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Chapter 20

Multiple Choice Questions

1. Many firms have retired their preference share because

a. preference share is sold on a lower yield basis than ordinary share and
dividends are taxable to the stockholder.
b. preferences share lacks a maturity date and dividends are not deductible for
tax purposes.
c. dividend payments are not guaranteed to the shareholder and are taxable
to the shareholder.
d. dividend payments are a fixed obligation and are not deductible for tax

2. A firm using a private placement to raise capital would generally be issuing

a. ordinary shares.
b. preference shares.
c. long-term bonds.
d. warrants.

3. A "tender offer” is
a. an advance by a customer on the purchase of merchandise.
b. a method of determining the effects of merger on earnings.
c. a proxy fight
d. a direct appeal to purchase shares from shareholders.

4. When a firm finances each asset with a financial instrument of the same approximate
maturity as the life of the asset, it is applying
a. portfolio management.
b. return maximization.
c. financial leverage.
d. a hedging approach.

5. All of the following are good sources of financing for permanent working
capital except
a. a bank line of credit.
b. retained earnings.
c. preference share.
d. ordinary share.

6. A ratio that examines the percentage change in earnings available to

ordinary shareholders that is associated with a given percentage change in
earnings before interest and taxes is measured of
a. times interest earned.
b. the degree of operating leverage.
c. the degree of financial leverage.
d. return on investment.

7. A leasing arrangement in which the lessor borrows money to acquire the

leased property is called a(n)
a. Operating lease.
b. sale and leaseback.
c. financial lease.
d. leveraged lease.

8. The current market price of Lee Company stock is P80 per share and its price-
earnings ratio is 8 to l. A P4 annual dividend was just paid to current
shareholders. lf dividends and earnings are expected to grow at a constant rate
of 12 percent, Lee Company’s cost of retained earnings is
a. 50%.
b. l2.5%.
c. l7.0%
d. l7.6%

9. Bee Corp. will issue PlOO million of preference shares. The stock will pay a P9
dividend and the offer price to the public will be P50 per share. Bee’s tax rate is
40 percent. Assuming floatation costs of P3 per share, Bee's cost of preference
share financing is
a. 18. 67%
b. 11.49%
c. 18.00%
d. 19.15%

10. A firm maintains a debt/equity ratio of 1.0. The debt consists of bonds with a
before tax cost of 9%. The equity consists of ordinary shares with a cost of 18%.
The marginal corporate tax rate is 40%. What is the weighted average cost of
a. 8.1%
b. 9.9%.
c. 10.8%
d. 11.7%

Rachel Ann Aralar Christian Ison

Gaeryl Cabigon Mary Angelique Pernecita
Emilio De Mesa Elaine Villegas