1) Self-liquidating loans are intended merely to carry a firm through seasonal peaks in
financing needs that are due primarily to buildups of accounts receivable and inventory.
2) The representative theory of dividends, as espoused by Modigliani and Miller,
suggests that dividends represent a significant active decision variable that affects firm
value.
3) In computing the cost of retained earnings, the net proceeds represents the amount of
money retained net of any underpricing and/or flotation costs.
4) A firm’s capital structure is the mix of the current liabilities, long-term debt, and
equity maintained by the firm.
5) Benchmarking is a type of cross-sectional analysis in which a firm’s ratios are
compared to a key competitor firm within the same industry, primarily to identify areas
for improvement.
6) The market value of common stock is related to its par value because both are
sensitive to the reactions of investors to new information.
7) Which of the following is true of a cash flow?
A) Profits do not necessarily result in cash flows available to the stockholders
B) It is guaranteed that the board of directors will increase dividends when net cash
flows increase
C) A firm’s income statement will never show a positive profit when its cash outflows
exceed its cash inflows
D) An increase in revenue will always result in an increase in cash flow
8) A corporation is evaluating the relevant cash flows for a capital budgeting decision
and must estimate the terminal cash flow. The proposed machine will be disposed of at
the end of its usable life of five years at an estimated sale price of $15,000. The
machine has an original purchase price of $80,000, installation cost of $20,000, and will
be depreciated under the five-year MACRS. Net working capital is expected to decline
by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital
gain. The terminal cash flow is ________.
A) $24,000
B) $16,000
C) $14,000
D) $26,000
9) A firm issued 10,000 shares of no par-value common stock, receiving proceeds of
$40 per share. The amount recorded is ________.
A) $0 in the Common Stock account
B) $0 in the Paid-in Capital in Excess of Par account
C) $400,000 in the Common Stock account
D) $400,000 in the Paid-in Capital in Excess of Par account
10) Given the financial data for New Electronic World, Inc. (NEW), compute the
following measures of cash flows for the NEW for the year ended December 31, 2015.
(a)Operating cash flow
(b)Free cash flow
For the year ended December 31,
11) Table 8.3
Consider the following two securities X and Y.
Using the data from Table 8.3, what is the portfolio expected return if you invest 100
percent of your money in X, borrow an amount equal to half of your own investment at
the risk-free rate and invest your borrowings in asset X?
A) 15.0%
B) 22.5%
C) 25.0%
D) 27.5%
12) A warrant is attached to a $1,000 par, 10 percent, 10-year bond, paying annual
interest and having 20 warrants attached for the purchase of a firm’s stock. The bonds
were initially sold for $1,200. When issued, similar risk, straight bonds were selling at a
14 percent rate of return. The implied price of the warrant is ________.
A) $10.40
B) $20.40
C) $10.00
D) $20.00
13) The most stringent step in the collection process is ________.
A) letters
B) personal visits
C) collection agencies
D) legal action
14) The ________ financing strategy requires a firm to pay interest on excess funds
borrowed but not needed throughout the entire year.
A) aggressive
B) conservative
C) permanent
D) seasonal
15) Table 3.1
Information (2013 values)
1> Sales totaled $110,000
2> The gross profit margin was 25 percent.
3> Inventory turnover was 3.0.
4> There are 360 days in the year.
5> The average collection period was 65 days.
6> The current ratio was 2.40.
7> The total asset turnover was 1.13.
8> The debt ratio was 53.8 percent.
Notes payable for CEE in 2013 was ________. (See Table 3.1)
A) $113,466
B) $ 52,372
C) $ 41,372
D) $ 10,609
16) Less certain a cash flow, the ________ the risk, and ________ the present value of
the cash flow.
A) lower; higher
B) lower; lower
C) higher; lower
D) higher; higher
17) A firm has an outstanding 15-year convertible bond issue with a $1,000 par value
and a stated annual interest rate of 7 percent. The bond is convertible into 50 shares of
common stock which has a current market price of $15. A straight bond could have
been sold with a 10 percent stated interest rate. The market value of the bond is
________.
A) $750
B) $772 at the minimum
C) $1,250 at the minimum
D) $1,000
18) What is the dividend on an 8 percent preferred stock that currently sells for $45 and
has a face value of $50 per share?
