1) Cash budgets and pro forma statements are useful not only for internal financial
planning but also are routinely required by the Internal Revenue Service (IRS).
2) If a firm is subject to capital rationing, it is able to accept all independent projects
that provide an acceptable return.
3) When unequal-lived projects are independent, the impact of differing lives must be
considered because the projects do not provide service over comparable time periods.
4) Dividends provide information about a firm’s current performance.
5) The Sarbanes-Oxley Act of 2002 was passed to eliminate many of the disclosure and
conflict-of-interest problems of corporations.
6) Operating leverage results from the existence of operating costs in a firm’s income
stream.
7) ________ are liabilities for services received for which payment has yet to be made.
A) Notes payable
B) Accruals
C) Accounts payable
D) Accounts receivable
8) If the cash discount period is increased, a firm’s investment in accounts receivable is
expected to ________.
A) increase because existing customers attracted by the new policy will buy more
products
B) decrease because of nondiscount takers paying earlier to avail the cash discount
C) decrease because discount takers will pay more in order to get more discount
D) decrease because new customers will doubt the quality of product due to increase in
discount
9) Which of the following is true of credit scoring of suppliers?
A) It is frequently used in business because the scoring information is easy to obtain
B) It is frequently used in business because scoring standards are too flexible
C) It is frequently not used in business because most business transactions involve
mercantile credit which cannot be scored
D) It is frequently used in business because mercantile credit decisions are easily
quantifiable
10) A firm has common stock with a market price of $25 per share and an expected
dividend of $2 per share at the end of the coming year. The growth rate in dividends has
been 5 percent. The cost of the firm’s common stock equity is ________.
A) 5 percent
B) 8 percent
C) 10 percent
D) 13 percent
11) A bank lends a firm $500,000 for one year at 8 percent and requires compensating
balances of 10 percent of the face value of the loan. The effective annual interest rate
associated with this loan is ________.
A) 8.9 percent
B) 8 percent
C) 7.2 percent
D) 7.0 percent
12) Convertible bonds normally have ________ to permit the issuer to retire or
encourage conversion of outstanding convertibles when appropriate.
A) a put feature
B) a call feature
C) a stock purchase warrant
D) a swap feature
13) An increase in the current liabilities to total assets ratio will result in ________.
A) an increase in risk
B) a decrease in risk
C) an increase in profit
D) a decrease in profit
14) Which pattern of cash flow stream is the most difficult to use when evaluating
projects?
A) mixed stream
B) conventional flow
C) nonconventional flow
D) annuity
15) Unlike the net present value criteria, the internal rate of return approach assumes a
reinvestment rate equal to ________.
A) the relevant cost of capital
B) the project’s internal rate of return
C) the project’s opportunity cost
D) the market’s interest rate
16) A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently
does not have the cash available to take the discount. The firm has a credit line
available at a local bank at an interest rate of 12 percent. The firm should ________.
A) give up the cash discount, financing the purchase with the line of credit
B) take the cash discount and pay on the 45th day after the date of sale
C) take the cash discount and pay on the first day of the cash discount period
D) take the cash discount, financing the purchase with the line of credit, the cheaper
source of funds
17) A firm has an average age of inventory of 60 days, an average collection period of
45 days, and an average payment period of 30 days. The firm’s operating cycle is
________ days.
A) 75
B) 105
C) 90
D) 135
18) The ________ measures the activity, or liquidity, of a firm’s stock of goods.
A) average collection period
B) inventory turnover ratio
C) average payment period
D) total asset turnover ratio
19) Which type of dividend payment policy has the advantage that if a firm’s earnings
drop, dividends will still be maintained at a relatively constant level?
A) constant-payout-ratio policy
B) regular dividend policy
C) low-regular-and-extra dividend policy
D) target dividend policy
20) Which of the following is a reason for a firm to underprice new issues?
A) When the market is in equilibrium, additional demand for shares can be achieved
only at a higher price
B) When additional shares are issued, each share’s percent of ownership in a firm is
diluted, thereby justifying a higher share value
C) When additional shares are issued, each share’s percent of ownership in a firm is
concentrated, thereby justifying a lower share value
D) When the market is in equilibrium, additional demand for shares can be achieved
only at a lower price