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1) which of the following statements is true?
a.accountants measure cash flows on a cash basis rather than an accrual basis
b.financial analysts focus solely on accrual basis values rather than cash flows when
evaluating potential investments
c.incremental cash flows effectively represent the marginal costs and marginal benefits
expected to result from undertaking a proposed investment
d.both (a) and (c) are true
e.all of the above statements are true
2) you are a gold producer and have noticed that the value of your business may
increase even though the price of gold falls. your explanation for this phenomenon is
a.that the relationship between the value of future cash flows and interest rates is
positive
b.that increased risk may increase the real option value of the firm
c.that cheaper gold prices are good for the economy and that must be good for the firm
d.none of the above
3) the method in which pro forma statements are constructed by assuring that all items
grow in proportion to sales is called the
a.percentage of sales method
b.common size method
c.sales dilution method
d.sales receipt method
4) you inherit $15,000 from your aunt. you decide to invest the money in a three-year
cd that pays 4% interest to use as a down payment on a house. how much money will
you have when the cd matures?
a.$13,334.95
b.$15,600.00
c.$16,800.00
d.$16,872.96
5) the spot rate for u.s. dollars and euros is $1.232/. the 90 day forward rate for the two
currencies is $1.254/. the u.s. dollar
a.trades at a 1.79% 90 day forward premium
b.trades at a 7.14% annual forward premium
c.trades at a 1.79% 90 day forward discount
d.trades at a 7.14% annual forward discount
6) stock prices usually drop by an amount nearly equal to the amount of the dividend on
a.the announcement date
b.the record date
c.the ex-dividend date
d.the payment date
7) which of the following does not represent a career opportunity in money
management?
a.portfolio manager
b.securities analyst
c.financial planner
d.capital budgeting analyst
8) narrbegin: terry corporation
terry corporation
one year ago, jason purchased 50 shares of terry corporation stock at $20 per share.
today, one year later, the stock pays a $2 per share dividend and the price is now $22
per share.
narrend
refer to terry corporation. what is the total dollar return on the investment for the one
year?
a.$4
b.$50
c.$75
d.$200
9) a firm is trying to determine the optimum level for an operating asset which will
have an effect on financing costs as well as lost sales cost. the optimum level is that
which
a.minimizes the financing costs
b.minimizes the lost sales costs
c.minimizes the total amount of financing and lost sales costs
d.it is impossible to determine without knowing more
10) narrbegin: dsss corporation
dsss corporation
dsss corporation is considering a new project to manufacture widgets. the cost of the
manufacturing equipment is $125,000. the cost of shipping and installation is an
additional $10,000. the asset will fall into the 3-year macrs class. the year 1- 4 macrs
percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. sales are expected
to be $225,000 per year. cost of goods sold will be 60% of sales. the project will require
an increase in net working capital of $10,000. at the end of three years, dsss plans on
ending the project and selling the manufacturing equipment for $25,000. the marginal
tax rate is 40% and dsss corporations appropriate discount rate is 15%.
narrend
refer to dsss corporation. what is the operating cash flow for year 1?
a.$54,797
b.$64,798
c.$70,803
d.$10,487
11) roger is considering the expansion of his business into a property he purchased two
years ago. which of the following items should not be included in the analysis of this
expansion?
a.roger can lease the property to another company for $12,000 per year
b.costs of hiring additional staff
c.the property was extensively renovated last year at a cost of $15,000
d.the expansion will result in a slight increase of inventory carried
12) the 1-year risk-free rate of return in hobbiton is 10% and the 1-year risk-free rate of
return in gondor is 20%. if the expected rate of inflation in hobbiton is 5%, the what
should be the expected rate of inflation in gondor? round to the nearest .01%
a.14.54%
b.12.70%
c.3.89%
d.none of the above
13) which of the following are methods to distribute cash to shareholders?
a.cash dividends
b.stock dividends
c.share repurchases
d.both (a) and (c)
14) narrbegin: bear lake lease purchase
bear lake equipment company (blec)
bear lake equipment company (blec) is considering an expansion which will require a
new machine that costs $125,000. blec can either lease or buy the equipment. the
companys tax rate is 40% and its after tax cost of debt is 5%.
lease: annual payments of $26,400 made at the beginning of each year over five years.
the lessor covers all maintenance, while the lessee covers insurance and other costs. the
lessee has the option to purchase the machine for $31,250 paid along with the final
lease payment.
purchase: the $125,000 cost will be financed over five years with annual end of year
payments of $31,580. the machine will be depreciated on the five year macrs schedule,
and the firm will pay $3,500 per year for a service contract to cover all maintenance.
the company will cover all insurance and other costs.
narrend
refer to blec. what is the after tax cash flow for the first year from a purchase of the
machine?
a.$31,583
b.$21,167
c.$19,515
d.$25,000
15) narrbegin: smart products eoq
smart products
assume a 365 day year.
smart products buys 300,000 units of a crucial input per year from a supplier that
fulfills its orders within two days of receiving them. smart products submits its orders
directly to the supplier through a web interface, so its lead time is the suppliers two day
turnaround time. each order costs smart products about $500 to place, while carrying
costs are about $60 per unit per year. the company seeks to maintain a five day usage
level in a safety stock.
narrend
which would improve smart products total cost at the eoq more, a 15% reduction in
carrying costs or a 10% reduction in order costs?
a.decreasing order costs decreases total cost by $10,062
b.decreasing order costs decreases total costs by $6,700
c.decreasing carrying costs decreases total costs by $10,062
d.decreasing carrying costs decreases total costs by $6,700
16) you purchased wpc common shares for $50 one year ago. you have received total
dividends equal to $8 during the year. if your total return during the period is 12%, then
what was the price of wpc when you sold the stock today?
a.$52.00
b.$48.00
c.$98.00
d.none of the above
17) roxy is evaluating a lock-box system that will reduce float by 6 days. the firm has
annual sales of $180 million and an opportunity cost of 12%. if the lock-box system is
adopted, what is the value of funds released?
a. $ 493,150.68
b. $ 355,068.49
c. $ 59,178.08
d. $ 2,958,904.11
18) if you are a company that has a very large amount of cash in its treasury and the irs
is concerned that you have been hoarding cash to prevent your shareholders from
having to pay dividend taxes, which of the following would be your most likely method
of getting cash into your shareholders hands?
a.repurchase shares
b.pay a cash dividend
c.repurchase debt
d.none of the above
19) you notice that the price of a one-year call option, with a $40 strike price, is $5. the
current price of the underlying stock is also $ what should the price of a one-year put
option be with a strike price of $40? assume that the interest rate on a one-year risk free
bond is 10%.
a.$5
b.$0
c.$1.36
d.$8.63
