1) A project with a payback period of four years is acceptable as long as the company’s
target payback period is greater than or equal to four years.
2) Interest payments on a loan obtained specifically to fund a new project should be
considered an incremental cash flow for the new project when determining the
accept/reject decision.
3) Lock-box arrangements yield benefits for all companies regardless of the size of
sales or customer remittance checks.
4) Because they occur in private, stricter regulations are placed on the private
placement of securities.
5) Accounting profits is the most relevant variable the financial manager uses to
measure returns.
6) The most important reasons firms hold cash balances are the transaction and
precautionary motives.
7) The provisions of the Sarbanes-Oxley Act of 2002, or SOX, apply to all U.S.-based
corporations, as well as to foreign corporations conducting business in U.S. markets.
8) Discretionary financing needed (DFN) is equal to projected total assets minus
projected total liabilities minus projected owners’ equity.
9) Firms like to hold large stocks of cash since the risk of becoming insolvent is
minimized.
10) Discretionary financing needed can be positive or zero, but not negative.
11) Artificially low interest rates helped create the housing bubble because low interest
rates (r value) create higher values (higher PVs).
12) One positive feature of the payback period is it emphasizes the earliest forecasted
free cash flows, which are less uncertain than later cash flows and provide for the
liquidity needs of the firm.
13) Any increase in interest payments caused by a project should be counted in the
incremental cash flows.
14) Raising funds internally is effectively increasing the investment of the firm’s
existing common shareholders.
15) The capital budgeting decision-making process involves measuring the incremental
cash flows of an investment proposal and evaluating the attractiveness of these cash
flows relative to the project’s cost.
16) When using the pvs (present value) function in Excel to calculate bond values, the
bond’s coupon rate is entered as the Rate variable.
17) In a perfect market, investors are only concerned with total returns and are not
concerned whether it is in capital gains or dividend income.
18) When a corporation designs an investment strategy for investing temporary excess
cash balances in marketable securities, it must consider a variety of factors. Which of
the following is the most important?
A) maintaining the safety of principal
B) maintaining the greatest float
C) achieving the highest yield
D) illiquidity
19) Your company is considering a project with the following cash flows:
Initial Outlay = $3,000,000
Cash Flows Year 1-8 = $547,000
Compute the internal rate of return on the project.
A) 6.38%
B) 8.95%
C) 9.25%
D) 12.34%
20) What is the yield to maturity of a bond that pays an 5% coupon rate with annual
coupon payments, has a par value of $1,000, matures in 15 years, and is currently
selling for $769?
A) 2.4%
B) 5.7%
C) 7.6%
D) 9.5%
21) Visionary TV Corporation bonds are currently priced at $1,088. They have a par
value of $1,000 and 12 years to maturity. They pay an annual coupon rate of 6%. What
is the yield to maturity on this bond?
A) 6.7%
B) 6.1%
C) 5.4%
D) 5.0%
22) Suppose a U.S. importer purchases an Italian product today but will not pay for it
for 90 days. The cost of the product today is 30,000 euros. The spot exchange rate today
is .6233 euros per dollar. If the U.S. importer does not hedge the position, which of the
following spot exchange rates in 90 days will yield the highest returns?
A) 0.6833 euros per dollar
B) 0.6499 euros per dollar
C) $1.4844 per euro
D) $1.5387 per euro
23) Common-sized income statements
A) assist in the comparison of companies of different sizes
B) show each income statement account as a percentage of total assets
C) compare companies with the same level of total sales
D) compare companies with the same level of net income
24) Cost of capital is commonly used interchangeably with all of the following terms
EXCEPT
A) the firm’s required rate of return
B) the hurdle rate for new investments
C) the internal rate of return for new investments
D) the firm’s opportunity cost of funds
25) A significant disadvantage of the internal rate of return is that it
A) does not fully consider the time value of money
B) does not give proper weight to all cash flows
C) may have an unrealistic reinvestment assumption
D) is expressed as a percentage
26) If you are an importer of goods and you will make payment for the purchase of
inventory on 90-day terms, which of the below is the correct term for the exchange rate
that you will use?
A) indirect rate
B) spot rate
C) direct rate
D) forward rate
27) SteelCo Production, Inc. is considering the use of a lock-box collection system.
SteelCo’s average check receipt is $1,350. The company invests excess cash in money
market certificates and receives an average of 3.5% annual interest. The lock-box
system will speed up SteelCo’s collections by 2.5 days. What is the maximum per check
processing cost that SteelCo should be willing to pay for the lock-box system?
A) $0.1871
B) $0.2987
C) $0.3236
D) $0.4519
28) California Retailing Inc. has sales of $4,000,000; the firm’s cost of goods sold is
$2,500,000; and its total operating expenses are $600,000. The firm’s interest expense is
$250,000, and the corporate tax rate is 40%. The firm paid dividends to preferred
stockholders of $40,000, and the firm distributed $60,000 in dividend payments to
common stockholders. What is California Retailing’s “Addition to Retained Earnings”?
