1) In a sole proprietorship, the owner is personally responsible without limitation for
the liabilities incurred.
2) The balance sheet reflects the accounting equation: Assets = Liabilities + Owners’
Equity.
3) NPV is the most theoretically correct capital budgeting decision tool examined in the
text.
4) The internal rate of return will equal the discount rate when the net present value
equals zero.
5) Shareholders, as owners of the corporation, face unlimited liability for the
corporation’s debts, while bondholders, as creditors, may only lose the value of their
investment if the company goes bankrupt.
6) Cash flows associated with a project’s termination generally include the salvage
value of the project net of any taxes associated with the sale.
7) The firm’s cost of capital is important when evaluation the firm’s overall value, but
should not be used to evaluate individual projects which have their own unique
characteristics.
8) Under majority voting a majority (>50%) shareholder will just be able to elect a
simple majority of the board of directors.
9) Companies with the largest cash balances reduce their risk of insolvency and thus
maximize the value of the companies for their shareholders.
10) Financial ratios are used by managers inside the company and by lenders,
credit-rating agencies, and investors outside of the company.
11) Borrowing funds using short-term debt, such as commercial paper, and using the
proceeds to invest in long-term investments, creates a re-financing risk that can force
firm’s to sell assets at distressed prices if financing becomes unavailable.
12) The net present value of a project will increase as the required rate of return is
decreased (assume only one sign reversal).
13) Using simulation provides the financial manager with a probability distribution of
an investment’s net present value or internal rate of return.
14) According to the CAPM, for each unit of Beta an asset’s required rate of return
increases by the market’s return.
15) Which of the following represents the correct ordering of standard deviation of
returns over the period 1926 to 2011 (from highest to lowest standard deviation of
returns)?
A) Treasury bills, long-term corporate bonds, common stocks, small firm common
stocks
B) small firm common stocks, common stocks, long-term corporate bonds, Treasury
bills
C) Treasury bills, common stocks, long-term corporate bonds, small firm common
stocks
D) Treasury bills, common stocks, small firm common stocks, long-term corporate
bonds
16) Selection of a source of short-term financing should include all of the following
EXCEPT
A) the effective cost of credit
B) the availability of financing in the amount and for the time needed
C) the floatation costs for debentures
D) the effect of the use of credit from a particular source on the cost and availability of
other sources of credit
17) Plato Industries’ projected sales for the first six months of 2012 are given below:
Jan.$250,000April$300,000
Feb.$340,000May$350,000
Mar.$280,000June$380,000
20% of sales are collected in cash at time of sale, 50% are collected in the month
following the sale, and the remaining 30% are collected in the second month following
the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to
the sales, and payments for purchases are made in the month of the sale. Total other
cash expenses are $70,000/month. The company’s cash balance as of February 28, 2012
will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato
has no short term borrowing as of February 28, 2012. Ignore any interest on short-term
borrowing. The company must have a minimum cash balance of $40,000 at the
beginning of each month. Plato’s projected cumulative short-term borrowing as of April
30, 2012?
A) $25,000
B) $33,000
C) $50,000
D) $60,000
18) The Securities and Exchange Commission (SEC)
A) regulates only initial public offerings, or IPOs
B) regulates only primary market transactions to ensure investors are provided with
adequate and accurate information on new securities
C) regulates both primary and secondary markets
D) regulates initial public offerings, but not seasoned equity offerings, in the primary
market
19) Which of the following is (are) false?
A) The constant dividend payout ratio policy seeks to pay a constant percentage of
earnings each year
B) The stable dollar dividend per share policy seeks to maintain a relatively stable
percentage dividend over time
C) The small, regular dividend plus a year-end extra policy pays a small, regular
dividend plus a year-end extra dividend in good years
D) The constant dividend payout ratio policy will result in more variability in dividends
than the stable dollar dividend per share policy
20) Other things being equal, investors will value which of the following bonds the
highest?
A) callable bonds
B) convertible bonds
C) bonds that are both callable and convertible
D) unsecured, callable bonds
21) PBJ Corporation issued bonds on January 1, 2006. The bonds had a coupon rate of
5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the
bonds mature on January 1, 2021. What is the yield to maturity for an PBJ Corporation
bond on January 1, 2012 if the market price of the bond on that date is $950?
A) 5.50%
B) 6.23%
C) 8.43%
D) 10.50%
22) If a firm has no operating leverage and no financial leverage, then a 10% increase in
sales will have what effect on EPS?
