1) Float exists when a payee has received funds in a spendable form but these funds
have not been withdrawn from the account of the payer.
2) Both warrants and rights result in new capital equity. However, warrants are issued at
an exercise price below the prevailing market price of the stock, whereas rights are
issued at a subscription price above the prevailing market price.
3) The date of record (dividends) is the actual date on which a company will mail the
dividend payment to the holders of record.
4) Since depreciation and other noncash charges represent a scheduled write-off of an
earlier cash outflow, they should not be included in the cash budget.
5) Mutually exclusive projects are those whose cash flows are constant over a specified
period of time and more than one project needs to be accepted in order to implement
capital budgeting decisions.
6) The statement of cash flows provides insight into a firm’s operating, investment, and
financing cash flows and reconciles them with changes in its cash and marketable
securities during the period of concern.
7) Since the conversion feature provides the purchaser of a convertible bond with the
possibility of becoming a stockholder, convertible bonds are a less expensive form of
financing than similar-risk nonconvertible or straight bonds.
8) A vertical merger may result in expansion of operations in an existing product line
and elimination of a competitor.
9) In the international context, the nominal interest rate is the stated interest rate
charged on financing when only the MNC parent’s currency is involved.
10) The over-the-counter (OTC) market is ________.
A) a highly liquid market as compared to NASDAQ
B) a market in which low risk-high return securities are traded
C) an organized market in which all financial derivatives are traded
D) a market where smaller, unlisted securities are traded
11) The stockholder’s report includes ________.
A) an estimated interest cost report
B) an estimated dividend report
C) a break-even sales report
D) a statement of retained earnings
12) Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year
ended December 31, 2015, for Hennesaw Lumber, Inc.
Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest
expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of
$150,000 during 2015. Hennesaw Lumber, Inc.’s income statement for the year ended
December 31, 2014 is shown below. From your preparation of the pro forma income
statement, answer the following multiple choice questions.
The pro forma accumulated retained earnings account on the balance sheet is projected
to be ________. (See Table 4.4)
A) $62,500
B) $52,500
C) $57,000
D) $67,000
13) For the year ended December 31, 2014, a corporation had cash flow from operating
activities of $20,000, cash flow from investment activities of -$15,000, and cash flow
from financing activities of -$10,000. The statement of cash flows would show a
________.
A) net increase of $5,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net decrease of $15,000 in cash and marketable securities
D) net increase of $25,000 in cash and marketable securities
14) Which of the following is a basic source of capital for a firm ?
A) short-term debt
B) discounts from suppliers
C) current liabilities
D) common stock
15) A ________ is a telegraphic communication that, via bookkeeping entries, removes
funds from the payer’s bank and deposits them in an account of the payee’s bank.
A) direct send
B) wire transfer
C) depository transfer check
D) preauthorized check
16) At the operating breakeven point, ________ equals zero.
A) sales revenue
B) fixed operating costs
C) variable operating costs
D) earnings before interest and taxes
17) In preparing a cash budget, the ________ seasonal and uncertain a firm’s cash
flows, the ________ the number of budgeting intervals it should use.
A) more; greater
B) more; fewer
C) less; greater
D) less; fewer
18) Payment of interest required only when earnings are made available from which to
make a payment is characteristic of a(n) ________.
A) floating rate bond
B) income bond
C) mortgage bond
D) equipment trust certificate
19) A ________ is responsible for the firm’s accounting activities, such as corporate
accounting, tax management, financial accounting, and cost accounting.
A) treasurer
B) controller
C) foreign exchange manager
D) pension fund manager
20) The Glass-Steagall Act ________.
A) was intended to regulate the activities in the secondary market
B) created the Securities Exchange Commission
C) separated the activities of commercial and investment banks
D) was intended to regulate the activities in the primary market
21) ________ is used to finance “rolling stock”airplanes,trucks,boats,railroad cars.
A) Income bonds
B) Equipment trust certificates
C) Collateral trust bonds
D) Subordinated debentures
22) A firm with a cash conversion cycle of 175 days wants to stretch its average
payment period from 30 days to 45 days. This will result in a(n) ________ in the cash
conversion cycle of ________ days.
A) increase; 15
B) decrease; 15
C) increase; 45
D) decrease; 45
23) In an effort to analyze Clockwork Company finances, