Accounts receivable represents credit sales that have not yet been paid by customers.
The fact that exchange rates are continually changing gives rise to the possibility that
money may be made or lost on an international transaction because of rate movements
outside the business deal. This exposure is generally referred to as the risk of
international trade.
The cash conversion cycle is shorter than the operating cycle by the time it takes for the
firm to pay its own bills.
Political risk is the probability that the value of a firm’s investment in a foreign country
will be reduced by political actions taken primarily, but not exclusively, by the country’s
government.
Investors buy securities for the future cash flows that come from owning them.
Portfolio risk is best reduced through diversification into stocks in fundamentally
different industries.
The importance of the timing of future payments is positively related to the interest rate.
Assuming a one year investment, the formulation for arriving at return is either FV1=
PV + kPV or FV1= PV(1+k).
The effective annual rate will increase as the number of compounding periods per year
increases.
The pure play method of estimating risk adjusted returns can be applied to any type of
capital budgeting project.
The wider the distribution of returns, the smaller is the investment’s risk.
A firm’s collection policy refers to how quickly and aggressively a firm oversees the
management of all of its receivables.
If the selling price of a depreciable asset exceeds its original cost, the excess of the
selling price over that original cost is taxed as a capital gain.
Bond ratings are the primary measure of default risk.
A decrease in the equity multiplier indicates that the firm has increased its use of debt.
Granting a tax deduction for corporate interest enables financial leverage to increase a
firm’s value by:
A.increasing EBIT.
B.decreasing the lender’s share of EBIT.
C.decreasing the government’s share of EBIT.
D.b and c
Economically, the worst case scenario for a firm that has made a direct investment in a
less developed country is:
A.excessive taxation.
B.a nonconvertible currency that makes it impossible to get profits home.
C.expropriation.
D.forcing partial ownership by citizens of the country.
Security A will yield a 6% return in one year. Security B will either yield a 3% return or
a 9% return in year with equal probability. Which is the better investment based on risk
aversion and why?
A.Security A, because it has a higher expected return with less risk.
B.Security B, because it has a higher expected return with less risk.
C.Security A, because it has an equivalent expected return with less risk.
D.Security B, because it may potentially produce a 9% return.
Which of the following is true of the breakeven diagrams?
A.Cost is plotted along the vertical axis and unit sales (Q for quantity) along the
horizontal axis.
B.Cost is plotted along the horizontal axis and unit sales (Q for quantity) along the
vertical axis.
C.Fixed cost is plotted along the horizontal axis and variable cost along the vertical
axis.
D.Revenue is plotted along the horizontal axis and unit sales (Q for quantity) along the
vertical.
Retained earnings are:
A.a liability.
B.profits that have not been distributed to shareholders as dividends.
C.the equivalent of stock.
D.the same as cash.
When calculating the net cash flow in a project’s expected final year:
A.recovery of any working capital invested is disregarded.
B.the after-tax salvage value of project equipment is considered.
C.the remaining principal on any borrowed funds is considered.
D.the sales proceeds from any land associated with the project is disregarded.
Which of the following is NOT used to accelerate cash receipts?
A.Lock Box Systems
B.Wire Transfers
C.Concentration Banks
D.Remote Disbursing
Which of the following is true of a portfolio?
A.It is usually held by high net worth investors.
B.It is considered diversified only if it contains both stocks and bonds.
C.Its risk and return are different from but based on those of the individual securities in
it.
D.It is available to institutional investors and pension funds.
When a recession came along in the late 1980s:
A.the junk bond market collapsed.
B.the merger wave beginning in 1981 accelerated.
C.the mastermind of the junk bond market, Michael Milken, received the Nobel Peace
Prize in Economics.
D.All of the above
Which of the following is an accepted financing wisdom?
A.The maturity of funds used to support a project should roughly match the project’s
duration.
B.Because firms can use their own equity as they choose, equity can be used to finance
projects of any duration.
C.Any project can appropriately be supported by funding with a shorter maturity.