A) EPS will remain the same
B) EPS will increase by 10%
C) EPS will decrease by 10%
D) EPS will increase by less than 10%
23) All of the following are likely to increase the cost of a company’s short-term
financing EXCEPT
A) an increase in the bank’s prime lending rate
B) an increase in the compensating balance required
C) taking a loan on a discount basis
D) an increase in the company’s debt rating by Moody’s or Standard and Poors
24) Which of the following refers to all institutions and procedures that provide for
transactions in short-term debt instruments generally issued by borrowers with very
high credit ratings?
A) capital market
B) commercial banks
C) money market
D) stock market
25) How much money must be put into a bank account yielding 6.42% (compounded
annually) in order to have $1,671 at the end of 11 years (round to nearest $1)?
A) $921
B) $886
C) $843
D) $798
26) Which of the following is true?
A) The forward rate is the same as the spot rate that will prevail in the future
B) The future spot rate is equal to the forward rate less the current spot rate
C) The actual spot rate that will prevail in the future is not known today
D) The future spot rate is the current spot rate increased by the inflation rate
27) Accrued wages and accrued taxes are considered to be
A) permanent sources of financing because companies must always pay wages and
taxes
B) spontaneous sources of unsecured short-term financing
C) secured sources of short-term financing
D) current assets
28) Which of the following is NOT a source of unsecured short-term credit?
A) trade credit
B) a line of credit
C) floating lien
D) commercial paper
29) Today is your 21st birthday and your bank account balance is $25,000. Your
account is earning 6.5% interest compounded daily. How much will be in the account
on your 50th birthday?
A) $159,795
B) $162,183
C) $163,823
D) $164,631
30) The acid-test ratio of a firm would be unaffected by which of the following?
A) Several short-term loans are consolidated and paid off using long-term debt
B) Equipment is purchased, financed by a long-term debt issue
C) Additional inventory is purchased for cash
D) Large accounts receivable balances are collected
31) For a typical corporation, which of the following capital structures will result in the
lowest weighted average cost of capital?
A) 40% debt, 20% preferred stock, 40% common equity
B) 50% debt, 10% preferred stock, 40% common equity
C) 60% debt, 10% preferred stock, 30% common equity
D) 60% debt, 15% preferred stock, 25% common equity
32) 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
33) The Boyles Ceramics, Inc. established a line of credit with a local bank. The
maximum amount that can be borrowed under the terms of the agreement is $1,000,000
at an annual rate of 8 percent. A compensating balance averaging 25 percent of the
amount borrowed is required. Prior to the agreement, Boyles had no deposit with the
bank. Shortly after signing the agreement, Boyles needed $240,000 to pay off a note
that was due. Boyles decides to borrow an amount sufficient to pay the $240,000 note
and also to cover the compensating balance. What is the effective annual cost of credit
if the loan is made on a discount basis?
A) 11.94%
B) 11.00%
C) 10.83%
D) 10.57%
34) Phillips Enterprises Inc. is expected to pay a dividend of $2.60 next year. Dividends
are expected to grow at a constant rate of 8% per year, and the stock price is currently
$20.00. New stock can be sold at this price subject to flotation costs of 15%. The
company’s marginal tax rate is 35%. Compute the cost of internal equity (retained
earnings) and the cost of external equity (new common stock), respectively.
A) 0, 21.00%
B) 8.00%, 23.29%
C) 21.00%, 23.29%
D) 23.00%, 25.48%
35) Which of the following will most likely result in an increase in discretionary
funding needed?
A) The company’s profit margin increases
B) The company’s dividend payout ratio increases
C) The company’s assets are only operating at 50% of capacity
D) The company pays its accounts payable in 50 days, up from 45 days
36) Jeter Industries has an accounts receivable turnover ratio of 4.5. If Jeter has an
accounts receivable balance of $100,000, what is Jeter’s average daily credit sales?
A) $745.23
B) $1,232.88
C) $22,222.22
D) $1,893.45
37) The Sarbanes-Oxley Act of 2002 holds all of the following groups strictly
accountable in a legal sense for any instances of misconduct EXCEPT
A) company officers.
B) outside members of the board of directors.
C) lawyers.
D) investors.
38) An independent project should be accepted if it
A) produces a net present value that is greater than or equal to zero
B) produces a net present value that is greater than the equivalent IRR
C) has only one sign reversal
D) produces a profitability index greater than or equal to zero
39) Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of
$500,000; long-term assets of $800,000; and long-term debt of $600,000. How much is
the firm’s total equity?
