1) A timeline identifies the timing and amount of a stream of cash flows, along with the
interest rate it earns.
2) The current ratio and the acid test ratio both measure financial leverage.
3) One of the attractive features of commercial paper is an active secondary market.
4) Capital rationing generally leads to higher stock prices as management is doing the
best job it can in selecting only the best capital budgeting projects.
5) An exchange rate of $1.6 per British Pound is an example of a direct quote in the
United States.
6) Efficient collection of accounts receivable helps to determine both the profitability
and the liquidity of the firm.
7) The money market includes transactions in short-term financial instruments.
8) Safety stock may be included into the EOQ model to alleviate problems caused by
violation of the assumptions of constant demand and instantaneous delivery.
9) Generally Accepted Accounting Principles (GAAP). GAAP is a set of
principle-based accounting standards established by the Financial Accounting Standards
Board (FASB).
10) Asset allocation is not recommended by financial planners because mixing different
types of assets, such as stocks with bonds, makes it more difficult to track performance
and adjust portfolios to changing market conditions.
11) A firm increases the risks of insolvency by keeping relatively large amounts of
money tied up in marketable securities.
12) Exchange rate risk exists in international trade contracts denominated in a foreign
currency, but not in foreign portfolio investments, because the returns on investment
securities are adjusted automatically for differences in exchange rates.
13) After a stock split of 2:1, each investor will have twice the number of shares, but the
same percentage ownership in the firm that he had before the split.
14) Net profit margin is equal to the gross profit margin times the operating profit
margin.
15) A homeowner that owes more on his/her mortgage than the home is worth is said to
be “under water”.
16) An efficient market is one where the prices of the assets traded in that market fully
reflect all available information at any instant in time.
17) 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.
18) All of the following are potential benefits of stock repurchases EXCEPT
A) a means for providing an internal investment opportunity.
B) an approach for maintaining the existing capital structure while still making a
distribution to shareholders.
C) a favorable impact on earnings per share.
D) the elimination of a minority ownership group of stockholders.
19) Which of the following would normally occur if a firm increases its investment in
current assets?
A) The firm’s liquidity would be improved
B) The firm’s net working capital would decline
C) The firm’s liquidity would be worsened
D) The firm’s profit margin would improve
20) Marley Financial plans to sell $50,000,000 of 120-day commercial paper, on which
it expects to pay discounted interest at a rate of 5% per year. Dealer fees are expected to
be $30,000. The effective cost of credit to Marley Financial is
A) 5.27%
B) 5.64%
C) 6.22%
D) 7.53%
21) AFB, Inc. is expecting sales to increase by 20% next year, but its net fixed assets
are expected to remain at their current level. This is an example of
A) economies of scale
B) lumpy assets
C) spontaneous financing
D) discretionary financing
22) If a firm with credit terms of 2/10 net 30 were to change its terms to 2/10 net 60, the
result would probably be
A) more customers would take advantage of the cash discount
B) fewer customers would take advantage of the cash discount
C) increased accounts receivable turnover
D) a reduction in safety stock
23) The prices for the National Gasworks Corporation for the second quarter of 2012
are given below. The price of the stock on April 1, 2012 was $130. Find the holding
period return for an investor who purchased the stock on April 1, 2012 and sold it the
last day of June 2012 .
Month EndPrice
April$125.00
May138.50
June132.75
A) -4.2%
B) -3.7%
C) 2.1%
D) 3.7%
24) The capital budgeting manager for XYZ Corporation, a very profitable high
technology company, completed her analysis of Project A assuming 5-year depreciation.
Her accountant reviews the analysis and changes the depreciation method to 3-year
depreciation. This change will
A) increase the present value of the NCFs
B) decrease the present value of the NCFs
C) have no effect on the NCFs because depreciation is a non-cash expense
D) only change the NCFs if the useful life of the depreciable asset is greater than 5
years
25) Given the following annual net cash flows, determine the internal rate of return to
the nearest whole percent of a project with an initial outlay of $750,000.
