1) The independence hypothesis suggests that the cost of equity decreases as financial
leverage increases.
2) Unlike market value, the intrinsic value of an asset is estimated independently of
risk.
3) The cash conversion cycle is equal to the days of sales outstanding plus the days of
sales in inventory plus the days of payables outstanding.
4) Credit terms of 2/10, net 30 have a lower effective cost than credit terms of 2/10, net
60 because in the first case the loan will be repaid sooner.
5) The EBIT-EPS indifference point is the level of production at which the company’s
EBIT equals its EPS.
6) In the EOQ model the optimal ordering quantity is the quantity for which the sum of
the costs of ordering and carrying inventory is minimized.
7) The balance sheet equation is Total Assets = Total Revenues – Total Liabilities.
8) Earnings available to common shareholders is equal to a corporation’s positive net
cash flow over a given period, typically one year.
9) Seasonality causes comparability problems in ratio analysis. A common solution is to
use an average account balance as opposed to an ending account balance.
10) Tim has $100 in a bank account paying 2% interest per year. At the end of 5 years,
Tim’s bank account balance will be $110 if interest is not compounded, but will be
greater than $110 if interest is compounded.
11) Commercial paper is a short-term, unsecured, promissory note.
12) The five basic principles of finance include all of the following EXCEPT
A) Cash flow is what matters
B) Money has a time value
C) Risk requires a reward
D) Incremental profits determine value
13) Rawhide Outfitters had projected its sales for the first six months of 2012 to be as
follows:
Jan.$ 50,000April$180,000
Feb.$ 60,000May$240,000
Mar.$100,000June$240,000
Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior
to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the
month following the sale, and the remaining 20% in the second month following the
sale. Total other cash expenses are $40,000/month. The company’s cash balance as of
March 1st, 2012 is projected to be $40,000, and the company wants to maintain a
minimum cash balance of $15,000. Excess cash will be used to retire short-term
borrowing (if any exists). The firm has no short-term borrowing as of March 1st, 2012.
Assume that the interest rate on short-term borrowing is 1% per month. What was
Rawhides’ projected loss for March?
A) $184,000
B) $110,000
C) $84,000
D) none of the above
14) John Maynard Keynes segmented a firm’s demand for cash into the following
motives:
A) risk, investment, and liquidity
B) transaction, speculative and precautionary
C) transaction, liquidity, and speculative
D) transaction, speculative, and risky
15) Lindsey Insurance Co. has current sales of $10 million and predicts next year’s sales
will grow to $14 million. Current assets are $3 million and fixed assets are $4 million.
The firm’s net profit margin is 7 percent after taxes. Presently, Lindsey has $900,000 in
accounts payable, $1.1 million in long-term debt, and $5 million (including $2.5 million
in retained earnings) in common equity. Next year, Lindsey projects that current assets
will rise in direct proportion to the forecasted sales, and that fixed assets will rise by
$500,000. Lindsey also plans to pay dividends of $400,000 to common shareholders.
a.What are Lindsey’s total financing needs for the upcoming year?
b.Given the above information, what are Lindsey’s discretionary financing needs?
16) All of the following are useful purposes of pro forma financial statements EXCEPT
A) they provide a useful tool for analyzing the effects of a firm’s forecasts on its
financial performance
B) they satisfy the SEC requirement for audited financial disclosure
C) they can be used to control, or monitor a firm’s progress for a planning period
D) they serve as a benchmark to compare actual results to planned activities
17) If a firm with credit terms of 1/10 net 30 were to change its terms to 3/10 net 30, the
result would probably be
A) increased bank loans
B) increased accounts receivable turnover
C) an increase in the average level of accounts receivable
D) a decrease in accounts payable
18) A corporate treasurer is typically responsible for each of the following duties
EXCEPT
A) cash management
B) credit management
C) capital expenditures
D) cost accounting
19) All of the following are examples of sources of discretionary financing EXCEPT
A) bank loans
B) notes payable
C) trade credit
D) common stock
20) KLE Holdings is considering a capital budgeting project with a life of 7 years that
requires an initial outlay of $277,400. The probability distribution for annual
incremental cash flows is as follows:
a.The risk-adjusted required rate of return for this project is 12%. Calculate the
risk-adjusted net present value of the project and the project’s IRR.
b.Should the project be accepted?
21) It is important to consider a new project’s affect on the cash flows of existing
projects because of
A) cannibalism
B) synergy
C) sunk costs
D) A and B above
22) All of the following forms of business organizations provide limited liability to all
owners EXCEPT
A) limited liability company
B) S-type corporation
C) corporation
D) limited partnership
23) All of the following will make the break-even point increase, other things equal,
EXCEPT
A) fixed costs increase
B) the sales price per unit is decreased due to competition
C) variable costs increase due to higher direct labor cost
D) the number of units sold for the year decreased
24) Table 4-5
Yen Inc.
Balance Sheet
Yen Inc.
Income Statement
For the year ended December 31, 2010
Based on the information contained in Tables 4-5, what was Yen’s return on common
equity for 2010?
A) 50.0%
B) 85.0%
C) 121.4%
D) 24.3%
25) Your grandparents deposit $2,000 each year on your birthday, starting the day you
are born, in an account that pays 7% interest compounded annually. How much will you
have in the account on your 21st birthday, just after your grandparents make their
deposit?
A) $101,802
B) $98,016
C) $86,058
D) $79,640