1) The net effect of changes in a cash discount period is quite difficult to analyze
because they are directly attributable to the three forces affecting a firm’s investment in
accounts receivable.
2) In ratio analysis, the financial statements being used for comparison should be dated
at the same point in time during the year. If not, the effect of seasonality may produce
erroneous conclusions and decisions.
3) If an asset is sold for more than its initial purchase price, the gain on the sale is
composed of two parts: a capital gain and recaptured depreciation.
4) Factoring accounts receivable is relatively an expensive source of secured short-term
funds that allows firms to turn accounts receivable immediately into cash.
5) The aggressive funding strategy is a strategy by which a firm finances all projected
funds requirements with long-term funds and uses short-term financing only for
emergencies or unexpected outflows.
6) Paid-in capital in excess of par represents the amount of proceeds ________.
A) in deficit of the par value from the original sale of common stock
B) in excess of the par value from the original sale of common stock
C) in excess of the par value from the current value of common stock
D) in excess of the par value from the intrinsic value of common stock
7) A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk
for a given level of return.
A) efficient
B) risk-free
C) risk-neutral
D) risk-indifferent
8) The primary purpose in preparing pro forma financial statements is ________.
A) for cash planning
B) to ensure the ability to pay dividends
C) for risk analysis
D) for profit planning
9) The approximate before-tax cost of debt for a 10-year, 8 percent, $1,000 par value
bond selling at $1,150 is ________.
A) 5.97 percent
B) 8.33 percent
C) 8.82 percent
D) 9 percent
10) Nico invested an amount a year ago and calculated his return on investment. He
found that his purchasing power had increased by 15 percent as a result of his
investment. If inflation during the year was 4 percent, then Nico’s ________.
A) real return on investment is more than 15 percent
B) nominal return on investment is more than 15 percent
C) nominal return on investment is less than 11 percent
D) real return on investment is equal to 4 percent
11) The cash flows from operating activities section of the statement of cash flows
includes ________.
A) labor expense
B) proceeds from the sale of fixed assets
C) principal paid
D) dividends paid
12) The ________ is a financial projection of a firm’s short-term cash surpluses or
shortages.
A) operating financial plan
B) cash budget
C) strategic financial journal
D) capital assets journal
13) A friendly merger is a ________.
A) merger in which the acquirer gains control of the target firm by buying sufficient
shared through private placement
B) merger in which the acquirer can attempt to gain control of the target firm by buying
sufficient shares of the target firm in the marketplace
C) merger transaction that is endorsed by the target firm’s management, approved by its
stockholders, and easily consummated
D) merger in which the target firm’s management acts to deter rather than facilitate the
acquisition
14) An increase in collection efforts by a firm will result in ________ in sales volume,
________ in the investment in accounts receivable, ________ in bad debt expenses, and
________ in collection expenditures.
A) an increase; a decrease; an increase; a decrease
B) an increase; a decrease; a decrease; an increase
C) an increase; a decrease; an increase; an increase
D) a decrease; a decrease; a decrease; an increase
15) Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment
proposals for the year beginning in 2014. For each investment proposal, the relevant
cash flows and other relevant financial data are summarized in the table below. In the
case of a replacement decision, the total installed cost of the equipment will be partially
offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on
ordinary income and on long-term capital gains. The firm’s cost of capital is 15 percent.
________________________________________________________
*Not applicable
For Proposal 1, the cash flow pattern for the expansion project is ________. (See Table
11.2)
A) a mixed stream and conventional
B) a mixed stream and nonconventional
C) a perpetuity and conventional
D) an annuity and nonconventional
16) Which of the following is true of benchmarking?
A) It is an analysis in which a firm’s ratio values are analyzed to project the
fundamental values of the assets for upcoming years or business cycle
B) It is an analysis in which a firm’s ratio values are compared with those of a key
competitor or with a group of competitors that it wishes to emulate
C) It is an analysis in which a firm’s financial performance over time is evaluated using
financial ratio analysis
D) It is a financial statement analysis technique which combines cross-sectional and
time-series analyses
17) A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate
outstanding. The issue pays interest annually and has 10 years remaining to its maturity
date. If bonds of similar risk are currently earning 8 percent, the firm’s bond will sell for
________ today.
A) $1,000
B) $805.20
C) $1,115.50
D) $1,268.40
18) The advantage of using the extra dividend policy is that ________.
A) a firm can avoid giving false hopes to shareholders
B) if a firm’s earnings drop, so does the dividend payment
C) the extra dividend may become a regular event
D) cyclical shifts in earnings may be avoided
19) For puts and calls, the exercise price is called ________.
A) the expected value
B) the market price of the stock
C) the strike price
D) the option price
20) Find the equal annual end-of-year payment on $50,000, 15 year, and 10 percent
loan.