1) Accounts receivable variables under control of the financial manager include the
terms of credit sales and the quality of credit customers.
2) Discretionary sources of financing are those sources that vary automatically with a
firm’s level of sales.
3) Pro forma financial statements depict the end result of the planning period’s
operations.
4) In response to the banking crisis and economic collapse of 2007 and 2008, the U.S.
government moved to increase interest rates in order to attract foreign capital seeking
high returns in U.S. banks.
5) The sum of the present values of an investment’s expected future cash flows is
known as the investment’s intrinsic value.
6) Using the weighted cost of capital as a cutoff rate assumes that future investments
will be financed so as to maintain the firm’s target degree of financial leverage.
7) In the EOQ model, the carrying cost on inventory should include the required rate of
an investment in inventory.
8) Only a firm’s financial decisions affect its stock prices.
9) Zero balance accounts permit centralized control over cash outflows while
maintaining divisional disbursing authority.
10) Efficient collection of accounts receivable helps to determine both the profitability
and the liquidity of the firm.
11) The bid-asked spread is much lower for currencies that are infrequently traded in
order to compensate banks for providing the service.
12) A security is considered liquid if it can be sold, regardless of the time it takes to
make the sale.
13) Liquidation value is of primary importance to investors because it represents the
true amount of cash that an investor is likely to receive.
14) The S&P 500 index must be used as the measure of market return in the CAPM or
the results are not theoretically accurate.
15) Preferred stock is riskier than long-term debt because its claim on assets and
income come after those of bonds.
16) Pro forma statements are important since they formally report the performance of
the firm during the previous reporting period.
17) Under the ideal conditions of perfect capital markets, dividend policy has no effect
upon share price.
18) Rogue Industries reported the following items for the current year: Sales =
$3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000;
Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses
= $80,000; and Taxes = $300,000. Rogue’s gross profit is equal to
A) $770,000
B) $1,070,000
C) $1,100,000
D) $1,500,000
19) If you put $10 in a savings account at the beginning of each month for 15 years,
how much money will be in the account at the end of the 10th year? Assume that the
account earns 12% compounded monthly and round to the nearest $1.
A) $1,200
B) $2,323
C) $5,046
D) $3,485
20) Which of the following categories of owners have limited liability?
A) general partners
B) sole proprietors
C) shareholders of a corporation
D) both A and B
21) Jay’s Lumber Supplies earns 2.5 percent on its investment in marketable securities.
A draft disbursing system has been proposed that will increase disbursement float by 4
days. Purchases next year are expected to total $18 million. Individual payments
average $1,000. Use a 365-day year.
a.If the draft system is adopted, what amount of funds can the firm expect to release
during the year?
b.If each issue draft costs the firm $0.30, should the draft system be adopted?
c.Should the firm consider any other factors?
22) You are working on your company’s cash budget for the coming year and you
believe there may be short periods of time where financing is required. Which of the
following sources of short-term financing is most certain to be available when needed?
A) trade credit
B) line of credit with a bank
C) revolving credit agreement with a bank
D) accounts receivable
23) a.Using the financial statements for GMT Enterprises for 2010 (given below),
calculate the return on equity, the debt ratio, and the times interest earned ratio.
b.Suppose the industry average debt ratio is 50%. Give one reason why the debt ratio
for GMT Enterprises may be considered favorable, and give one reason why the debt
ratio for GMT Enterprises may be considered unfavorable.
GMT Enterprises
2010 Financial Statements
24) General Motors raises money by selling a new issue of common stock. This
transaction occurs in
A) the secondary market
B) the capital market
C) the money market
D) the futures market
25) A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary
annuity that promises to pay him $50,000 per year for as long as he lives. Which of the
following statements is MOST correct?
A) Because of the time value of money, the man will always be better off taking the
$500,000 up front
B) The higher the interest rate, the more likely the man will prefer the $500,000 lump
sum
C) If the man expects to live more than 10 years, then he will prefer the annuity
D) If the man is certain the company will not default on its future payments, he should
select the $50,000 per year
26) Table 3-2
Enigma has the following financial information:
No changes were made in interest payable or taxes payable.
Based on the information in Table 3-2, what is Enigma’s cash flow from operations?
A) $85,000
B) $100,000
C) $105,000
D) $75,000
27) Use the following information to calculate the change in the company’s cash
balance for the year.
A) $145,000
B) $180,000
C) $260,000
D) $365,000
28) An example of a primary market transaction involving a money market security is
A) a new issue of a security with a very short maturity
B) a new issue of a security with a very long maturity
C) the transfer of a previously-issued security with a very short maturity
D) the transfer of a previously-issued security with a very long maturity
29) Which of the following statements about operating leverage is true?
A) Operating leverage reduces a firm’s risk
B) Operating leverage is the responsiveness of the firm’s EBIT to fluctuations in sales
C) Operating leverage involves the usage of fixed cost financial securities in the
operation of a business
D) Operating leverage is the responsiveness of the firm’s EPS to fluctuations in sales
30) Apollo Corp. reported the following balance sheet:
Apollo Corp.’s current ratio is
A) 2.59
B) 2.74
C) 2.98
D) 3.88
31) AFB, Inc. declared a dividend of $2 per share, which was an increase of 25% from
the prior year, yet AFB, Inc. stock declined by 3% the day of the announcement. DAS,
Inc. declared a dividend of $2 per share, which was the same as the prior year, and its
stock increased in value by 2% on the day of the announcement. These events could be
most readily explained by the
A) information effect
B) clientele effect
C) expectations theory
D) residual dividend theory
32) How can investors reduce the risk associated with an investment portfolio without
having to accept a lower expected return?
A) Wait until the stock market rises
B) Increase the amount of money invested in the portfolio
C) Purchase a variety of securities; i.e., diversify
D) Purchase stocks that have exceptionally high standard deviations
33) All of the following are criticisms of the payback period criterion EXCEPT
A) time value of money is not accounted for
B) cash flows occurring after the payback are ignored
C) it deals with accounting profits as opposed to cash flows
D) none of the above; they are all criticisms of the payback period criteria
34) Trinitron, Inc. purchased a new molding machine for $85,000. The company paid
$8,000 for shipping and another $7,000 to get the machine integrated with the
company’s existing assets. Trinitron, Inc. must maintain a supply of special lubricating
oil just in case the machine breaks down. The company purchased a supply of oil for
$4,000. The machine is to be depreciated on a straight-line basis over its expected
useful life of 8 years. Trinitron is replacing an old machine that was purchased 6 years
ago for $50,000. The old machine was being depreciated on a straight-line basis over a
ten year expected useful life. The machine was sold for $15,000. Trinitron’s marginal
tax rate is 40%. What is the amount of the initial outlay?
A) $89,000
B) $87,000
C) $91,000
D) $85,000
35) A corporate bond has a coupon rate of 9%, a face value of $1,000, a market price of
$850, and the bond matures in 15 years. Therefore, the bond’s yield to maturity is
A) 9%
B) 24%
C) 11.1%
D) 13.45%
36) An American manufacturer with its corporate headquarters in New York City is
purchasing goods from a French supplier. Which of the following statements is true
regarding the exchange rate risk for this contract?
A) The American company will bear all of the exchange rate risk if the contract is
denominated in dollars
B) The French company will bear all of the exchange rate risk if the contract is
denominated in dollars
C) Both companies could bear exchange rate risk if the contract is denominated in
British Pounds
D) Both B and C are correct
37) Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions
will increase the company’s current ratio?
A) The company collects $500,000 of its accounts receivable
B) The company sells $1 million of inventory on credit
C) The company pays back $50,000 of its long-term debt
D) The company writes a $30,000 check to pay off some existing accounts payable
38) A “Dutch auction” was used by Google to raise money in 2004. A Dutch auction
involves
A) selling bonds in Europe
B) allowing investors to submit bids saying how many shares they’d like to buy and at
what price
C) allowing investment banking firms to submit bids on how many shares they are
willing to sell and at what price
D) hiring a Dutch firm to sell a company’s securities at auction
39) U.S. Savings Bonds are sold at a discount. The face value of the bond represents its
value on its future maturity date. Therefore
A) the current price of a $50 face value bond that matures in 10 years will be greater
than the current price of a $50 face value bond that matures in 5 years
B) the current price of a $50 face value bond that matures in 10 years will be less than
the current price of a $50 face value bond that matures on 5 years
C) the current prices of all $50 face value bonds will be the same, regardless of their
maturity dates because they will all be worth $50 in the future
D) the current price of a $50 face value bond will be higher if interest rates increase
40) Project W requires a net investment of $1,000,000 and has a payback period of 5.6
years. You analyze Project W and decide that Year 1 free cash flow is $100,000 too low,
and Year 3 free cash flow is $100,000 too high. After making the necessary adjustments
A) the payback period for Project W will be longer than 5.6 years
B) the payback period for Project W will be shorter than 5.6 years
C) the IRR of Project W will increase
D) the NPV of Project W will decrease
41) The current ratio of a firm would be decreased by which of the following?
A) Land held for investment is sold for cash
B) Equipment is purchased, financed by a long-term debt issue
C) Inventories are sold for cash
D) Inventories are sold on a long-term credit basis
42) High Inc. has an accounts receivable turnover ratio of 7.3. Low Company has an
accounts receivable turnover ratio of 5. Assuming that High and Low have the same
sales level, which of the following statements is correct?
A) High’s average collection period is less than Low’s
B) Low’s average collection period is less than High’s
C) High has a higher accounts receivable balance on average than does Low Company
D) Low Company has (on average) a lower accounts receivable balance than does High