Which of the following assumptions is embodied in the AFN equation?
a.All balance sheet accounts are tied directly to sales.
b.Accounts payable and accruals are tied directly to sales.
c.Common stock and long-term debt are tied directly to sales.
d.Fixed assets, but not current assets, are tied directly to sales.
e.Last year’s total assets were not optimal for last year’s sales.
Money markets are markets for
a.Foreign currencies.
b.Consumer automobile loans.
c.Common stocks.
d.Long-term bonds.
e.Short-term debt securities such as Treasury bills and commercial paper.
Vogril Company issued 20-year, zero coupon bonds with an expected yield to maturity
of 9%. The bonds have a par value of $1,000 and were sold for $178.43 each. What is
the expected interest expense on these bonds for Year 8?
a.$29.36
b.$30.82
c.$32.36
d.$33.98
e.$35.68
What is the present value of the following cash flow stream at a rate of 8.0%?
a.$7,917
b.$8,333
c.$8,772
d.$9,233
e.$9,695
Your firm’s EPS last year was $1.00. You expect sales to increase by 15% during the
coming year. If your firm has a degree of operating leverage equal to 1.25 and a degree
of financial leverage equal to 3.50, then what is its expected EPS?
a.$1.57
b.$1.66
c.$1.74
d.$1.83
e.$1.92
Which of the following is NOT commonly regarded as being a credit policy variable?
a.Credit period.
b.Collection policy.
c.Credit standards.
d.Cash discounts.
e.Payments deferral period.
Which of the following statements is most CORRECT?
a.Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have
remained unaltered since that time.
b.Federal bankruptcy law deals only with corporate bankruptcies. Municipal and
personal bankruptcy are governed solely by state laws.
c.All bankruptcy petitions are filed by creditors seeking to protect their claims on firms
in financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the
perspective of the firm’s management.
d.Chapters 11 and 7 are the most important bankruptcy chapters for financial
management purposes. If a reorganization plan cannot be worked out under Chapter 11,
then the company will be liquidated as prescribed in Chapter 7 of the Act.
e.”Restructuring” a firm’s debt can involve forgiving a certain portion of the debt but
does not involve changing the debt’s maturity or its contractual interest rate.
Coats Corp. generates $10,000,000 in sales. Its variable costs equal 85% of sales and its
fixed costs are $500,000. Therefore, the company’s operating income (EBIT) equals
$1,000,000. The company estimates that if its sales were to increase 10%, its net
income and EPS would increase 17.5%. What is the company’s interest expense?
a.$122,482
b.$128,929
c.$135,714
d.$142,857
e.$150,000
Exhibit 7A.1
Gargoyle Unlimited is planning to issue a zero coupon bond to fund a project that will
yield its first positive cash flow in 3 years. That cash flow will be sufficient to pay off
the entire debt issue. The bond’s par value will be $1,000, it will mature in 3 years, and
it will sell in the market for $727.25. The firm’s marginal tax rate is 40%.
Refer to Exhibit 7A.1. What is the expected after-tax cost of this debt issue?
a.5.76%
b.6.06%
c.6.38%
d.6.72%
e.7.06%
Companies HD and LD have identical tax rates, total assets, total investor-supplied
capital, and returns on investors’ capital (ROIC), and their ROICs exceed their after-tax
costs of debt, rd(1 – T). However, Company HD has a higher debt ratio and thus more
interest expense than Company LD. Which of the following statements is CORRECT?
a.Company HD has a higher net income than Company LD.
b.Company HD has a lower ROA than Company LD.
c.Company HD has a lower ROE than Company LD.
d.The two companies have the same ROA.
e.The two companies have the same ROE.
Harry’s Inc. is considering a project that has the following cash flow and WACC data.
What is the project’s NPV? Note that if a project’s projected NPV is negative, it should
be rejected.
a.$105.89
b.$111.47
c.$117.33
d.$123.51
e.$130.01
Which of the following statements is CORRECT?
a.Perhaps the most important step when developing forecasted financial statements is to
determine the breakdown of common equity between common stock and retained
earnings.
b.The first, and perhaps the most critical, step in forecasting financial requirements is to
forecast future sales.
c.Forecasted financial statements, as discussed in the text, are used primarily as a part
of the managerial compensation program, where management’s historical performance
is evaluated.
d.The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed
assets.
e.The AFN equation produces more accurate forecasts than the forecasted financial
statement method, especially if fixed assets are lumpy and economies of scale exist.
Whittington Inc. has the following data. What is the firm’s cash conversion cycle?
a.31 days
b.34 days
c.37 days
d.41 days
e.45 days