A) $1,200,000
B) $800,000
C) $900,000
D) $2,000,000
40) The net present value method
A) is consistent with the goal of shareholder wealth maximization
B) recognizes the time value of money
C) uses all of a project’s cash flows
D) all of the above
41) LPD Logistics, Inc.’s projected sales for the first six months of 2010 are given
below.
Jan.$300,000April$350,000
Feb.$350,000May$500,000
Mar.$475,000June$400,000
20% of sales are collected in the month of the sale, 75% are collected in the month
following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of
sales. Purchases are made the month prior to the sales and are paid during the month the
purchases are made (i.e. goods sold in March are bought and paid for in February).
Total other cash expenses are $35,000/month. The company’s cash balance as of
February 1, 2010 will be $30,000. Excess cash will be used to retire short-term
borrowing (if any). LPD has no short term borrowing as of February 28, 2010. Assume
that the interest rate on short-term borrowing is 1% per month. The company must have
a minimum cash balance of $20,000 at the beginning of each month. What is LPD’s
projected total receipts (collections) for March?
A) $357,500
B) $310,000
C) $456,000
D) $475,000
42) All of the following factors support the proposition that dividend policy matters
EXCEPT
A) investors desire to minimize and defer taxes, and capital gains get preferential tax
treatment over dividend income
B) perfect capital markets
C) information asymmetry exists between shareholders and managers
D) flotation costs significantly increase the cost of new common stock compared to
retained earnings
43) The basic format of an income statement is
A) Sales – Expenses = Profits
B) Income – Expenses = EBIT
C) Sales – Liabilities = Profits
D) Assets – Liabilities = Profits
44) During the period 1987 to 2011, the average yield on 3-Month U.S. Treasury bills
was 3.85%, the average inflation rate was 2.92%, the average yield on 30-year Treasury
bonds was 6.14%, and the average return on 30-year AAA-Rated Corporate Bonds was
7.00%. The real risk-free short-term interest rate is
A) 0.90%
B) 2.13%
C) 2.97%
D) 4.76%
45) Fiesta Taco Company purchases 30,000 boxes of ground beef each year. It costs $50
to place each order and $10.00 per year for each box held as inventory.
a.What is the average inventory held during the year?
b.What is the economic order quantity for the ground beef?
c.How many orders will be made each year?
46) LaMike owns 1,000 shares of DAS. Inc.’s common stock. The stock has a par value
of $1 per share and is currently selling for $80 per share. DAS declares a 20% stock
dividend. In a perfect capital market, after the dividend Sam will have
A) 1,200 shares selling for $66.67 each
B) 1,020 shares selling for $80.80 each
C) 1,200 shares selling for $96.00 each
D) 1,020 shares selling for $64.00 each
47) Lasalle Industries is considering the purchase of a new machine that will cost
$250,000, plus an additional $10,000 to ship and install. The new machine will have a
5-year useful life and will be depreciated to zero using the straight-line method. The
machine is expected to have a salvage value of $30,000 at the end of year five.
LaSalle’s income tax rate is 40%. The additional net working capital from this project of
$50,000 is expected to return to its pre-project level upon termination. What is the
non-operating terminal cash flow of the machine?
A) -$32,000
B) $48,000
C) $68,000
D) $80,000
48) One potential reason for a share repurchase is
A) to increase the power of a minority group of shareholders
B) maximize the dilution in earnings associated with a merger
C) a reduction in the firm’s cost associated with servicing small stockholders
D) to signal the market that the firm’s stock price is too high
49) The Bolster Company is considering two mutually exclusive projects:
The required rate of return on these projects is 12 percent.
a.What is each project’s payback period?
b.What is each project’s discounted payback period?
c.What is each project’s net present value?
d.What is each project’s internal rate of return?
e.Fully explain the results of your analysis. Which project do you prefer, and why?
50) According to the hedging principle, fixed assets should NOT be financed with
A) permanent financing
B) temporary financing
C) permanent plus spontaneous financing
D) equity financing
51) The Modigliani and Miller hypothesis suggests that capital structure doesn’t matter.
All of the following conditions need to be met for this hypothesis to be true EXCEPT
A) corporate income is not subject to taxation
B) capital structure consists only of stocks and bonds
C) securities are traded in perfect or efficient markets
D) all corporate net income is paid out as dividends
52) The relevant variable a financial manager uses to measure returns is
A) net income determined using generally accepted accounting principles
B) earnings per share minus dividends per share
C) cash flows
D) dividends
53) Based on the information in Table 4-1, assuming that no preferred dividends were
paid, the return on common equity is
A) 55.15%
B) 44.86%
C) 38.83%
D) 17.56%