1) Safety stocks are extra inventories that can be drawn down when actual lead times
and/or usage rates are greater than expected.
2) Fluctuations in foreign exchange markets can affect foreign revenues and profits of a
multinational company, but they have no impact on its overall value.
3) When unequal-lived projects are independent, the length of the project lives is not
critical.
4) Since retained earnings is a more expensive source of financing than debt and
preferred stock, the weighted average cost of capital will fall once retained earnings
have been exhausted.
5) The companies controlled by a holding company are normally referred to as its
subsidiaries.
6) Institutional investors are professional investors who work on behalf of individuals,
business, and government.
7) One of the responsibilities of a debtor in possession (DIP) is the liquidation of a
bankrupt firm’s assets.
8) The value of a firm measured as the sum of the values of its operating units if each
were sold separately is known as a firm’s part and parcel value.
9) Complete the balance sheet for General Aviation, Inc. based on the following
financial data.
Balance Sheet
General Aviation, Inc.
December 31, 2013
Key Financial Data (2005)
1> Sales totaled $720,000.
2> The gross profit margin was 38.7 percent.
3> Inventory turned 6 times.
4> There are 360 days in a year.
5> The average collection period was 31 days.
6> The current ratio was 2.35.
7> The total asset turnover was 2.81.
8> The debt ratio was 49.4 percent.
9> Total current assets equal $159,565.
10) The total rate of return on an investment over a given period of time is calculated by
________.
A) dividing the asset’s cash distributions during the period, plus change in value, by its
beginning-of period investment value
B) dividing the asset’s cash distributions during the period, plus change in value, by its
ending-of period investment value
C) dividing the asset’s cash distributions during the period, minus change in value, by
its ending-of period investment value
D) dividing the asset’s cash distributions during the period, minus change in value, by
its beginning-of period investment value
11) Which of the following steps in the capital budgeting process follows the decision
making step?
A) proposal generation
B) review and analysis
C) transformation
D) implementation
12) A type of long-term financing used by both corporations and government entities is
________.
A) common stocks
B) bonds
C) preferred stocks
D) retained earnings
13) High-risk, high-yield junk bonds have declined in popularity over time due to
________.
A) the decline in mergers and takeovers, which these bonds were used to finance
B) the declining need of growth capital
C) the stabilizing of interest rates
D) a number of major defaults on these bonds
14) A firm has an average age of inventory of 101 days, an average collection period of
49 days, and an average payment period of 60 days. The firm’s cash conversion cycle is
________ days.
A) 60
B) 52
C) 41
D) 90
15) Table 11.4
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is
considering replacing an existing piece of equipment with a more sophisticated
machine. The following information is given.
Given the information in Table 11.4 and 15 percent cost of capital,
(a)Compute the net present value.
(b)Should the project be accepted?
16) If accounts receivable increase by $1,000,000, inventory decreases by $500,000,
and accounts payable increase by $500,000, net working capital would ________.
A) decrease by $500,000
B) increase by $1,500,000
C) increase by $2,000,000
D) experience no change
17) Table 9.1
A firm has determined its optimal capital structure which is composed of the following
sources and target market value proportions.
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A
flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share
par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the
stock is $3 per share.
Common Stock: A firm’s common stock is currently selling for $18 per share. The
dividend expected to be paid at the end of the coming year is $1.74. Its dividend
payments have been growing at a constant rate for the last four years. Four years ago,
the dividend was $1.50. It is expected that to sell, a new common stock issue must be
underpriced $1 per share in floatation costs. Additionally, the firm’s marginal tax rate is
40 percent.
The firm’s after-tax cost of debt is ________. (See Table 9.1)
A) 3.25 percent
B) 4.67 percent
C) 8 percent
D) 8.13 percent
18) MACRS RATE
A corporation is selling an existing asset for $1,700. The asset, when purchased, cost
$10,000, was being depreciated under MACRS using a five-year recovery period, and
has been depreciated for four full years. If the assumed tax rate is 40 percent on
ordinary income and capital gains, the tax effect of this transaction is ________.
A) $0 tax liability
B) $840 tax liability
C) $3,160 tax liability
D) $3,160 tax benefit
19) A firm can accept a project with a net present value of zero because ________.
A) the project would maintain the wealth of the firm’s owners
B) the project would enhance the wealth of the firm’s owners
C) the project would maintain the earnings of the firm
D) the project would enhance the earnings of the firm
20) The ________ of a given outcome is its chance of occurring.
A) dispersion
B) standard deviation
C) probability
D) reliability
21) Preferred stock is valued as if it were a ________.
A) fixed-income obligation
B) bond
C) perpetuity
D) common stock
22) Table 15.1
Irish Air Services has determined several factors relative to its asset and financing mix.
(a)The firm earns 10 percent annually on its current assets.
(b)The firm earns 20 percent annually on its fixed assets.
(c)The firm pays 13 percent annually on current liabilities.
(d)The firm pays 17 percent annually on long-term funds.
(e)The firm’s monthly current, fixed, and total asset requirements for the previous year
are summarized in the table below:
If the firm’s current liabilities in June were $37,000, the net working capital was
________. (See Table 15.1)
A) $20,000
B) $21,500
C) $23,000
D) $38,000
23) The yield on commercial paper is generally higher than the yield on ________.
A) preferred stock
B) a corporate bond
C) common stock
D) a Treasury bill