D.Any project can appropriately be supported by funding with a longer maturity.
Urguhart has just declared a 4-for-3 stock split. If the pre-split price of common stock
was $54 a share, what do you expect the post-split price will be?
A.$72.00
B.$36.18
C.$42.23
D.$40.50
The initial outlay calculation for an asset replacement decision normally includes any:
A.after-tax salvage value of the old asset.
B.an initial buildup in net working capital.
C.interest expense.
D.a and b
Which group of investors would most likely prefer a high dividend-payout stock, given
the existence of taxes and transactions costs?
A.Investors saving for retirement.
B.Investors in a high tax bracket.
C.Investors needing current income.
D.Investors seeking high capital gains.
Marshall Manufacturing has an ACP of 60 days, an inventory turnover of 6, and turns
its payables over once a month. How long is Marshall’s cash conversion cycle?
(Assume a 360-day year)
A.30 days
B.60 days
C.90 days
D.120 days
Which of the following financial ratios are market-based ratios?
A.Debt-to-equity
B.Price-to-earnings
C.Return on investment
D.All of the above
Which of the following is true of the degree of total leverage?
A.It is the product of the degree of financial leverage and the degree of operating
leverage.
B.It is the sum of the degree of financial leverage and the degree of operating leverage.
C.It is the difference between the degree of financial leverage and the degree of
operating leverage.
D.It is the relative change in financial leverage with respect to the operational leverage.
If a low cash flow this year makes a low cash flow next year more likely to occur, this
means the project cash flows tend to be ____.
A.less predictable
B.independent of each other
C.more volatile
D.correlated
Last year Avator’s operating income (EBIT) increased by 22 percent while its dollar
sales increased by 15%. What is Avator’s degree of operating leverage (DOL)?
A..68
B.2.0
C.1.47
D..32
A bond€s current yield is calculated as:
A.the annual interest payment divided by the bond€s current market yield.
B.the annual interest payment divided by the bond€s face value.
C.the annual interest payment divided by the bond€s current price.
D.the par value divided by the bond€s current price.
Morrison Movers’s optimal capital structure calls for financing seventy percent of new
assets with equity. Assuming that Morrison Movers has net income of $5 million, how
much can be paid out in the form of a dividend and still have sufficient funds to cover a
$6 million capital budget?
A.$0, it needs all of the funds for expansion.
B.$ 800,000
C.$4,200,000
D.$5,000,000
Alpha Corp is thinking about acquiring Omega Inc. Omega generated cash of $50M last
year and is expected to grow at 5% indefinitely. Alpha expects synergies of at least
$15M per year after the merger which will also grow at 5%. Omega has 20M shares of
common stock outstanding on which stockholders earn a return of about 15%. What is
the maximum price per share Alpha should offer for Omega?
The following information relates to the planned acquisition of a target. Cash flow and
synergy figures are after tax. ($M)
Calculate the maximum percentage premium that should be offered to the target
company’s shareholders.
Key Graphics expects to finish the current year with the financial results indicated on
the worksheet given below. Develop next year’s income statement and ending balance
sheet using that information and the following planning assumptions and facts. Note
that due to an economic slowdown, Key Graphics is expecting a ten percent reduction
in revenue. It is attempting to cut expenditures by an even greater percentage, resulting
in a larger net profit. Work to the nearest thousand dollars.
PLANNING ASSUMPTIONS AND FACTS
Income Statement Items
Balance Sheet Items
Define opportunity costs and explain their role in capital budgeting.
Should investors be concerned about the ethics of the firms in which they invest? Why
or why not? If most of investors worry about it, how will that affect corporate behavior?
During the past year, Albert Corporation had
sales of $5 million,
cost of goods sold of $2.7 million,
operating expense of $1.3 million, and
interest expense of $0.5 million.
During the year Albert
paid a preferred stock dividend of $100,000
paid a common stock dividend of $150,000 and
paid off debt of $2.3 million.
What was Albert€s taxable income?