1) Since lenders are generally reluctant to grant loans to a firm to pay dividends, the
firm’s ability to pay cash dividends is generally constrained by the amount of excess
cash available.
2) In capital budgeting, risk refers to a high degree of variability of the initial
investment of a project.
3) If the expected return is less than the required return, investors will sell the asset,
because it is not expected to earn a return commensurate with its risk.
4) An ordinary annuity is an annuity in which cash flows occur at the beginning of each
period.
5) Risk can be assessed by means of scenario analysis and probability distributions.
6) The free cash flow valuation model can be used to determine the value of an entire
company as the present value of its expected free cash flows discounted at the firm’s
weighted average cost of capital.
7) When the net proceeds from sale of a bond equal its par value, the before-tax cost
would just equal the coupon interest rate.
8) The relative inexpensiveness of debt capital is due to the fact that the lenders take the
least risk among the long-term contributors of capital.
9) Sensitivity analysis is a statistics-based approach used in capital budgeting to asses
risk by applying predetermined probability distributions and random numbers to
estimate risky outcomes.
10) Relevant cash flows are the incremental cash outflows and inflows associated with
a proposed capital expenditure.
11) In general, the more debt a firm uses, the smaller its financial leverage.
12) At a firm’s quarterly dividend meeting held on December 5, the directors declared a
$1.50 per share cash dividend to be paid to the holders of record on Monday, January 1.
Before the dividend was declared, the firm’s accumulated retained earnings balance and
cash balance were $1,280,000 and $30,000 respectively. The firm has 10,000 shares of
common stock outstanding. On January 2, the cash, dividends payable, and retained
earnings accounts had balances of ________.
A) $15,000, $0, and $1,265,000, respectively
B) $30,000, $15,000, and $1,280,000, respectively
C) $30,000, $0, and $1,265,000, respectively
D) $15,000, $0, and $1,280,000, respectively
13) Should Tangshan Mining company accept a new project if its maximum payback is
3.25 years and its initial after-tax cost is $5,000,000 and it is expected to provide
after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000
in year 3, and $1,800,000 in year 4?
A) Yes, since the payback period of the project is less than the maximum acceptable
payback period
B) No, since the payback period of the project is more than the maximum acceptable
payback period
C) Yes, since the risk exposure of the project is less than the maximum acceptable risk
exposure
D) No, since the risk exposure of the project is more than the maximum acceptable risk
exposure
14) A decrease in the production time to manufacture a finished good will result in
________.
A) an increase in the average age of inventory
B) a decrease in the cash conversion cycle
C) an increase in the cash conversion cycle
D) a decrease in the average age of inventory
15) If a corporation sells certain capital equipment for more than its initial purchase
price, the difference between the sale price and the purchase price is called a(n)
________.
A) ordinary gain
B) revenue gain
C) capital gain
D) abnormal gain
16) When discussing weighing schemes for calculating the weighted average cost of
capital, ________.
A) market value weights are preferred over book value weights and target weights are
preferred over historical weights
B) book value weights are preferred over market value weights and target weights are
preferred over historical weights
C) book value weights are preferred over market value weights and historical weights
are preferred over target weights
D) market value weights are preferred over book value weights and historical weights
are preferred over target weights
17) A firm purchased goods on January 27 with a purchase price of $1,000 and credit
terms of 2/10 net 30 EOM. The firm paid for these goods on February 9. The firm must
pay ________ for the goods.
A) $1,000
B) $980
C) $800
D) $900
18) Table 4.5
A financial manager at General Talc Mines has gathered the financial data essential to
prepare a pro forma balance sheet for cash and profit planning purposes for the coming
year ended December 31, 2015. Using the percent-of-sales method and the following
financial data, prepare the pro forma balance sheet in order to answer the following
multiple choice questions.
(a)The firm estimates sales of $1,000,000.
(b)The firm maintains a cash balance of $25,000.
(c)Accounts receivable represents 15 percent of sales.
(d)Inventory represents 35 percent of sales.
(e)A new piece of mining equipment costing $150,000 will be purchased in 2010.
Total depreciation for 2010 will be $75,000.
(f)Accounts payable represents 10 percent of sales.
(g)There will be no change in notes payable, accruals, and common stock.
(h)The firm plans to retire a long term note of $100,000.
(i)Dividends of $45,000 will be paid in 2015.
(j)The firm predicts a 4 percent net profit margin.
Balance Sheet
General Talc Mines
December 31, 2014
The pro forma total liabilities amount is ________. (See Table 4.5)
A) $500,000
B) $550,000
C) $700,000
D) $650,000
19) The cash flows from financing activities section of the statement of cash flows
includes ________.
A) labour expense
B) cost of raw materials
C) purchase of long-term assets
D) dividends paid
20) Which capital budgeting method is most useful for evaluating a project that has an
initial after-tax cost of $5,000,000 and is expected to provide after-tax operating cash
flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3, and
$2,300,000 in year 4?
A) net present value
B) internal rate of return
C) payback
D) accounting rate of return
21) What is Nico’s portfolio beta if he invests an equal amount in Asset X with a beta of
0.60, Asset Y with a beta of 1.60, and the risk-free asset?
A) 1.24
B) 1.00
C) 0.73
D) 0.66
22) In terms of inventory management, multinational firms ________.
A) have only economic factors to consider, since this is a fixed asset and is minimally
affected by political factors
B) must deal with a wide number of factors, including exchange rate fluctuations,
tariffs, nontariff barriers, integration schemes such as the EU, and other rules and
regulations
C) have only economic factors to consider, since this is a current asset and is minimally
affected by political factors
D) have only political factors to consider, since inventory is minimally affected by
foreign economic factors
23) Apex Inc. issues a bond of $1,000 which pays interest semiannually at a coupon
interest rate of 8%. The maturity of the bond is 15 years. Where should this bond be
traded?
A) forex market
B) money market
C) capital market
D) commodities market
24) ________ are promised a fixed periodic dividend that must be paid prior to paying
any common stock dividends.
A) Preferred stockholders
B) Common stockholders
C) Bondholders
D) Creditors
25) Cull Incorporated recently borrowed $250,000 from Century Bank when the prime
rate was 4%. The loan was for 90 days with interest to be paid at the end of the period
with a rate fixed at 1.5% above the prime rate. What is the total interest paid on this
loan and what is the effective annual rate? (Assume a 365 day year.)
A) The total interest paid is $3390.41 and the effective annual rate is 5.62%
B) The total interest paid is $13,750 and the effective annual rate is 5.62%
C) The total interest paid is $13,750 and the effective annual rate is 5.55%
D) The total interest paid is $3390.41 and the effective annual rate is 1.36%