1) The forward exchange rate quoted today should be equal to the spot rate in the
future.
2) The procedure by which significant changes may be made to a partnership, such as
admission of a new partner or termination of the partnership, are governed by each state
so no partnership agreement is needed.
3) Raising funds internally is effectively increasing the investment of the firm’s existing
common shareholders.
4) Proper diversification generally results in the elimination of risk.
5) In general, a project’s free cash flows will fall in one of the following three
categories: initial outlay, differential cash flows over the project’s life, and the terminal
cash flow.
6) The required rate of return reflects the costs of funds needed to finance a project.
7) An indirect quote indicates the number of units of foreign currency that can be
bought for one unit of the home currency.
8) Operating profits or EBIT is used to measure a firm’s profits on assets because it
does not include the firm’s cost of debt financing.
9) Effective cash management involves the tradeoff between the risk of insolvency
(resulting in higher near cash balances) and the desire to earn higher returns (resulting
in lower near cash balances).
10) One way to improve a company’s cash conversion cycle is to increase its days sales
outstanding.
11) Adding gourmet coffee stations to my convenience store is expected to increase
sales of my breakfast sandwiches; however, the sales of breakfast sandwiches should
not be included in the evaluation of the gourmet coffee project because only relevant,
incremental cash flows should be considered.
12) Only purely domestic firms that buy all of their inputs and sell all of their outputs in
their home countries are unaffected by events in international financial markets.
13) A key tool for evaluating business risk is break-even analysis.
14) Break-even analysis assumes that a multiproduct firm maintains a constant
production and sales mix.
15) As production levels increase, fixed costs stay the same in total, but decrease on a
per unit basis.
16) Bond prices are inversely related to market interest rates.
17) On an accrual basis income statement, revenues equal cash receipts and expenses
equal cash expenditures.
18) Accounting profits are used to make capital budgeting decisions because generally
accepted accounting principles ensure that profits are the best measure of a company’s
economic activity.
19) Which of the following expenses associated with a project should NOT be included
in a capital budgeting analysis?
A) additional allocated fixed overhead from corporate headquarters
B) additional maintenance expenses associated with new equipment
C) reengineering of a production line associated with a new project
D) training sales staff on a new product
20) A plant may remain operating when sales are depressed
A) if the selling price per unit exceeds the variable cost per unit
B) to help the local economy
C) in an effort to cover at least some of the variable cost
D) unless variable costs are zero when production is zero
21) The president of Smith Brothers, Inc. wants a dividend policy that minimizes the
likelihood of decreasing the company’s dividend per share. Which of the following
policies should the CEO select?
A) constant dividend payout ratio
B) stable dollar dividend per share
C) regular dividend plus a year-end extra
D) All policies have the same likelihood of a dividend decrease because dividend
changes are dependent on changes in earnings
22) Based on the information in Table 4-1, the operating profit margin is
A) 47.5%
B) 37.5%
C) 26.4%
D) 32.8%
23) Baker Corp. is required by a debt agreement to maintain a current ratio of at least
2.5, and Baker’s current ratio now is 3. Baker wants to purchase additional inventory for
its upcoming Christmas season, and will pay for the inventory with short-term debt.
How much inventory can Baker purchase without violating its debt agreement if their
total current assets equal $15 million?
A) $0.50 million
B) $1.67 million
C) $4.50 million
D) $6.00 million
24) The risk premium would be greater for an investment in an oil and gas exploration
in unproven fields than an investment in preferred stock because
A) oil and gas exploration investments have a greater variability in possible returns
B) the preferred stock is more liquid
C) the inflation rate would vary more with oil and gas exploration investments
D) both A and B
25) Balon Plastics, Inc. is trying to decide how best to finance a proposed $10,000,000
capital investment. Under Plan I, the project will be financed entirely with long-term 9
percent bonds. The firm currently has no debt or preferred stock. Under Plan II,
common stock will be sold to net the firm $20 a share; presently, 1,000,000 shares are
outstanding. The corporate tax rate for Roberts is 40 percent.
a.Calculate the indifference level of EBIT associated with the two financing plans.
b.Prepare an EBIT-EPS analysis chart, showing the intersection of the two financing
plan lines.
c.Which financing plan would you expect to cause the greatest change in EPS relative
to a change in EBIT? Why?
d.If EBIT is expected to be $3.1 million, which plan will result in a higher EPS?
26) Which of the following is NOT an underlying assumption of the EOQ?
A) uniform demand
B) constant unit price
C) variable carrying cost
D) instantaneous delivery
27) Wendy purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Wendy
sold the shares on 12/31/09 for $3.45. Genetics stock has a beta of 1.3, the risk-free rate
of return is 3%, and the market risk premium is 8%. The required return on Genetics
Stock is
A) 13.4%
B) 16.5%
C) 17.6%
D) 21.1%
28) A Johnson corporation bond is currently selling for $850. The bond matures in 20
years, has a face value of $1,000, and a yield to maturity of 10.55%. The bond’s coupon
rate is
A) 10%
B) 11%
C) 12%
D) 13%
29) At 6 percent compounded monthly, how long will it take to triple your money?
A) 221 months
B) 175 months
C) 102 months
D) 48 months
30) AFB, Inc. is expecting sales to increase by 20% next year, but its net fixed assets
are expected to remain at their current level. This is an example of
A) economies of scale
B) lumpy assets
C) spontaneous financing
D) discretionary financing
31) AFB Corp. Declared a $1.00 dividend on January 5th, with an ex-dividend date of
January 19th, a record date of January 21st, and a payment date of March 15th. Doug
purchased AFB stock on January 6th.
A) Doug will not receive the dividend because he purchased the stock after the
declaration date
B) Doug will not receive the dividend because he purchased the stock prior to the
record date
C) Doug will receive the dividend if he still sells his stock on January 20th because he
owned the stock on the ex-dividend date
D) Doug will receive the dividend if he still owns the stock on January 21st, even if he
sells the stock before the payment date
32) The recent financial crises was exacerbated by
A) managers who overestimated risk and hence did not invest sufficient funds
B) managers who underestimated the real risks of their decisions and borrowed
excessively
C) a lack of financial leverage that made U.S. firms less competitive in world markets
D) extremely high interest rates in the United States that stifled investment
33) Which of the following statements concerning net income is MOST correct?
A) Net income represents cash available to pay dividends
B) Net income represents sales minus operating expenses at a specific point in time
C) Negative net income reduces a company’s cash balance
D) Net income represents income that may be reinvested in the firm or distributed to its
owners
34) Which of the following statements would NOT be a valid use of pro forma financial
statements?
A) to determine a firm’s needs for financing
B) to enhance a firm’s ability to offer shareholders guaranteed operating results
C) to analyze the effects of a firm’s forecasts on its financial performance
D) to serve as a benchmark when comparing actual results to planned activities
35) Universal Financial, Inc. has total current assets of $1,200,000; long-term debt of
$600,000; total current liabilities of $500,000; and long-term assets of $800,000. How
much is the firm’s net working capital?
A) $1,000,000
B) $900,000
C) $600,000
D) $700,000
36) Dynamic Industries paid a dividend of $1.65 on its common stock yesterday. The
dividends of Wallace Industries are expected to grow at 9% per year indefinitely. If the
risk free rate is 3% and investors’ risk premium on this stock is 8%, estimate the value
of Wallace Industries stock 2 years from now.
A) $106.84
B) $100.43
C) $91.81
D) $54.71
37) How is preferred stock similar to common stock?
A) Preferred dividend payments usually have unlimited growth potential
B) Investors cannot sue a corporation for the non-payment of dividends
C) Both preferred and common stockholders have voting control of a firm
D) Preferred stock dividends and common stock dividends are fixed
38) Table 4-3
Emery Corporation
Based on the information in Table 4-3, the operating profit margin is
A) 13.75%
B) 18.59%
C) 25.80%
D) 33.33%
39) Project LMK requires an initial outlay of $400,000 and has a profitability index of
1.5. The project is expected to generate equal annual cash flows over the next twelve
years. The required return for this project is 20%. What is project LMK’s net present
value?
A) $600,000
B) $150,000
C) $120,000
D) $80,000
40) Which of the following is an advantage of the use of current liabilities to finance
assets?
A) less risk of illiquidity
B) more flexibility
C) lower interest costs
D) Both B and C
41) AFB, Inc. and DAS, Inc. both paid a $2 per share dividend last year. This year,
AFB, Inc. announces an increase to $3 per share while DAS, Inc. announces an increase
to $2.50 per share. After the announcement, the price of DAS, Inc. stock increases and
the price of AFB, Inc.’s stock decreases. Which of the following best explains this
situation?
A) The stock market is irrational
B) AFB, Inc. had higher agency costs than DAS, Inc. prior to the announcement
C) Both companies need to raise capital for positive NPV projects and flotation costs
are high
D) Capital markets are perfect
42) Assume that you won the Lotta Dough Lotto jackpot for $20 million. Further
assume that you were offered a choice to receive the $20 million today, or receive it in
equal installments of $1 million per year for 20 years. According to one of the
principles of finance, which would you take?
A) the $20 million in equal installments of $1 million per year for 20 years because you
would be afraid of spending it all right away
B) the $20 million today because it would be worth more than if you would receive it in
equal installments of $1 million per year for 20 years
C) You would be indifferent as to when you would receive the $20 million since the
total number of dollars received is the same either way
D) the $20 million in equal installments of $1 million per year for 20 years because it
would be worth more than if you would receive it today
43) A discretionary form of financing would be
A) notes payable
B) accounts payable
C) accrued expenses
D) A and B
44) A capital budgeting project has a net present value of $30,000 and a modified
internal rate of return of 15%. The project’s required rate of return is 13%. The internal
rate of return is
A) greater than $30,000
B) less than 13%
C) between 13% and 15%
D) greater than 15%
45) Lithium Lakes Industries preferred stock has a par value of $100 and pays a
dividend of $6.00 per share. It presently sells for $87 per share. What do investors
require as a rate of return on this stock? Round off to the nearest .10%.
A) 14.5%
B) 9.3%
C) 6.9%
D) 6.0%
46) Last year Gator Getters, Inc. had $50 million in total assets. Management desires to
increase its plant and equipment during the coming year by $12 million. The company
plans to finance 40 percent of the expansion with debt and the remaining 60 percent
with equity capital. Bond financing will be at a 9 percent rate and will be sold at its par
value. Common stock is currently selling for $50 per share, and flotation costs for new
common stock will amount to $5 per share. The expected dividend next year for Gator
is $2.50. Furthermore, dividends are expected to grow at a 6 percent rate far into the
future. The marginal corporate tax rate is 34 percent. Internal funding available from
additions to retained earnings is $4,000,000.
a.What amount of new common stock must be sold if the existing capital structure is to
be maintained?
b.Calculate the weighted marginal cost of capital at an investment level of $12 million.
47) The “percentage” used in the percent of sales calculation can come
A) from the most recent financial statement item as a percent of current sales
B) from an average computed over several years
C) from an analyst’s judgment
D) from any of the above or a combination of the above
48) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A
costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.
Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in
year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.’s required rate
of return for these projects is 10%. The net present value for Project B is
A) $58,097
B) $66,363
C) $74,538
D) $112,000
49) Ribbon Industries reported sales of $3 million and net income of $400,000 for
2010. The retained earnings balance at the end of 2012 is $7 million. Ribbon Industries
has a dividend payout ratio of 30%. If sales are expected to increase by 25% next year,
what will be the projected balance in retained earnings using the percent of sales
method?
A) $7,280,000
B) $6,720,000
C) $7,350,000
D) $8,750,000
50) Investors generally don’t like risk. Therefore, a typical investor
A) will not be induced to take on any risk
B) will only take on the least risk possible
C) will only take on additional risk if he expects to be compensated in the form of
additional return
D) will only accept a zero return if the risk is zero
51) You just graduated and landed your first job in your new career. You remember that
your favorite finance professor told you to begin the painless job of saving for
retirement as soon as possible, so you decided to put away $2,000 at the end of each
year in a Roth IRA. Your expected annual rate of return on the IRA is 7.5%. How much
will you accumulate at retirement after 40 years of investing (note: this may assume
that you are even retiring early)?
A) $94,426
B) $247,921
C) $1,088,632
D) $454,513
52) 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