Which one of the following statements is correct?
A. Firms should generally finance all of their assets with long-term debt.
B. Firms that follow restrictive financial policies can generally avoid short-term debt
financing.
C. Short-term borrowing is generally more expensive than long-term borrowing.
D. Long-term interest rates tend to be more volatile than short-term rates.
E. A firm is less apt to face financial distress if it adopts a flexible financial policy
rather than a restrictive policy.
Sherpa Movers has just gone public. Under a firm commitment agreement, the firm
received $34.40 for each of the 3.5 million shares sold. The initial offering price was
$37 per share, and the stock rose to $43 per share in the first few minutes of trading.
Sherpa Movers paid $896,000 in legal and other direct costs and $225,000 in indirect
costs. What was the flotation cost as a percentage of the funds raised?
A. 22.91 percent
B. 23.85 percent
C. 24.49 percent
D. 26.17 percent
E. 28.60 percent
Which one of the following is most likely the fastest method of collecting cash?
A. Requiring customers to submit all payments to a lockbox
B. Requiring customers to submit all payments to the home office
C. Initiating a financial electronic data interchange at the time of sale
D. Offer customers credit terms of 1/5, net 15
E. Eliminating all disbursement float
An investment has an initial cost of $3.3 million. This investment will be depreciated by
$900,000 a year over the three-year life of the project. Should this project be accepted
based on the average accounting rate of return if the required rate is 10.0 percent? Why
or why not?
A. Yes, because the AAR is 10.0 percent
B. Yes, because the AAR is less than 10.0 percent
C. Yes, because the AAR is greater than 10.0 percent
D. No, because the AAR is greater than 10.0 percent
E. No, because the AAR is less than 10.0 percent
Which one of the following activities is most apt to reduce the inventory period?
A. Replacing slow-moving items with faster-selling products
B. Replacing fresh foods with canned goods
C. Manufacturing a product for inventory rather than for an order
D. Increasing the amount of inventory on hand
E. Decreasing the number of times the inventory turns over per year
Currently, you own 5.4 percent of the outstanding stock of Keiffer Industries. The firm
has decided to issue additional shares of stock and has given you the first option to
purchase 5.4 percent of those additional shares. Which one of the following will you be
participating in if you opt to purchase the shares you have been offered?
A. Rights offer
B. Red herring offer
C. Private placement
D. IPO
E. General cash offer
Your portfolio is 240 shares of Rising Sun Co. The stock currently sells for $62 a share.
The company has announced a dividend of $1.10 per share with an ex-dividend date of
May 6. Assume there are no taxes. What will your portfolio value be on May 7?
A. $14,616
B. $14,880
C. $15,026
D. $15,144
E. $15,210
Which one of the following will increase the operating cash flow as computed using the
tax shield approach?
A. Decrease in depreciation
B. Decrease in sales
C. Increase in variable costs
D. Decrease in fixed costs
E. Increase in the tax rate
Given an interest rate of zero percent, the future value of a lump sum invested today
will always:
A. remain constant, regardless of the investment time period.
B. decrease if the investment time period is shortened.
C. decrease if the investment time period is lengthened.
D. be equal to $0.
E. be infinite in value.
Marcos Enterprises has three separate divisions. The firm allocates each division $1.5
million per year for capital purchases. Which one of the following terms applies to this
allocation process?
A. Soft rationing
B. Hard rationing
C. Opportunity cost
D. Sunk cost
E. Strategic planning
The managers of H.R Construction are considering remodeling plans for an old building
the firm currently owns. The building was purchased eight years ago for $689,000.
Over the past eight years, the firm rented out the building and used the rent to pay off
the mortgage. The building is now owned free and clear and has a current market value
of $898,000. The firm is considering remodeling the building into a conference centre
and sandwich bar at an estimated cost of $1.7 million. The estimated present value of
the future income from this centre is $2.9 million. Which one of the following defines
the opportunity cost of the remodeling project?
A. Initial cost of the building
B. Cost of the remodeling
C. Current market value of the building
D. Initial cost of the building plus the remodeling costs
E. Current market value of the building plus the remodeling costs
A firm has net income of $114,000, a return on assets of 12.6 percent, and a debt-equity
ratio of 0.60. What is the return on equity?
A. 17.11 percent
B. 18.98 percent
C. 20.16 percent
D. 22.20 percent
E. 24.60 percent
Which one of the following industries is most apt to have the shortest operating cycle?
A. Toy store
B. Car manufacturer
C. Local restaurant
D. Furniture store
E. Plastics manufacturer
A firm has sales of $529,000 for the year. The profit margin is 3.4 percent and the
retention ratio is 60 percent. What is the common-size percentage for the dividends
paid?
A. 0.99 percent
B. 1.18 percent
C. 1.21 percent
D. 1.36 percent
E. 1.42 percent
A firm is considering two different capital structures. The first option is an all-equity
firm with 32,000 shares of stock. The second option is 20,000 shares of stock plus some
debt. Ignoring taxes, the break-even level of earnings before interest and taxes between
these two options is $48,000. How much money is the firm considering borrowing if
the interest rate is 8 percent?
A. $175,000
B. $225,000
C. $250,000
D. $275,000
E. $300,000
The clientele effect states that investors fall into various groups because of differences
in their preferences for which one of the following?
A. Share price levels
B. Risk level
C. Short-term versus long-term investments
D. Rates of return
E. Dividends