Corporate Issuers Topic Quiz

Question 1

With respect to a corporation’s mechanisms to manage stakeholder relationships, special resolutions are most accurately described as a:

Answer 1

Resolutions refer to matters that require approval by a voting majority of shareholders.

Special resolutions are those that amend a corporation’s bylaws or address issues such as mergers or takeovers, and may require a supermajority of shareholder votes.

(Module 22.1, LOS 22.b)

Question 2

Which of the following changes in a firm’s working capital management is most likely to result in a shorter operating cycle?

Answer 2

The operating cycle is average days of receivables plus average days of inventory.

Changing its credit terms for customers from “net 60” to “net 30” would likely decrease the firm’s average days of receivables and shorten its operating cycle.

Increasing inventory quantities would increase average days of inventory and lengthen the operating cycle.

Stretching payables by waiting until their due date to pay would increase the firm’s average days of payables.

This would shorten the firm’s cash conversion cycle (days of receivables + days of inventory – days of payables) but would not affect its operating cycle.

(Module 23.1, LOS 23.a)

Question 3

Companies that use significant short-term funding in their capital structure should:

Answer 3

Companies that use significant short-term funding should maintain multiple sources of funding because market conditions and lender circumstances can change over time.

Companies should maintain sources of excess funding to take advantage of profitable that may arise, even if doing so raises their overall funding costs.

(Module 23.1, LOS 23.c)

Question 4

With regard to the internal rate of return (IRR), which of the following statements is most accurate?

Answer 4

The IRR is the discount rate that equates a project’s initial cost with the present value of its future expected cash flows (i.e., for which a project’s net present value equals zero).

The correct IRR decision rule is to accept the project if IRR is greater than the required rate of return, and to reject the project if IRR is less than the required rate of return.

(Module 24.1, LOS 24.b)

Question 5

One of the results of Modigliani and Miller’s model of capital structure for a firm with a zero tax rate is that:

Answer 5

In MM without taxes, a firm’s cost of equity increases with more debt in its capital structure, while the cost of debt financing remains constant.

(Module 25.2, LOS 25.c)

Question 6

An analyst observes that Fuchsia Company is using a bundling strategy and Turquoise Company is using a razors-and-blades strategy. Which feature of the two companies’ business models is the analyst comparing?

Answer 6

Bundling and razors-and-blades are examples of pricing models for multiple products.

(Module 26.1, LOS 26.b)