Assume you can currently exchange one U.S. dollar for one hundred Japanese yen. Also
assume the inflation rate will be 2.5 percent annually in the U.S. and 2 percent in Japan.
Given these assumptions, how many yen should you expect in exchange for one U.S.
dollar next year?
A. More than 100
B. Either 100 or more than 100
C. Exactly 100
D. Either 100 or less than 100
E. Less than 100
Answer:
Jericho Snacks is an all-equity firm with estimated earnings before interest and taxes of
$826,000 annually forever. Currently, the firm has no debt but is considering borrowing
$650,000 at 6.75 percent interest. The tax rate is 34 percent and the current cost of
equity is 17.2 percent. What is the value of the levered firm?
A. $3,187,271
B. $3,169,535
C. $3,307,271
D. $3,390,535
E. $3,506,418
Answer:
Which one of the following has nearly the same meaning as free cash flow?
A. Net income
B. Cash flow from assets
C. Operating cash flow
D. Cash flow to shareholders
E. Addition to retained earnings
Answer:
Which one of the following best describes a line of credit?
A. Long-term, prearranged, committed bank loan
B. Short-term loan secured by accounts receivable
C. Short-term loan secured by inventory
D. Long-term, prearranged, noncommitted bank loan
E. Short-term prearranged bank loan that can be either committed or noncommitted
Answer:
Contingency planning focuses on the:
A. opportunity costs involved with a project.
B. sunk costs related to a project.
C. economic effects on a project’s profitability.
D. managerial options implicit in a project.
E. optional capital requirements of a project.
Answer:
Delta Mowers has a debt-equity ratio of 1.2. Its WACC is 10.1 percent, and its cost of
debt is 7.5 percent. There is no corporate tax. What is the firm’s cost of equity capital?
A. 12.60 percent
B. 13.22 percent
C. 13.83 percent
D. 14.29 percent
E. 14.80 percent
Answer:
Which one of the following statements is correct?
A. Firms cannot use lockboxes if they use cash concentration accounts.
B. Firms prefer to increase processing delay on disbursements.
C. Firms prefer to eliminate all types of float.
D. Firms open regional offices so their employees can pick up lockbox payments
throughout the day.
E. The Check Clearing Act for the 21st Century is designed to reduce the collection time
to one day.
Answer:
An investment has conventional cash flows and a profitability index of 1.0. Given this,
which one of the following must be true?
A. The internal rate of return exceeds the required rate of return.
B. The investment never pays back.
C. The net present value is equal to zero.
D. The average accounting return is 1.0.
E. The net present value is greater than 1.0.
Answer:
Gorman Distributors shows the following information on its 2014 income statement:
sales = $317,800; costs = $211,400; other expenses = $18,500; depreciation expense =
$31,200; interest expense = $2,100; taxes = $18,600; dividends = $12,000. In addition,
you’re told that the firm issued $4,500 in new equity during 2014, and redeemed $6,500
in outstanding long-term debt. If net fixed assets increased by $7,400 during the year,
what was the addition to net working capital?
A. $17,900
B. $14,600
C. $15,800
D. $16,200
E. $17,400
Answer:
The corporate tax structure in the U.S. is based on a:
A. maximum tax rate of 38 percent.
B. minimum tax rate of 10 percent.
C. flat rate of 34 percent for the highest income earners.
D. flat-rate tax.
E. modified flat-rate tax.
Answer:
After successfully completing your corporate finance class, you feel the next challenge
ahead is to serve on the board of directors of Marine Enterprises. Unfortunately, you
will be the only individual voting for you. If Marine Enterprises has 350,000 shares
outstanding and the stock currently sells for $52, how much will it cost you to buy a
seat if the company uses straight voting? Assume Marine Enterprises uses cumulative
voting and there are five open seats in the current election; how much will it cost you to
buy a seat now?
A. $9,100,000; $3,640,000
B. $9,100,000; $3,033,385
C. $9,100,052; $3,548,052
D. $9,100,052; $3,033,385
E. $9,100,052; $3,640,000
Answer:
Which one of the following is a primary benefit of implementing zero-balance accounts
into a cash management system?
A. Increased disbursements float
B. Total elimination of all safety stocks
C. Additional cash availability
D. Decreased collection float
E. Elimination of all float
Answer:
What is the NPV of the following set of cash flows at a discount rate of zero percent?
What if the discount rate is 15 percent?
A. -$41,700; -$8,665.07
B. -$41,700; $1,208.19
C. $0; $1,208.19
D. $2,500; $1,208.19
E. $2,500; -$8,665.07
Answer:
Which one of the following best indicates a firm is utilizing its assets more efficiently
than it has in the past?
A. Decrease in the total asset turnover
B. Decrease in the capital intensity ratio
C. Increase in days’ sales in receivables
D. Decrease in the profit margin
E. Decrease in the inventory turnover rate
Answer:
The profitability index reflects the value created per dollar:
A. invested.
B. of sales.
C. of net income.
D. of taxable income.
Answer:
The common stock of Wiley and Sons has a beta that is 25 percent larger than the
overall market beta. Currently, the market risk premium is 9.5 percent while the U.S.
Treasury bill is yielding 4.7 percent. What is the cost of equity for this firm?
A. 13.76 percent
B. 14.96 percent
C. 15.80 percent
D. 16.58 percent
E. 16.85 percent
Answer:
Your portfolio has provided you with returns of 8.6 percent, 14.2 percent, -3.7 percent,
and 12.0 percent over the past four years, respectively. What is the geometric average
return for this period?
A. 7.25 percent
B. 7.54 percent
C. 7.57 percent
D. 7.63 percent
E. 9.55 percent
Answer:
Nu Tek is comprised of four separate operating divisions. For this year, the firm has
decided to allocate capital funds using a soft rationing approach. Which one of the
following applies to this situation?
A. Division managers will be limited to accepting a single new project each.
B. Division managers are being given blanket approval to accept all positive net present
value projects.
C. Divisions managers will vie with each other for additional capital allocations.
D. Division managers will not receive any funding for new projects but will be allowed
to expand current operations.
E. Division managers will not receive capital funding for any project.
Answer:
Roscoe’s purchased new machinery three years ago for $1.8 million. The machinery can
be sold to Stewart’s today for $1.2 million. Roscoe’s current balance sheet shows net
fixed assets of $960,000, current liabilities of $348,000, and net working capital of
$121,000. If all the current assets were liquidated today, the company would receive
$518,000 cash. The book value of the firm’s assets today is _____ and the market value
is ____.
A. $1,081,000; $1,308,000
B. $1,081,000; $1,718,000
C. $1,307,000; $1,429,000
D. $1,429,000; $1,308,000
E. $1,429,000; $1,718,000
Answer:
Which one of the following principles refers to the assumption that a project will be
evaluated based on its incremental cash flows?
A. Forecast assumption principle
B. Base assumption principle
C. Fallacy principle
D. Erosion principle
E. Stand-alone principle
Answer:
On any given day, a firm receives numerous checks worth an average combined total of
$5,900. The funds from the deposited checks are generally available after two days.
Every day, the firm mails out checks totaling $4,400 that generally take three days to
clear the bank. What is the amount of the collection float?
A. $4,400
B. $5,900
C. $11,800
D. $13,250
E. $13,400
Answer: