1) The speed of the collections process is determined by three types of float: mail float,
processing float, and transit float.
2) One of the problems associated with maximization of total current stock value is that
it ignores the timing of a project’s return.
3) The residual theory of dividends connects a firm’s dividend policy and its level of
capital investments.
4) When using a financial calculator, cash outflows generally have to be entered as
negative numbers, because a financial calculator sees money “leaving your hands.”
5) It is possible for two companies to have the same financial performance, but their
financial statements can be different, depending on how and when the managers choose
to report certain transactions.
6) The risk-return tradeoff is seen in many areas of finance.
7) The funds needed to satisfy the precautionary motive are entirely held in cash.
8) The cash budget is composed of four elements: cash receipts, cash disbursements,
depreciation, and the net change in cash for the period.
9) If two companies have the same revenues and operating expenses, their net incomes
will still be different if one company finances its assets with more debt and the other
company with more equity.
10) Accrued wages and taxes are secured sources of financing because companies are
obligated to make these payments before they make payments on any other loans or pay
dividends.
11) A well-diversified portfolio typically has systematic risk equal to about 40% of the
portfolio’s total risk.
12) Management of a firm’s liquidity involves management of the firm’s investment in
current assets as well as its mix of long-term capital.
13) The residual dividend theory suggests that dividends should be paid to stockholders
first and then what is left can be reinvested by the firm.
14) A common protective provision in a bond indenture is the limitation of dividends on
the issuing firm’s common stock.
15) Because financial markets can be extremely volatile, with bond and stock prices
changing significantly from day to day, a firm’s management has much greater control
over the firm’s operating leverage than over its financial leverage.
16) Exchange rate fluctuations do not increase the riskiness of foreign portfolio
investments because changes in exchange rates are compensated for by changes in
interest rates and investment returns.
17) Under terms of a field warehouse financing agreement, the collateral inventories are
physically separated from the borrower’s other inventories but remain under the
borrower’s control.
18) Covered interest arbitrage can be taken advantage of when premiums in forward
rates are not exactly equal to the interest rate differential between two countries.
19) The Road Ready Riding, Inc. will use an estimated 24,000 wheel assemblies in its
manufacturing process next year. The carrying cost of the wheel assembly inventory is
$1.80 per wheel and the ordering cost per order is $50. What is Road Ready’s economic
ordering quantity of wheel assemblies?
A) 785
B) 997
C) 1,098
D) 1,155
20) Which of the following should be included in an analysis of a new project’s cash
flows?
A) any sales from existing products that would be lost if customers were expected to
purchase a new product instead
B) all financing costs
C) all sunk costs
D) no opportunity costs
21) Capital market transactions include which of the following?
A) any security that is purchased from a brokerage firm that is well capitalized
B) common stock of a public corporation
C) all securities that are purchased in the open market
D) U.S. Treasury bills
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 35,000 euros. The spot exchange rate today
is .6233 euros per dollar. The importer creates a forward-market hedge. The 90-day
forward rate is .6100 euros per dollar. The amount the U.S. importer will pay in 90 days
is
A) $56,153
B) $57,377
C) $55,683
D) $56,667
23) Exchange rate risk
A) exists when the contract is written in terms of the foreign currency
B) exists also in direct foreign investments and foreign portfolio investments
C) does not exist if the international trade contract is written in terms of the domestic
currency
D) all of the above
24) A flower shop is trying to determine the optimal order quantity of the wicker
baskets that it places many of its arrangements in. The store thinks it will sell 2000 of
these baskets over the next year. The baskets cost the shop $2.00 each. The carrying
costs of the baskets is $0.15 each per year. It costs the shop $8.00 to order.
a.What is the economic order quantity?
b.What is the total cost for ordering the baskets once a year? Four times a year?
25) Progressive Corporation issued callable bonds. The bonds are most likely to be
called if
A) interest rates decrease
B) interest rates increase
C) Shafer Corporation needs additional financing
D) Shafer Corporation’s stock price increases dramatically
26) What provision entitles the common shareholder to maintain a proportionate share
of ownership in a firm?
A) the cumulative feature
B) the convertible feature
C) the proportionality clause
D) the preemptive right
27) While Rogue Corporation has been in business for over 50 years, newly developed
products pushed the firm’s year-over-year growth rate to 35% during the latest three
years. The firm is proud of its history of paying dividends, but the vigorous recent
growth of the firm has left it cash challenged. Which of the following
policies/procedures would you consider best under the circumstances?
A) Borrow long-term to pay the current dividend
B) Look seriously for a merger partner
C) Enter into a long-term stock repurchase program
D) Substitute a stock dividend for the current cash dividend
28) 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
29) A corporate manager decides to build a new store on a lot owned by the corporation
that could be sold to a local developer for $250,000. The lot was purchased for $50,000
twenty years ago. When determining the value of the new store project
A) the cost of the lot is zero since the corporation already owns it
B) the opportunity cost of the lot is $250,000 and should be included in calculating the
value of the project
C) the cost of the lot for valuation purposes is $50,000 because land does not depreciate
D) the incremental cash flow should be the $50,000 original cost less accumulated
amortization
30) Given the following information on S & G Inc.’s capital structure, compute the
company’s weighted average cost of capital.
Type ofPercent ofBefore-Tax
CapitalCapital StructureComponent Cost
Bonds40%7.5%
Preferred Stock5%11%
Common Stock (Internal Only)55%15%
The company’s marginal tax rate is 40%.
A) 13.3%
B) 7.1%
C) 10.6%
D) 10%
31) Which of the following is true regarding the correct price of the forward contract?
A) If the quote is less than the computed price, the forward contract is undervalued
B) If the quote is greater than the computed price, the forward contract is overvalued
C) Both A and B
D) Neither A nor B
32) Which of the following should be included in the initial outlay?
A) taxable gain on the sale of old equipment being replaced
B) first year depreciation expense on any new equipment purchased
C) preexisting firm overhead reallocated to the new project
D) increased investment in inventory and accounts receivable
33) The purpose of carrying inventory is to
A) make different production processes more dependent on sales
B) make sales more independent of the production process
C) have collateral for loans
D) improve the current ratio
34) Consider the after-tax cash flows for Project S and Project L:
Project SProject L
Year 1$30000
Year 20$3000
Project SProject L
Year 1$30000
Year 20$3000
A rational person would prefer ________.
A) Project S because the money can be reinvested sooner
B) Project L because they can avoid taxes by receiving cash flows later
C) information about profits instead of cash flows
D) neither investment over the other
35) A U.S.-based multinational corporation has 100% owned subsidiary in Argentina.
The subsidiary operates only domestically, that is, all transactions occur within
Argentina. Therefore, the U.S. multinational corporation
A) is exposed to translation risk only
B) is not exposed to exchange rate risk because the subsidiary operates 100%
domestically
C) is exposed to both translation exposure and economic exposure
D) is most concerned with transactions exposure
36) Which of the following statements is true?
A) Short-term bonds have greater interest rate risk than do long-term bonds
B) Long-term bonds have greater interest rate risk than do short-term bonds
C) All bonds have equal interest rate risk
D) Interest rate risk is highest during periods of high interest rates
37) Incremental cash flows refer to
A) the difference between after-tax cash flows and before-tax accounting profits
B) the new cash flows that will be generated if a project is undertaken
C) the cash flows of a project, minus financing costs
D) the cash flows that are foregone if a firm does not undertake a project
38) In the present value bond valuation model, risk is generally incorporated into the
A) maturity amount
B) timing of cash flows (assuming more risky cash flows are received early)
C) discount rate or required return
D) cash flows (making some smaller if they are more risky)
39) Which of the following is a spontaneous source of financing?
A) accrued expenses
B) notes payable
C) common stock
D) paid-in-capital
40) Your company is able to arrange financing at either a rate of 12.75% annually, or at
a rate of 12% compounded monthly. Assuming financing is needed for one year, which
rate is the best?
A) 12% compounded monthly, because the annual percentage yield is 12.68%
B) Both rates are effectively the same, so your company should be indifferent between
the two
C) 112.75% annually because the annual percentage yield for 12% compounded
monthly is greater than 12.75%
D) 12.75% annually, because even though the annual percentage yield is higher, interest
if paid only once per year at year end
41) If you invest $750 every six months at 8 percent compounded semiannually, how
much would you accumulate at the end of 10 years?
A) $10,065
B) $10,193
C) $22,334
D) $21,731
42) Which of the following affects the precautionary motive for holding cash?
A) the cash flow predictability
B) the firm’s access to external funds
C) both A and B
D) none of the above
43) As of today, the most severe economic crisis to afflict the United States economy is
considered to be
A) the Great Depression of the 1930s
B) the Great Recession of 2007 – 2009
C) the Reagan Tax Law Changes of 1985
D) the Savings and Loan Crisis of 1978 – 1982
44) A justification for no dividend payments that would be pleasing to shareholders
could be
A) insufficient cash available for dividend payments
B) positive NPV investment projects that require the firm to retain cash for investment
purposes
C) an investor clientele that prefers current liquidity
D) cash will be used for a stock dividend
45) The inventory loan arrangement in which all of the borrower’s inventories are used
as collateral is termed a
A) terminal warehouse agreement
B) floating lien agreement
C) chattel mortgage agreement
D) field warehouse financial agreement
46) The cash budget consists of all the following factors EXCEPT
A) cash receipts
B) cash disbursements
C) new financing needed
D) net income
47) The internal rate of return is
A) the discount rate that makes the NPV positive
B) the discount rate that equates the present value of the cash inflows with the present
value of the cash outflows
C) the discount rate that makes NPV negative and the PI greater than one
D) the rate of return that makes the NPV positive
48) General Electric (GE) has been a public company for many years with its common
stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of
new common stock, the transaction will be describe as
A) an initial public offering
B) a secondary market transaction because GE common stock has been trading for
years
C) a seasoned equity offering because GE has sold common stock before
D) a money market transaction because GE raises new money to fund its business
49) A firm that maintains a ‘stable dollar dividend per share” will generally not increase
the dividend unless
A) a stock split occurs
B) the firm merges with another profitable firm
C) the firm is sure that a higher dividend level can be maintained
D) the P/E ratio has increased steadily over the past 5 years
50) Mountain Snow Sports, Inc. is trying to determine the optimal order quantity for
snow boards for the next twelve months. Annual sales are expected to be 1,000,000
units at a retail price of $400 each. The cost of carrying snow boards is $80 per year.
Studies show that it costs Mountain Snow $250 to prepare and receive an order. What is
the EOQ?
A) 2,750
B) 2,500
C) 2,000
D) 1,850
51) A typical measure for the risk-free rate of return is the
A) U.S. Treasury Bill rate
B) prime lending rate
C) money market rate
D) short-term AAA-rated bond rate
52) Congratulations! You are the proud winner of the multi-state Sour Ball Lottery. You
are to receive $2,000,000 at the end of each year for the next 20 years. While the
Lottery Commission refers to this as a $40,000,000 jackpot, if you choose the “cash
option” they will give you much less than that; you can receive a lump sum payment
today equal to the present value of the ordinary annuity instead of the 20 annual
payments. If the discount rate that the Lottery Commission uses to determine the lump
sum payoff is 7%, what is your payoff if you select the cash option?
A) $26,945,332
B) $39,707,503
C) $42,977,401
D) $21,188,028
53) If you wish to accumulate $200,000 in the child’s college fund after 18 years, and
can invest at a 7.5% annual rate, how much must you invest at the end of each year if
the first deposit is made at the end of the first year?
54) Using the 2012 financial statements for DRE Corporation and this additional
information, prepare a pro forma income statement and balance sheet for the year 2013.
Determine the discretionary financing needed (DFN) and assume that if the DFN is
positive, the company will increase long-term debt, and if DFN is negative, the
company will pay back some long-term debt.
Sales for next year (2013) are expected to increase by $300,000 to $1,800,000. The firm
is running efficiently and at full capacity so that all assets and spontaneous liabilities are
expected to increase proportionally with sales. The dividend payout ratio for 2013 will
be 40%.
DRE Corporation
2012 Financial Statements
55) Office Clean Corporation has a capital structure consisting of 30 percent debt and
70 percent common equity. Assuming the capital structure is optimal, what amount of
total investment can be financed by a $35 million addition to retained earnings without
selling new common stock?
56) gat, Inc. has issued a $1,000 par 4% annual coupon bond that is to mature in 18
years. If your required rate of return is 6.5%, what price would you be willing to pay for
the bond?
57) Frank Zanca is considering three different investments that his broker has offered to
him. The different cash flows are as follows:
Because Frank only has enough savings for one investment, his broker has proposed the
third alternative to be, according to his expertise, “the best in town.” However, Frank
questions his broker and wants to calculate the present value of each investment.
Assuming a 15% discount rate, what is Frank’s best alternative?
58) Diana Ltd. paid a $2.50 per share dividend yesterday. The dividend is expected to
grow at 10 percent per year for the foreseeable future. Diana Ltd. has a beta of 1.6, a
standard deviation of returns of 30 percent, and a required return of 18%. What is the
value of a share of Diana Ltd. common stock?
59) The ZYX Corporation is planning to request a line of credit from its bank and wants
to estimate its cash needs for the month of September. The following sales forecasts
have been made for 2010:
July$500,000
August 400,000
September 300,000
October 200,000
November 100,000
Collection estimates were obtained from the credit collection department as follows:
20% collected within the month of sale; 70% collected the first month following this
sale; and 10% collected the second month following the sale. Payments for labor and
raw materials are typically made in the month in which these costs are incurred. Total
labor and raw material costs each month are 50% of sales. General administrative
expenses are $30,000 per month, lease payments are $10,000 per month, and
depreciation charges are $20,000 per month. The corporation tax rate is 40%; however,
no corporate taxes are paid in September. Prepare a pro forma income statement and
cash budget for September.
60) The preferred stock of Wells Co. sells for $17 and pays a $1.75 dividend. The net
price of the stock after issuance costs is $15.30. What is the cost of capital for new
preferred stock?
61) You wish to accumulate $10,000 by depositing $481.46 per month into a savings
account that earns 4.75% compounded monthly. How many monthly deposits must you
make?