1) Under terms of a field warehouse financing agreement, the collateral inventories are
physically separated from the borrower’s other inventories but remain under the
borrower’s control.
2) If a company’s cash balance increases during the year, and the company also reports
positive net income, then the company’s retained earnings balance must increase.
3) According to the clientele effect, dividend policy matters even if capital markets are
perfect because investors self-select into dividend preference groups.
4) The purchase of a pool of mortgages is often financed through the sale of securities
called mortgage-backed securities, or MBS. This is a key part of the securitization
process.
5) Overhead costs are sometimes incremental cash flows and other times are considered
sunk costs.
6) A currency swap is the exchange of principal and interest in one currency for the
same in another currency for an agreed period of time.
7) Pro forma financial statements depict the end result of the planning period’s
operations.
8) In order to maximize shareholder value, a corporation must earn a higher rate of
return on a dollar that is retained in the corporation than the shareholders can earn by
investing the dollar elsewhere.
9) The presence of debt and/or preferred stock in a firm’s financial structure means the
firm is using financial leverage.
10) The accounting book value of an asset represents the historical cost of the asset
rather than its current market value or replacement cost.
11) Common stockholders’ equity equals common stock issued minus treasury stock.
12) Another name for an asset’s expected rate of return is holding-period return.
13) The expected rate of return from an investment is equal to the expected cash flows
divided by the initial investment.
14) The independence hypothesis suggests that the cost of equity decreases as financial
leverage increases.
15) When making financial decisions, managers should always look at marginal, or
incremental cash flows.
16) In the case of insolvency, the claims of debt are honored prior to those of common
stock and after those of preferred stock.
17) Keystone Corporation will issue new common stock to finance an expansion. The
existing common stock just paid a $1.50 dividend, and dividends are expected to grow
at a constant rate 8% indefinitely. The stock sells for $45, and flotation expenses of 5%
of the selling price will be incurred on new shares. What is the cost of new common
stock be for Keystone Corp.?
A) 11.33%
B) 11.51%
C) 11.60%
D) 11.79%
E) 12.53%
18) If you put $10,000 in an investment that returns 11 percent compounded monthly
what would you have after 10 years (round to nearest $1)?
A) $29,892
B) $27,559
C) $25,486
D) $22,489
19) The present value of a single future sum
A) increases as the number of discount periods increases
B) is generally larger than the future sum
C) depends upon the number of discount periods
D) increases as the discount rate increases
20) Butler Automotive developed a new diagnostic testing procedure that is expected to
increase sales by $10,000 per month. As more drivers bring in their vehicles, Butler
expects to also do more oil changes and brake repairs. As a result, inventory levels of
oil and brake parts must be increased by $5,000. Revenues from oil changes and brake
jobs are expected to increase by $4,000 per month. An example of a synergistic effect
from the new diagnostic testing procedure is the
A) increase in inventory levels of oil and brake parts
B) increase in revenue of $10,000 per month for the diagnostic testing
C) increase in revenues from oil changes and brake jobs of $4,000 per month
D) increase in all activities totaling $19,000 per month
21) LPD Logistics, Inc.’s projected sales for the first six months of 2010 are given
below.
Jan.$300,000April$350,000
Feb.$350,000May$500,000
Mar.$475,000June$400,000
20% of sales are collected in the month of the sale, 75% are collected in the month
following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of
sales. Purchases are made the month prior to the sales and are paid during the month the
purchases are made (i.e. goods sold in March are bought and paid for in February).
Total other cash expenses are $35,000/month. The company’s cash balance as of
February 1, 2010 will be $30,000. Excess cash will be used to retire short-term
borrowing (if any). LPD has no short term borrowing as of February 28, 2010 . Assume
that the interest rate on short-term borrowing is 1% per month. The company must have
a minimum cash balance of $20,000 at the beginning of each month. What is LPD’s
projected cash balance as of April 1, 2010?
A) ($48,600)
B) ($58,036)
C) $14,238
D) $21,400
22) Jimmy just bought a new Ford SUV for his business. The price of the vehicle was
$40,000. Jimmy made a $5,000 down payment and took out an amortized loan for the
rest. The car dealership made the loan at 8% interest compounded monthly for five
years. He is to pay back the principal and interest in equal monthly installments
beginning one month from now. Determine the amount of Jimmy’s monthly payment.
A) $634.56
B) $709.67
C) $745.87
D) $809.33
23) AFB, Inc. had earnings per share of $4 per share last year and paid a dividend of $1
per share. For the current year, AFB, Inc. generated earnings per share of $6 and paid a
dividend of $1 per share. This is an example of what type of dividend policy?
A) constant dividend payout ratio
B) stable dollar dividend per share
C) small, regular dividend plus a year-end extra
D) payout ratio equal to zero
24) Which of the following goals of the firm are synonymous (equivalent) to the
maximization of shareholder wealth?
A) profit maximization
B) risk minimization
C) maximization of the total market value of the firm’s common stock
D) none of the above
25) You are given the following probability distribution for XYZ common stock’s
returns during the next year, which are assumed to be normally distributed. Show all
work below, and complete the following:
a. Calculate the standard deviation of the returns, and round to the nearest one-half
percent.
b. Draw a graphical representation of XYZ’s normal distribution below (ye old
bell-shaped curve). LABEL THE AXES OF THE GRAPH OR THE FOLLOWING
RESULTS WILL BE MEANINGLESS. Using your result in part A for the standard
deviation (rounded to the nearest one-half percent) explain and indicate on the graph,
the probability that XYZ will return more than 13.5%, assuming a normal distribution.
26) The market risk premium remains constant over time because the risk free rate of
return moves inversely with beta.
27) Table 4-2
Drummond Company
Balance Sheet
The acid-test ratio is
A) 1.17
B) 1.33
C) 1.39
D) 2.15
28) A wealthy private investor providing a direct transfer of funds is called
A) a venture capitalist
B) an investment banker
C) a financial intermediary
D) an angel investor
29) The selection of a proper marketable-securities mix involves evaluation of certain
criteria. What are these criteria and why are they important?
30) Plato Industries’ projected sales for the first six months of 2012 are given below:
Jan.$250,000April$300,000
Feb.$340,000May$350,000
Mar.$280,000June$380,000
20% of sales are collected in cash at time of sale, 50% are collected in the month
following the sale, and the remaining 30% are collected in the second month following
the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to
the sales, and payments for purchases are made in the month of the sale. Total other
cash expenses are $70,000/month. The company’s cash balance as of February 28, 2012
will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato
has no short term borrowing as of February 28, 2012 . Ignore any interest on short-term
borrowing. The company must have a minimum cash balance of $40,000 at the
beginning of each month. What is Plato Industries’ total cash receipts for April 2012?
A) $340,000
B) $326,000
C) $302,000
D) $300,000
31) Answer the questions below using the following information on stocks A, B, and C.
Assume the risk-free rate of return is 3% and the expected market return is 12%
a.Calculate the required return for stocks A, B, and C.
b.Assuming an investor with a well-diversified portfolio, which stock would the
investor want
to add to his portfolio?
c.Assuming an investor who will invest all of his money into one security, which stock
will the investor choose?
32) A lockbox system can reduce all of the following elements of float EXCEPT
A) mail float
B) processing float
C) transit float
D) disbursing float
33) You invest $1,000 at a variable rate of interest. Initially the rate is 4% compounded
annually for the first year, and the rate increases one-half of one percent annually for
five years (year two’s rate is 4.5%, year three’s rate is 5.0%, etc.). How much will you
have in the account after five years?
A) $1,276
B) $1,359
C) $1,462
D) $1,338
34) Cash inflows come from
A) purchase of marketable securities
B) purchase of fixed assets
C) credit sales
D) cash sales
35) The risk premium would be greater for an investment in an oil and gas exploration
in unproven fields than an investment in preferred stock because
A) oil and gas exploration investments have a greater variability in possible returns
B) the preferred stock is more liquid
C) the inflation rate would vary more with oil and gas exploration investments
D) both A and B
36) Ted Tech Inc. is offering a 10% stock dividend. The firm currently has 200,000
shares outstanding and after-tax profits of $800,000. The current price of the stock is
$48.
a.Calculate the new earnings per share.
b.What is the original price/earnings multiple?
c.Providing that the price/earnings multiple stays the same, what will the new stock
price be after the stock dividend?
37) How is preferred stock affected by a decrease in the required rate of return?
A) The value of a share of preferred stock increases
B) The dividend increases
C) The dividend decreases
D) The dividend yield increases
38) All of the following are examples of sources of discretionary financing EXCEPT
A) bank loans
B) notes payable
C) trade credit
D) common stock
39) If bankruptcy costs and/or shareholder under diversification are an issue, what
measure of risk is relevant when evaluating project risk in capital budgeting?
A) total project risk
B) contribution-to-firm risk
C) systematic risk
D) capital rationing risk
40) The recent financial crises was exacerbated by
A) managers who overestimated risk and hence did not invest sufficient funds
B) managers who underestimated the real risks of their decisions and borrowed
excessively
C) a lack of financial leverage that made U.S. firms less competitive in world markets
D) extremely high interest rates in the United States that stifled investment
41) Rogue Recreation, Inc. has normally distributed returns with an expected return of
15% and a standard deviation of 5%, while Lake Tours, Inc. has normally distributed
returns with an expected return of 15% and a standard deviation of 15%. Which of the
following is TRUE?
A) Lake Tours’ investors are not being adequately compensated for relevant risk
B) Rogue Rec is likely to experience returns larger than those of Lake Tours
C) Lake Tours is more likely to have negative returns than Rogue Rec
D) Rational investors will prefer Lake Tours, Inc. over Rogue Recreation, Inc
42) What is the present value of an annuity of $4,000 received at the beginning of each
year for the next eight years? The first payment will be received today, and the discount
rate is 9% (round to nearest $1).
A) $36,288
B) $35,712
C) $25,699
D) $24,132
43) Potential sources of financing to support an increase in sales include all of the
following EXCEPT
A) increase in the dividend payout ratio
B) increase in spontaneous liabilities
C) increase in accounts payable
D) issuance of bonds and/or common stock
44) Potential applications of the break-even model include
A) replacement for time-adjusted capital budgeting techniques
B) pricing policy
C) optimizing the cash-marketable securities position of a firm
D) all of the above
45) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A
costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.
Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in
year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.’s required rate
of return for these projects is 10%. The net present value for Project B is
A) $58,097
B) $66,363
C) $74,538
D) $112,000
46) High Tech Corp. cut its research and development budget in 2010 by $4,000,000 in
order to improve its cash flow for the year. Which of the following statements is MOST
correct?
A) The stock price will likely increase because the value of stock is based on reported
cash flow
B) The stock price may decrease because investors may predict that future cash flows
will decrease due to the lack of innovation and new products
C) The change will have no impact on stock price because the company’s profits will
not change in 2010
D) The stock price will increase only if reported profits in 2010 are also higher than
profits reported in 2009
47) At what rate must $287.50 be compounded annually for it to grow to $650.01 in 14
years?
A) 6 percent
B) 5 percent
C) 7 percent
D) 8 percent
48) Lindsey Insurance Co. has current sales of $10 million and predicts next year’s sales
will grow to $14 million. Current assets are $3 million and fixed assets are $4 million.
The firm’s net profit margin is 7 percent after taxes. Presently, Lindsey has $900,000 in
accounts payable, $1.1 million in long-term debt, and $5 million (including $2.5 million
in retained earnings) in common equity. Next year, Lindsey projects that current assets
will rise in direct proportion to the forecasted sales, and that fixed assets will rise by
$500,000. Lindsey also plans to pay dividends of $400,000 to common shareholders.
a.What are Lindsey’s total financing needs for the upcoming year?
b.Given the above information, what are Lindsey’s discretionary financing needs?
49) You want to invest in bonds. Explain whether or not each provision listed will make
the bonds more or less desirable as an investment: call provision, convertible bond
provision, subordinated debt
50) Dave Company, Inc. is considering purchasing a new grinding machine with a
useful life of five years. The initial outlay for the machine is $165,000. The expected
cash inflows are as follows:
Given that the firm has a 10% required rate of return, what is the NPV?
51) Blanton Corporation increased its financial leverage during 2010 by taking out a
loan and using the proceeds to buy back common stock. At the end of 2010, the
corporation reported higher earnings per share and higher return on equity. However, its
stock price declined. Discuss why this may happen.