A) $650,000
B) $390,000
C) $330,000
D) $290,000
29) DAS, Inc. is preparing its financial forecast for next year and its discretionary
financing needed is negative. This means that
A) sales growth must be negative
B) the predicted change in total assets must be negative
C) the predicted change in spontaneous liabilities and retained earnings must be greater
than the predicted change in total assets
D) the dividend payout ratio must be greater than the predicted growth rate in sales
30) An investor is considering two equally risky investments. Investment A is expected
to return $1,000 per year for the next 5 years. Investment B is expected to return $6,000
at the end of 5 years. Which of the following statements is MOST correct if both
investments A and B have the same cost?
A) A risk averse investor will select investment B because it is expected to provide the
most cash ($6,000 > $5,000)
B) A risk averse investor will select investment A because it provides cash earlier than
investment B
C) The investor will select investment A only if the cost is less than $1,000
D) The investor may select investment A or investment B depending on the opportunity
cost of money
31) Your firm is considering an investment that will cost $750,000 today. The
investment will produce cash flows of $250,000 in year 1, $300,000 in years 2 through
4, and $100,000 in year 5 . What is the investment’s discounted payback period if the
required rate of return is 10%?
A) 3.33 years
B) 3.16 years
C) 2.67 years
D) 2.33 years
32) As interest rates, and consequently investors’ required rates of return, change over
time the ________ of outstanding bonds will change as a result.
A) maturity date
B) coupon interest payment
C) par value
D) price
33) Over the period 1926 to 2011 the standard deviation of returns has been the greatest
for which of the following?
A) treasury bills
B) corporate bonds
C) common stocks
D) common stocks of small firms
34) One component of a firm’s financial structure which is NOT a component of its
capital structure is
A) common stock
B) accounts payable
C) long-term debt
D) preferred stock
35) Both investor A and investor B are considering the purchase of Corporation FJR
bonds. The bonds are selling at a price of $1,100 each. Investor A decides to buy the
bonds and Investor B does not buy the bonds.
A) Investor A must have a required return lower than the required return for Investor B
B) The yield to maturity for Investor A must be higher than the yield to maturity for
Investor B
C) The yield to maturity for Investor A must be less than the yield to maturity for
Investor B
D) The yield to maturity for this bond must be higher than the coupon rate
36) A firm has after-tax cash flow from operations equal to $100,000. Operating
working capital increased by $20,000, and the firm purchased $30,000 of fixed assets.
The firm’s free cash flow was
A) $50,000
B) $90,000
C) $110,000
D) $150,000
37) If markets were entirely efficient (perfect), which of the following would we
conclude?
A) There would be no inflation
B) Book value would be the same as market value
C) No firms would ever default on their bonds
D) Market value and intrinsic value would be the same
38) Strategies to counter exchange rate risk include all of the following EXCEPT
A) futures contracts
B) spot-market hedges
C) forward-market hedges
D) money-market hedges
39) All of the following may influence a firm’s dividend payment EXCEPT
A) investment opportunities
B) investor transaction costs
C) common stock par value
D) flotation costs
40) A toy manufacturer following the hedging principle will generally finance seasonal
inventory build-up prior to the Christmas season with
A) common equity to avoid interest on a recurring annual need
B) selling equipment
C) trade credit
D) long-term bonds since this is a recurring financing need
41) Money market transactions include which of the following?
A) any security that is paid for with cash
B) 30-year U.S. Treasury bonds
C) all securities paid for with the proceeds of a money market account
D) securities that have a maturity of less than one year
42) Which of the following are short-term, unsecured promissory notes sold by large
businesses?
A) negotiable certificates of deposit
B) repurchase agreements
C) money market mutual funds
D) commercial paper
43) The risk free rate of return is 2.5% and the market risk premium is 8%. Rogue
Transport has a beta of 2.2 and a standard deviation of returns of 28%. Rogue
Transport’s marginal tax rate is 35%. Analysts expect Rogue Transport’s dividends to
grow by 6% per year for the foreseeable future. Using the capital asset pricing model,
what is Rogue Transport’s cost of retained earnings?
A) 16.4%
B) 17.7%
C) 19.6%
D) 20.1%
44) A six-year project for Little Egypt, Inc. results in additional accounts receivable of
$150,000, additional inventory of $50,000, and additional accounts payable of $80,000
today. What is the change in the NPV of a project solely due to the additional net
working capital (NWC) needs? Assume a 14% discount rate, and the recovery of net
working capital at the end of the project.
A) a decrease of $34,606
B) a decrease of $42,670
C) a decrease of $120,000
D) a decrease of $58,689
45) Table 4-4
Wes Donnell, Inc.
Balance Sheet
Wes Donnell, Inc.
Income Statement
For the year ended December 31, 2010
In addition to the information contained in Table 4-4, you know that the current ratio for
2010 is 4 and that the corporation paid $11,600 in dividends in 2010 . What is Wes
Donnell’s total asset balance for 2010?
A) $42,500
B) $36,500
C) $38,500
D) $26,900