1) Accounting figures and cash flows are not necessarily the same due to the presence
of certain non-cash expenditures on a firm’s income statement.
2) If the ending cash is greater than the minimum cash balance, excess cash exists.
3) Simulation is an approach that evaluates the impact on return of simultaneous
changes in a number of variables.
4) An increment above the prime rate on a floating-rate loan will be higher than on a
fixed-rate loan of equivalent risk because the lender bears higher risk with a
floating-rate loan.
5) In cash budgeting, other cash receipts are cash receipts expected to result from
sources other than sales.
6) On a purely theoretical basis, NPV is a better approach when selecting among two
mutually exclusive projects.
7) In an efficient market, the expected return and the required return are equal.
8) A project must be rejected if its payback period is less than the maximum acceptable
payback period.
9) A banker’s acceptance is a low-risk security because at least two, and sometimes
three, parties may be liable for its payment at maturity.
10) Weights that use accounting values to measure the proportion of each type of capital
in a firm’s financial structure are called book value weights.
11) Otto is planning for his son’s college education to begin ten years from today. He
estimates the end-of-the-year tuition, books, and living expenses to be $10,000 per year
for a four-year degree. How much must Otto deposit today, at an interest rate of 12
percent, for his son to be able to withdraw $10,000 per year for four years of college?
A) $12,880
B) $ 9,780
C) $40,000
D) $18,950
12) Certain financing plans are termed conservative when ________.
A) short-term financing is used frequently
B) working capital is relatively high
C) current assets are relatively low
D) risk is increased
13) Rita borrows $4,500 from the bank at 9 percent annually compounded interest to be
repaid in three equal annual installments. The interest paid in the third year is
________.
A) $277.95
B) $405.00
C) $352.00
D) $147.00
14) The percent-of-sales method of developing a pro forma income statement forecasts
sales and other line items as a ________.
A) percentage of projected sales
B) percentage of average sales over a period
C) percentage of projected total assets
D) percentage of average total assets over a period
15) The final step in the capital budgeting process is ________.
A) implementation
B) follow-up
C) review and analysis
D) decision making
16) If the required return is less than the coupon rate, a bond will sell at ________.
A) par
B) a discount
C) a premium
D) book value
17) Incentive plans usually tie management compensation to ________.
A) share price
B) dividends
C) coupon payments
D) inventory turnover
18) Which of the following is a characteristic of convertible bonds?
A) Conversion increases a firm’s debt ratio
B) It is a more expensive form of financing than straight bonds
C) It enhances marketability of a firm’s bonds
D) It is nothing but a put option
19) Table 4.5
A financial manager at General Talc Mines has gathered the financial data essential to
prepare a pro forma balance sheet for cash and profit planning purposes for the coming
year ended December 31, 2015. Using the percent-of-sales method and the following
financial data, prepare the pro forma balance sheet in order to answer the following
multiple choice questions.
(a)The firm estimates sales of $1,000,000.
(b)The firm maintains a cash balance of $25,000.
(c)Accounts receivable represents 15 percent of sales.
(d)Inventory represents 35 percent of sales.
(e)A new piece of mining equipment costing $150,000 will be purchased in 2010.
Total depreciation for 2010 will be $75,000.
(f)Accounts payable represents 10 percent of sales.
(g)There will be no change in notes payable, accruals, and common stock.
(h)The firm plans to retire a long term note of $100,000.
(i)Dividends of $45,000 will be paid in 2015.
(j)The firm predicts a 4 percent net profit margin.
Balance Sheet
General Talc Mines
December 31, 2014
General Talc Mines may prepare to ________. (See Table 4.5)
A) arrange for a loan equal to the external funds requirement
B) eliminate the dividend to cover the needed financing
C) cancel the retirement of the long term note to cover the needed financing
D) repurchase common stock equal to the external funds requirement
20) Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
Common stock dividends paid in 2015 amounted to ________. (See Table 4.1)
A) $100
B) $50
C) $600
D) $150
21) A firm has projected sales in May, June, and July of $100, $200, and $300,
respectively. The firm makes 20 percent of sales for cash and collects the balance one
month following the sale. The firm’s total cash receipts in July is ________.
A) $220
B) $200
C) $180
D) $140
22) A bond rated Aaa according to Moody’s, is considered ________.
A) a high grade bond
B) a prime quality bond
C) an upper medium grade bond
D) a medium grade bond
23) A firm has the following stockholders’ equity balances:
In states where the firm’s legal capital is defined as the par value of its common stock,
the maximum cash dividend the firm could pay is ________.
A) $3,600,000
B) $400,000
C) $3,200,000
D) $1,600,000
24) Which of the following is true of the issuance of nonvoting common stock?
A) It is issued in the event of a hostile takeover to preserve the interests of existing
owners
B) It helps the corporation to raise capital through the sale of common stock, without
giving up its voting control
C) It helps the existing stockholders to automatically transfer their voting rights to new
stockholders without any legal proceeding
D) It tends to result in the dilution of voting rights of current stockholders
25) The General Chemical Company uses 150,000 gallons of hydro chloric acid per
month. The cost of carrying the chemical in inventory is 50 cents per gallon per year,
and the cost of ordering the chemical is $150 per order. The firm uses the chemical at a
constant rate throughout the year. The chemical’s economic order quantity is ________.
A) 32,863 gallons
B) 11,619 gallons
C) 9,487 gallons
D) 1,900 gallons
26) The DuPont system merges the income statement and balance sheet into two
summary measures of profitability, ________.
A) net profit margin, and return on total assets
B) net profit margin, and return on equity
C) return on total assets, and return on common equity
D) net profit margin, and price/earning ratio
27) In general, the more net working capital a firm has, ________.
A) the greater its risk
B) the lower its risk
C) the less likely are creditors to lend to the firm
D) the lower its level of long-term funds
28) In evaluating the initial investment for a capital budgeting project, ________.
A) an increase in net working capital is considered a cash inflow
B) a decrease in net working capital is considered a cash outflow
C) an increase in net working capital is considered a cash outflow
D) net working capital does not have to be considered