Chapter 18 Test Bank - Static

5. Identify the type of specialized investment that each of the following situa- tions requires. a. You hire an employee to operate a machine that only your company uses. b. An aerosol canning company designs a filling line that can be used only for a particular firm's product. c. A company builds a manufacturing facility across the street from its pri- mary buyer. 6. Under what conditions might the Justice Department approve a merger between two companies that operate in an industry with a premerger Herfindahl- Hirschman index of 2,900 if the postmerger index is expected to increase by 225?

3. Which of the following statements about the characteristics of debt and equities is true? C 1) They can both be long-term financial instruments. 2) Bond holders are residual claimants. 3) The income from bonds is typically more variable than that from equities 4) Bonds pay dividends. 5) They both involve a claim on the issuer's income 6) More than one answer is correct.

1. It involves planning, organizing, directing, and controlling the financial activities such as procurement and utilization of funds of the business. 2. A formal arrangement between two or more people to manage business operations and share its profits and liabilities. 3. It is the process of estimating revenue and expenses over a specified period of time. 4. This refers to how much of the total assets is financed by debt and how much is financed by equity. 5. Function of financial management that determines how to finance working capital accounts such as accounts receivable and inventories.

22. Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs.   Question 22 options:   a)  equity   b)  diversification   c)  regulations   d)  expertise

1. Financial institutions in the U.S. economy Suppose Yakov would like to use $6,000 of his savings to make a financial investment. One way of making a financial investment is to purchase stock or bonds from a private company. Suppose RoboTroid, a robotics firm, is selling stocks to raise money for a new lab-a practice known as finance. Buying a share of RoboTroid stock would give Yakov the firm. In the event that RoboTroid runs into financial difficulty, will be paid first. Suppose Yakov decides to buy 100 shares of RoboTroid stock. /hich the following statements are correct? Check all that apply. O An increase in the perceived profitability of RoboTroid will likely cause the value of Yakov's shares to rise. O Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Yakov's shares to decline. O The price of his shares will rise if RoboTroid issues additional shares of stock. Alternatively, Yakov could make a financial investment by…

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Part II. True or false questions. 1. The ultimate goal of a corporation is to maximize shareholder value. 2. Under perfect capital market, the weighted average cost of capital does not change when the firm increases its leverage. 3. In a capital market with corporate taxes, the unlevered beta increases with leverage. 4. A bond's interest rate risk increases with coupon rates and decreases with maturity. 5. A firm in distress can pay out dividends to signal its prospects. 6. If an investor is risk-neutral, his risk premium for any given asset is zero. 7. When we introduce a new product, the sales of the old product might be affected. This is an example of side effect. 8. Sunk costs should be considered when we evaluate a new project. 9. The P/E ratio can sometimes be unreliable when we use the comparable firm approach to value a firm. 10. In a world with taxes, a firm's cost of equity capital increases as the firm takes on more debt.