1) Average age of inventory is viewed as the average length of time inventory is held by
a firm or as the average number of days’ sales in inventory.
2) Unsystematic risk can be eliminated through diversification.
3) Total leverage can be defined as the potential use of fixed costs, both operating and
financial, to magnify the effect of changes in sales on a firm’s earnings per share.
4) The change in net working capitalregardless of whether an increase or decreaseis not
taxable because it merely involves a net buildup or net reduction of current accounts.
5) The major purpose of the Sarbanes-Oxley Act of 2002 was to place caps on the
compensation that could be paid to corporate executives.
6) Holding all other factors constant, a firm that is subject to a greater level of business
risk should employ less operating leverage than an otherwise equivalent firm that is
subject to a lesser level of business risk.
7) Corporation X needs $1,000,000 and can raise this through debt at an annual rate of
10 percent, or preferred stock at an annual cost of 7 percent. If the corporation has a 40
percent tax rate, the after-tax cost of each is ________.
A) debt: $100,000; preferred stock: $70,000
B) debt: $60,000; preferred stock: $42,000
C) debt: $60,000; preferred stock: $70,000
D) debt: $100,000; preferred stock: $42,000
8) Dan plans to fund his individual retirement account (IRA) with the maximum
contribution of $2,000 at the end of each year for the next 10 years. If Dan can earn 10
percent on his contributions, how much will he have at the end of the tenth year?
A) $12,290
B) $20,000
C) $31,874
D) $51,880
9) For the year ended December 31, 2014, a corporation had cash flow from operating
activities of $12,000, cash flow from investment activities of – $10,000, and cash flow
from financing activities of $4,000. The statement of cash flows would show a
________.
A) net decrease of $18,000 in cash and marketable securities
B) net decrease of $6,000 in cash and marketable securities
C) net increase of $6,000 in cash and marketable securities
D) net increase of $2,000 in cash and marketable securities
10) 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
The external financing required in 2015 will be ________. (See Table 4.5)
A) $230,000
B) $240,000
C) $0
D) $195,000
11) A firm needs $1.5 million of new long-term financing. The firm is considering the
sale of common stock or a convertible bond. The current market price of the common
stock is $16 per share. To sell this new issue, the stock would have to be underpriced by
$1 and sold for $15 per share. The firm currently has 600,000 shares of common stock
outstanding. The alternative is to issue 30-year, 8 percent, and $1,000 par-value
convertible bonds. The conversion price would be set at $20 per share, and the bond
could be sold at par. The earnings for the firm are expected to be $700,000 in the
coming year. Which plan results in less dilution of the earnings per share?
A) The common stock with an EPS of $1.17
B) The convertible bond with an EPS of $1.17
C) The common stock with an EPS of $1.00
D) The convertible bond with an EPS of $1.00
12) When fewer units of a foreign currency are required to buy one dollar, the currency
is said to have ________.
A) appreciated with respect to the dollar
B) depreciated with respect to the dollar
C) appreciated with respect to the home currency
D) appreciated with respect to the average rate of the home currency
13) The market value of a convertible bond will exceed the conversion value or straight
bond value, whichever is greater, by an amount called the market premium. This
premium exists because ________.
A) markets are efficient
B) buyers and sellers do not usually agree on the conversion value
C) purchasers expect future stock price movements to be positive
D) the straight bond value is close to the conversion value
14) A firm with a very low current ratio in comparison to the industry standard could
lower the risk of unavailable short-term funds by moving toward ________ financing
strategy.
A) the aggressive
B) the conservative
C) a permanent
D) a seasonal
15) $100 is received at the beginning of year 1, $200 is received at the beginning of
year 2, and $300 is received at the beginning of year 3. If these cash flows are deposited
at 12 percent, their combined future value at the end of year 3 is ________.
A) $1,536
B) $ 672
C) $ 727
D) $1,245
16) Relevant portion of an asset’s risk attributable to market factors that affect all firms
is called ________.
A) credit risk
B) diversifiable risk
C) systematic risk
D) maturity risk
17) Table 15.6
A breakdown of Teffan, Inc.’s outstanding accounts receivable dated June 30, 2014 on
the basis of the month in which the credit sale was initially made follows. The firm
extends 30-day credit terms.
An evaluation of the firm’s collection efforts based on the aging schedule would suggest
________. (See Table 15.6)
A) poor credit management
B) satisfactory credit management
C) superior credit management
D) overzealous collection efforts
18) Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
The firm may have increased long-term debts to finance ________. (See Table 4.1)
A) an increase in net fixed assets
B) an increase in current assets
C) accounts receivable payments
D) an increase in dividends
19) The primary purpose of a stock split is to ________.
A) issue additional shares
B) increase the dividend
C) reduce the price of a stock
D) reduce trading activity
20) The purpose of the debt covenant that prohibits borrowers from entering into certain
types of leases is to ________.
A) protect the lender by controlling the risk and marketability of the borrower’s security
investments alternatives
B) limit the amount of fixed-payment obligations
C) ensure a cash shortage does not cause an inability to meet current obligations
D) limit the annual cash dividends paid by the firm
21) A ________ gives the holder an option to purchase a certain number of shares of
common stock at a specified price over a certain period of time.
A) put option
B) convertible bond
C) stock purchase warrant
D) repurchase agreement
22) The ________ represents a summary statement of a firm’s financial position at a
given point in time.
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings