Which one of the following statements concerning financial leverage is correct?

a) The benefits of leverage are unaffected by the amount of a firm’s earnings.

b) The use of leverage will always increase a firm’s earnings per share.

c) The shareholders of a firm are exposed to greater risk anytime a firm uses financial leverage.

d) Earnings per share are unaffected by changes in a firm’s debt-equity ratio.

e) Financial leverage is beneficial to a firm only when the firm has minimal earnings.

12. A 10-year bond pays 11 percent interest on a $1000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity?

a) 9.33%

b) 7.94%

c) 12.66%

d) 8.10%

13. Which of the following is true regarding bonds?

a) Most bonds do not carry default risk.

b) Municipal bonds are free of default risk.

c) Bonds are not sensitive to changes in the interest rates.

d) Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.

e) None of the above is true

14. Two years ago, MorningStar Company issued seven percent, 25-year bonds and Track, Inc. issued seven percent, 10-year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm’s bond prices in the market, assuming they have equal risk?

a) Track’s decreased more than Morningstar’s

b) Morningstar’s increased more than Track’s

c) Morningstar’s decreased more than Track’s

d) They are both priced the same

15. A call provision in a bond agreement grants the issuer the right to:

a) Repurchase the bonds prior to maturity at a pre-specified price.

b) Replace the bonds with equity securities.

c) Repurchase the bonds after maturity at a pre-specified price.

d) Change the coupon rate, provided the bondholders are notified in advance.

e) Buy back the bonds on the open market prior to maturity.

1. Which of the following is true regarding put bonds?

a) Have coupons that depend on the company’s income

b) Can be exchanged for a fixed number of shares before maturity only

c) Can be exchanged for a fixed number of shares before maturity

d) Allow the holder to require the issuer to buy the bond back

2. The term debenture refers to

a) Long-term, secured debt.

b) Long-term, unsecured debt.

c) The after-acquired property clause.

d) A document covering the specific terms of the debt issue.

3. Company A has a bond outstanding with $90 annual interest payment, a market price of $820, and a maturity date in five years. Assume the par value to be $1,000. What is the bond’s current yield?

a) 9%

b) 14%

c) 11%

d) Cannot be determined

e) None of the above

4. (Which one of the following practices will reduce a firm’s collection float?

a) utilizing zero-balance accounts

b) depositing checks weekly, rather than daily

c) requiring all customers pay by check, rather than with cash

d) installing a lockbox system

e) paying all bills five days sooner

5. Storage and tracking costs, insurance and taxes, and losses due to theft are examples of:

a) Inventory depletion costs

b) Sunk costs

c) Inventory costs

d) None of the above

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