A) $3.33
B) $3.60
C) $4.00
D) $5.00
19) The key dimension of credit selection which analyzes an applicant’s record of
meeting past obligations is ________.
A) collateral
B) capacity
C) character
D) capital
20) Table 10.3
A firm is evaluating two projects that are mutually exclusive with initial investments
and cash flows as follows:
If the firm in Table 10.3 has a required payback of two years, it should ________.
A) accept Project A and Project B
B) accept Project A and reject Project B
C) reject Project A and accept Project B
D) reject both the projects
21) Lisa’s Riding Equipment Company has entered into two lease arrangements. One
lease is an operating lease on an office copier requiring annual lease payments of
$2,000 for the next three years. The other lease is a 15-year financial lease on a building
requiring annual lease payments of $150,000. If the firm’s discount rate is 10 percent,
how should each lease be presented on the firm’s balance sheet?
22) The Oxford Heating Company has been very successful in the past four years. Over
these years, it paid common stock dividend of $4 in the first year, $4.20 in the second
year, $4.41 in the third year, and its most recent dividend was $4.63. The company
wishes to continue this dividend growth indefinitely. What is the value of the company’s
stock if the required rate of return is 12 percent?
23) Income Statement
Huddleston Manufacturing Company
For the Year Ended December 31, 2015
Huddleston Manufacturing estimates its sales in 2016 will be $3 million. Interest
expense is expected to remain unchanged at $70,000, and the firm plans to pay cash
dividends of $140,000 during 2016. Use the percent-of-sales method to prepare a pro
forma income statement for the year ended December 31, 2016, based on the 2015
income statement shown above.
24) Jia’s Apple Farm uses 35 baskets each day to pack apples for shipping. It takes 5
days to receive a shipment of baskets after an order is placed and she would like a
safety stock of 3 days in inventory. At what level of inventory should Jia’s place an
order for baskets?
25) Table 4.8
Balance Sheet
Wirl Wind Company
The Wirl-Wind Company of America is trying to plan for the next year. Using the
current income statement and balance sheet given in Table 4.8, and the additional
information provided, prepare the company’s pro forma statements.
Sales are projected to increase by 15 percent.
Total of $75,000 in dividend will be paid.
A minimum cash balance of $650,000 is desired.
A new asset for $50,000 will be purchased.
Depreciation expense for next year is $50,000.
Marketable securities will remain the same.
Accounts receivable, inventory, accounts payable, notes payable, and accruals will
increase by 15 percent.
$30,000 new issue of bond will be sold.
No new stock will be issued.
26) Dr. Dan is considering investment in a project with beta coefficient of 1.75. What
would you recommend him to do if this investment has an 11.5 percent rate of return,
risk-free rate is 5.5 percent, and the rate of return on the market portfolio of assets is 8.5
percent?
27) Last Christmas, Danny received an annual bonus of $1,500. These annual bonuses
are expected to grow by 5 percent for the next 5 years. How much will Danny have at
the end of the fifth year if he invests his Christmas bonuses (including the most recent
bonus) in a project paying 8 percent per year?
28) Using the risk-adjusted discount rate method of project evaluation, find the NPV for
projects X and Y. Which project should Nico select using this method? (See Table 12.5)
29)
30) Consider two firms, Go Debt corporation and No Debt corporation. Both firms are
expected to have earnings before interest and taxes of $100,000 during the coming year.
In addition, Go Debt is expected to incur $40,000 in interest expenses as a result of its
borrowings whereas No Debt will incur no interest expense because it does not use debt
financing. However, No Debt will have to pay stockholders $40,000 in dividend
income. Both firms are in the 40 percent tax bracket. Calculate the Earnings after tax
for both firms. Which firm has the higher after-tax earnings? Which firm appears to
have the higher cash flow? How do you account for the difference?