1) Ramakrishnan Inc. reported 2008 net income of $20 million and depreciation of
$1,500,000. The top part of Ramakrishnan, Inc.’s 2007 and 2008 balance sheets is listed
below (in millions of dollars).
Calculate the 2008 net cash flow from operating activities for Ramakrishnan, Inc.
A.$12,500,000
B.$10,500,000
C.$8,500,000
D.$7,100,000
2) This is the amount of additional taxes a firm must pay out for every additional dollar
of taxable income it earns.
A.Average tax rate
B.Marginal tax rate
C.Progressive tax system
D.Earnings before tax
3) Currency Exchange Compute the amount of foreign currency that can be purchased
for $600,000:
1 Korean Won = $0.001045
A.627,000 Won
B.627 Won
C.5,741,640 Won
D.574,162,679.4 Won
4) Currency Exchange Compute the number of dollars that can be bought with 1.5
million of foreign currency units:
$1 = 0.5467 Latvian Lat
A.$969,806.68520
B.$9,698,066.852
C.$82,003,061.45
D.$2,743,735.138
5) Why do firms offer customers discounts for paying early?
A.If customers pay early, the firm increases the likelihood of being paid
B.If customers pay early, the firm’s cash cycle is shortened
C.If customers pay early, the firm improves its credit policy
D.All of the above
6) The theory that argues that individual investors and financial institutions have
specific maturity preferences is called the ______________.
A.Market segmentation theory
B.Unbiased expectations theory
C.Liquidity preference theory
D.Inverted forward theory
7) Compute the Payback statistic for Project X and recommend whether the firm should
accept or reject the project with the cash flows shown below if the appropriate cost of
capital is 10 percent and the maximum allowable payback is 5 years.
A.3.67 years, accept
B.4.67 years, accept
C.3.67 years, reject
D.4.67 years, reject
8) Which of the following is correct?
A.Total risk is measured by the standard deviation
B.There is a positive relationship between risk and return
C.If you observe a high variability in a stock’s returns you can infer that the stock is
very risky
D.All of these statements are correct
9) Exchange Rate Quote Convert the following indirect quote to a dollar direct quote:
$1 = 15,990 Vietnam Dong
A.$0.00006254
B.$159.90
C.$6.2539
D.$1.00625
10) Effects that arise from a new product or service that decrease sales of the firm’s
existing products or services are referred to as
A.complementary effects
B.substitutionary effects
C.sunk effects
D.marginal effects
11) Convert the following direct quote to dollar indirect quote: 1 Danish Krone =
$0.1991.
A.5.0226 Krone
B.5.1137 Krone
C.5.2814 Krone
D.5.3097 Krone
12) Which of the following is NOT a reason for holding cash?
A.transaction facilitation
B.compensating balances
C.investment opportunities
D.transaction opportunities
13) Statement of Retained Earnings Use the following information to find dividends
paid to common stockholders during 2008 .
A.$3 million
B.$4 million
C.$10 million
D.$17 million
14) Which of the following would NOT be an example of an agency bond?
A.Federal Home Loan Bank bond
B.Student Loan Marketing Association bond
C.Fannie Mae bond
D.Treasury bills
15) Portfolio Weights An investor owns $10,000 of Adobe Systems stock, $15,000 of
Dow Chemical, and $25,000 of Office Depot. What are the portfolio weights of each
stock?
A.Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333
B.Adobe System = 0.2, Dow Chemical = 0.3, Office Depot = 0.5
C.Adobe System = 0.3, Dow Chemical = 0.2, Office Depot = 0.5
D.Adobe System = 0.2667, Dow Chemical = 0.3333, Office Depot = 0.4
16) MMK Cos. normally pays an annual dividend. The last such dividend paid was
$2.00, all future dividends are expect to grow at a rate of 6 percent per year, and the
firm faces a required rate of return on equity of 13 percent. If the firm just announced
that the next dividend will be an extraordinary dividend of $22 per share that is not
expected to affect any other future dividends, what should the stock price be?