YearNet Cash Flow
1$500,000
2$150,000
3$250,000
A) 9%
B) 11%
C) 13%
D) 15%
26) LED Corp.’s common stock paid $2.50 in dividends last year (D0). Dividends are
expected to grow at a 12-percent annual rate forever. If LED’s current market price is
$40.00, and your required rate of return is 23 percent, should you purchase the stock?
A) No, the percentage return on the stock is too high, thus it is too risky
B) Yes, the stock is expected to return more than you require
C) No, the stock is overpriced
D) Not enough information is given
27) A company is expanding and has already signed a lease on new office space that
costs $10,000 per month. The company also needs a new information system and hired
a consultant to recommend new software. The consultant was paid $5,000 for her
recommendation. Now the company is trying to make a choice between three
competing software products. In the capital budgeting decision to purchase new
software, the monthly rent for the office space is ________ and the consultant’s fee is
________.
A) a sunk cost; a sunk cost
B) an opportunity cost; a sunk cost
C) incremental cash outflow; an opportunity cost
D) a sunk cost; a part of the initial outlay
28) All of the following are FALSE EXCEPT
A) the mail float is caused by the time lapse from the moment a firm receives the check
and begins to process it
B) the processing float is caused by the time necessary for a bank to process the check
C) the transit float is caused by the time lapse from the moment a customer mails a
check until the firm begins to process it
D) the disbursing float derives from the fact that funds remain in a firm’s bank account
until its payment check is cleared through the banking system
29) You are analyzing the purchase of new equipment. Since you are not an expert on
this type of equipment, you hire a consulting firm to make recommendations. The
consultant charged you $1,500 and recommended the purchase of the latest model from
ACME Corp. of America. The equipment costs $80,000, and it will cost another
$10,000 to modify it for special use by your firm. The equipment will be depreciated on
a straight-line basis over six years with no salvage value. You expect the equipment will
be sold after three years for $28,000. Use of the equipment will require an increase in
your company’s net working capital of $4,000, but this $4,000 will be recovered at the
end of year three. The use of the equipment will have no effect on revenues, but it is
expected to save the firm $50,000 per year in before-tax operating costs. Your
company’s marginal tax rate is 35%. What is the terminal cash flow for this project?
A) ($17,000)
B) $24,500
C) $33,950
D) $37,950
30) Which of the following would be an example of the “precautionary motive” for a
firm holding cash balances?
A) purchase of inventory
B) anticipating a strike
C) purchase fixed assets
D) make dividend payments
31) Use the following information to calculate the company’s accounting net income for
the year.
A) $300,000
B) $240,000
C) $125,000
D) $120,000
32) Table 4-1
Stewart Company
Balance Sheet
The debt ratio is
A) 24.1%
B) 32.6%
C) 45.0%
D) 55.2%
33) Which of the following does NOT provide an indication of liquidity?
A) quick ratio
B) debt ratio
C) inventory turnover
D) average collection period
34) Limited partnerships are not as prevalent as corporations because
A) limited partners can lose up to three times the amount they invested in the
partnership if the business goes bankrupt
B) limited partnerships have the disadvantage of double taxation
C) the general partner has no liability, making it difficult for the partnership to borrow
money
D) it is easier to transfer ownership by selling common stock than it is to sell
partnership
35) Two factors that cause the investor’s required rate of return to differ from the
company’s cost of capital are
A) taxes and risk
B) transactions costs and risk
C) taxes and transactions costs
D) risk and opportunity cost differences
36) A stock’s beta is a measure of its
A) unsystematic risk
B) systematic risk
C) company-unique risk
D) diversifiable risk
37) A company has preferred stock with a current market price of $18 per share. The
preferred stock pays an annual dividend of 4% based on a par value of $100. Flotation
costs associated with the sale of preferred stock equal $1.50 per share. The company’s
marginal tax rate is 40%. Therefore, the cost of preferred stock is
A) 28.80%
B) 24.24%
C) 22.22%
D) 14.55%
38) The interest on corporate bonds is typically paid
A) semiannually
B) annually
C) quarterly
D) monthly
39) Bass Frozen Foods, Inc. has found three acceptable investment opportunities. The
three projects require a total of $5 million in financing. It is the company’s policy to
finance its investments by using 40% debt and 60% common equity. The firm has
generated $3.8 million dollars from its operations that could be used to finance the
common equity portion of its investments.
a.What portion of the new investments will be financed by common equity and what
portion by debt?
b.According to the residual dividend theory, how much would be paid out in dividends?
40) A local restaurant owner is considering expanding into another rural area. The
expansion project will be financed through a line of credit with City Bank. The
administrative costs of obtaining the line of credit are $500, and the interest payments
are expected to be $1,000 per month. The new restaurant will occupy an existing
building that can be rented for $2,500 per month. The incremental cash flows for the
new restaurant include
A) $500 administrative costs, $1,000 per month interest payments, $2,500 per month
rent
B) $500 administrative costs, $2,500 per month rent
C) $1,000 per month interest payments, $2,500 per month rent
D) $2,500 per month rent
41) When an investment banking firm “underwrites” an issue of securities, the firm is
performing which of the following?
A) agreeing to market the securities to investors for a fee
B) giving legal advice to the firm that is issuing the securities
C) offering to purchase the securities from the firm, thereby assuming the risk of resale
to investors
D) agreeing to provide insurance that the firm’s securities will sell for a price that is
established by the firm
42) The one-year interest rate is 4%. The interest rate for a two-year security is 6%. The
one-year interest rate one year from now is 8.34%. According to the liquidity preference
theory, the risk premium for the second one-year investment is
A) 0.50%
B) 0.34%
C) 0.30%
D) 1.66%
43) Table 4-2
Drummond Company
Balance Sheet
The current ratio is
A) 2.97
B) 2.46
C) 2.35
D) 2.23
44) A Spot transaction occurs when
A) one currency is deposited in a foreign bank
B) one currency is immediately exchanged for another currency
C) one currency is exchanged for another currency at a specified price
D) one currency is exchanged for another currency in 30, 60, or 90 days
45) Private placements usually have several advantages associated with them, but also
tend to suffer from specific disadvantages. Which of the following is a disadvantage of
a private placement when compared to other methods of selling new securities?
A) strictly standardized features/terms
B) higher interest costs
C) reduced flotation costs
D) avoidance of registration with the SEC
46) Which of the following accounts belongs in the equity section of a balance sheet?
A) retained earnings
B) cash
C) long-term debt
D) dividends
47) Salvage value would most likely NOT be considered by
A) net present value
B) internal rate of return
C) payback
D) A and B
48) The advantages of NPV are all of the following EXCEPT
A) it can be used as a rough screening device to eliminate those projects whose returns
do not materialize until later years
B) it provides the amount by which positive NPV projects will increase the value of the
firm
C) it allows the comparison of benefits and costs in a logical manner through the use of
time value of money principles
D) it recognizes the timing of the benefits resulting from the project
49) A discretionary form of financing would be
A) notes payable
B) accounts payable
C) accrued expenses
D) A and B
50) Table 4-1
Stewart Company
Balance Sheet
The total asset turnover ratio is
A) 1.11
B) 1.41
C) 2.33
D) 4.45
51) Based on the security market line, Robo-Tech stock has a required return of 14%
and Friendly Insurance Company has a required return of 10%. Robo-Tech has a
standard deviation of returns of 18%. Therefore
A) Friendly must have a standard deviation of returns of less than 18% because
Friendly is less risky than Robo-Tech
B) all rational investors will prefer Friendly over Robo-Tech
C) for a well-diversified investor, Friendly is less risky than Robo-Tech
D) the beta for Friendly must be greater than the beta for Robo-Tech because Friendly
is the better buy for a risk-averse investor
52) An investor currently holds the following portfolio:
Amount
Invested
8,000 shares of Stock A$16,000Beta = 1.3
15,000 shares of Stock B$48,000Beta = 1.8
25,000 shares of Stock C$96,000Beta = 2.2
The investor is worried that the beta of his portfolio is too high, so he wants to sell
some stock C and add stock D, which has a beta of 1.0, to his portfolio. If the investor
wants his portfolio to have a beta of 1.72, how much stock C must he replace with stock
D?
A) $18,000
B) $24,000
C) $31,000
D) $36,000
53) Which of the following would be considered a variable cost in a manufacturing
setting?
A) rent
B) administrative salaries
C) insurance
D) direct labor
54) A company borrows $2,000,000 and uses the money to purchase high technology
machinery for its operations. These are examples of
A) cash flow from financing and cash flow from operations
B) cash flow from investing and cash flow from operations
C) cash flow from financing and cash flow from investing
D) cash flow from investing and cash flow from financing
55) An investor who requires a 12% percent return for a stock that pays no dividends
and requires a 9% return for a stock that pays its entire return from dividends is most
likely a proponent of
A) the bird-in-the-hand dividend theory
B) the residual dividend theory
C) the clientele effect
D) the information effect
56) If Neal O’Danny preferred stock pays an annual dividend of $2.80, and investors
require a 9% return, what is the value of O’Danny’s preferred stock today?
57) Bill starts a retirement fund at age 21 and plans on depositing equal annual amounts
on each birthday, starting at age 21, and ending at age 60 . He wants to have $2 million
at age 60 . John starts his fund on his 30th birthday. He wants to deposit equal annual
amounts on each birthday starting on his 30th birthday and ending on his 60th birthday.
John wants to have $2 million at age 60 . If the investment funds earn 10% per year,
calculate the amounts the Bill and John respectively will have to save each year
(rounded to the nearest dollar) to meet their goals. Comment on the difference.
58) How could an analyst determine whether a company’s ratio is good or bad?
59) Tannerly Worldwide’s common stock is currently selling for $48 a share. If the
expected dividend at the end of the year is $2.40 and last year’s dividend was $2.00,
what is the rate of return implicit in the current stock price?
60) D&B Contracting plans to purchase a new backhoe. The one under consideration
costs $233,000, and has a useful life of 8 years. After-tax cash flows are expected to be
$31,384 in each of the 8 years and nothing thereafter. Calculate the internal rate of
return for the grader.
61) The manager of Golden Ray Corporation receives a bonus if company profits
exceed $1,000,000 this year. During the final week of the year, the manager changes an
accounting policy that will increase reported profits from $950,000 to $1,025,000,
triggering his bonus. The change in profits of $75,000 will reverse itself in the next
year, and the accounting change has no impact on Golden Ray’s cash flow. Discuss the
above situation as it relates to both an agency problem and efficient markets.
62) Your friend, John, believes that since capital markets are efficient, he doesn’t need
to read the financial press or be involved in stock research before purchasing stocks for
his portfolio. He simply throws darts at the stock pages and buys the stocks the darts
hit. Is stock research and analysis important when buying and selling stocks in an
efficient market?
63) Amalgamated Enterprises is planning to purchase some new equipment. With this
new equipment, the company expects sales to increase from $8,000,000 to $10,000,000.
A portion of the financing for the purchase of the equipment will come from a
$1,000,000 new common stock issue. The company knows that its current assets, fixed
assets, accounts payable, and accrued expenses increase directly with sales. The
company’s net profit margin on sales is 8 percent, and the company plans to pay 40
percent of its after-tax earnings in dividends. A copy of the company’s current balance
sheet is given below.
Amalgamated Enterprises Balance Sheet
Prepare a pro forma balance sheet for Amalgamated for next year.
64) The Knight Corporation projects that next year its fixed costs will total $240,000.
Its only product sells for $34 per unit, of which $18 is a variable cost. The management
of Knight is considering the purchase of a new machine that will lower the variable cost
per unit to $14. The new machine, however, will add to fixed costs through an increase
in depreciation expense. How large can the addition to fixed costs be in order to keep
the firm’s break-even point in units produced and sold unchanged?
65) The expected return for the market portfolio is 13%, the expected return on U.S.
Treasury Bills is 2%, and the expected return on AAA-rated short-term corporate bonds
is 7%. Calculate the required return for a stock with a beta equal to 1.5 .