A.$39.63
B.$47.88
C.$49.02
D.$32.71
17) Your company is considering the purchase of a new machine. The original cost of
the old machine was $25,000; it is now 5 years old, and it has a current market value of
$10,000. The old machine is being depreciated over a 10-year life toward a zero
estimated salvage value on a straight-line basis, resulting in a current book value of
$12,500 and an annual depreciation expense of $2,500. The old machine can be used
for 6 more years but has no market value after its depreciable life is over. Management
is contemplating the purchase of a new machine whose cost is $20,000 and whose
estimated salvage value is zero. Expected before-tax cash savings from the new
machine are $3,500 a year over its full MACRS depreciable life. Depreciation is
computed using MACRS over a 5-year life, and the cost of capital is 13 percent.
Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project
be?
A.$984
B.$1,200
C.$2,700
D.$5,000
18) Calculating Fees on a Loan Commitment During the last year you have had a loan
commitment from your bank to fund working capital for your business. The total line
available was $2,500,000, of which you took down $1,000,000. It is now the end of the
loan commitment period and your bank is asking you to pay the back-end fees. You
have misplaced the paperwork that listed the terms of the commitment, but you know
you paid total fees (this does not include any interest paid to borrow the $1,000,000) of
$15,000 on this loan commitment. You remember that the back-end fee was 30 basis
points. Calculate the front-end fee on this loan commitment.
A.30 basis points
B.42 basis points
C.60 basis points
D.70 basis points
19) JJJ Corp has $10 million in assets and is currently financed with 100% equity. The
firm decides to switch to a 60% equity/40% debt structure and decides to fund the next
$4 million of assets for future projects entirely with debt, resulting in the desired capital
structure at some point in the future. This is an example of _________________.
A.Active Capital Structure Management
B.Separation Principle
C.Modigliani-Miller Theorem in practice
D.Passive Capital Structure Management
20) A firm that is efficient in inventory management will have ____________.
A.a high inventory turnover ratio and a low days sales in inventory ratio
B.a low inventory turnover ratio and a low days sales in inventory ratio
C.a high inventory turnover ratio and a high days sales in inventory ratio
D.a low inventory turnover ratio and a high days sales in inventory ratio
21) What would be the appropriate way to forecast sales for a firm that has stable
year-to-year sales, but seasonally fluctuating month-to-month sales?
A.Forecasts would need to be adjusted for a trend, but would not need a regression to
adjust for seasonality
B.Forecasts would need to be adjusted for seasonality, but would not need a regression
to adjust for a trend
C.Ignore both the trend and the seasonality
D.None of these
22) This is defined as a combination of investment assets held by an investor.
A.bundle
B.market basket
C.portfolio
D.All of these
23) JJJ Corp has $10 million in assets and is currently financed with 100% equity. The
firm decides to switch to a 60% equity/40% debt structure and decides to sell $4 million
of debt and use the proceeds to retire $4 million in equity today. This is an example of
_________________.
A.Underinvestment
B.Active Capital Structure Management
C.Modigliani-Miller Theorem in practice
D.None of these
24) You are evaluating a project for your company. You estimate the sales price to be
$500 per unit and sales volume to be 2000 units in year 1; 3000 units in year 2; and
1500 units in year 3 . The project has a three-year life. Variable costs amount to $300
per unit and fixed costs are $200,000 per year. The project requires an initial investment
of $325,000 in assets which will be depreciated straight-line to zero over the three-year
project life. The actual market value of these assets at the end of year 3 is expected to
be $50,000. NWC requirements at the beginning of each year will be approximately 25
percent of the projected sales during the coming year. The tax rate is 34 percent and the
required return on the project is 12 percent. What is the operating cash flow for the
project in year 2?
A.$74,167
B.$192,500
C.$300,833
D.$374,500
25) Calculating Costs of Issuing Debt Home Improvement, Inc., needs to raise $2
million to finance plant expansion. In discussions with its investment bank, Home
Improvement learns that the bankers recommend a debt issue with gross proceeds of
$1,000 per bond and they will charge an underwriter’s spread of 7 percent of the gross
proceeds. How many bonds will Home Improvement need to sell in order to receive the
$2 million they need?
A.2,140
B.2,151
C.2,150,537
D.2,140,000
26) Special rights given to some employees to buy a specific number of shares of the
company stock at a fixed price during a specific period of time.
A.executive stock options
B.privately held information
C.restricted stock
D.stock market bubble
27) Calculating Costs of Issuing Stock Your company needs to raise $50 million to
finance plant expansion. In discussions with its investment bank, you learn that the
bankers recommend a gross price of $75 per share and that 675,000 shares of stock be
sold. If the net proceeds on the stock sale leave your company with $50 million, what is
the underwriter’s spread on the stock issue?
A.$0.93
B.$1.85
C.$6.67
D.$9.00
28) Internal Growth Rate Last year Umbrellas Unlimited Corporation had an ROA of
10% and a dividend payout ratio of 50%. What is the internal growth rate?
A.1.00%
B.2.25%
C.5.26%
D.100.00%
29) Liquidity Ratios You are evaluating the balance sheet for Blue Jays Corporation.
From the balance sheet you find the following balances: Cash and marketable securities
= $200,000, Accounts receivable = $800,000, Inventory = $1,000,000, Accrued wages
and taxes = $250,000, Accounts payable = $400,000, and Notes payable = $300,000.
What are Blue Jays’ Current ratio, Quick ratio, and Cash ratio, respectively?
A.1.05263, 1.05263, 0.21053
B.2.10526, 1.05263, 0.21053
C.3.07692, 1.53846, 0.30769
D.3.07692, 1.05263, 0.30769
30) JoJo’s portfolio’s return is 12%. She is invested in Cisco and IBM which had returns
of 15% and 9% respectively. What percentage of JoJo’s assets are invested in each firm?
A.40% in Cisco and 60% in IBM
B.50% in Cisco and 50% in IBM
C.30% in Cisco and 70% in IBM
D.Unable to determine with the data provided
31) This subarea of finance looks at firm decisions in acquiring and utilizing cash
received from investors or from retained earnings.
A.investments
B.financial management
C.treasury management
D.none of these
32) Suppose a firm has a retention ratio of 40 percent and net income of $10 million.
How much does it pay out in dividends?
A.$4 million
B.$6 million
C.$10 million
D.$16.67 million
33) Explain how investors can assess bond market performance.
34) When might earnings management become an ethical consideration?
35) If a firm needs to keep minimum cash balance on hand and faces both cash inflows
and outflows, which cash management strategy would be most appropriate for the firm
to use?
36) Show the time line for a $300 cash outlay today, a $483.15 inflow in year five, and
a 10 percent interest rate.
37) Ratio Analysis Use the following information to complete the balance sheet below.
Current ratio = 3
Current liabilities = 5 million
Credit sales = 25 million
Average collection period = 30
Inventory turns = 8
Total asset turns = .75
Debt ratio = 45%
38) What would be more valuable, receiving $1,000 today or receiving $3,000 in 10
years when interest rates are 8 percent? Why?
39) Market Value Ratios You are considering an investment in Taylor’s Hot Rods,
Corp. During the last year the firm’s income statement listed addition to retained
earnings = $2.5 million and common stock dividends = $1.2 million. Taylor’s year-end
balance sheet shows common stockholders’ equity = $10 million with 2 million shares
of common stock outstanding. The common stock’s market price per share = $45.00.
What is Taylor’s Hot Rods’ book value per share and earnings per share? Calculate the
market-to-book ratio and PE ratio.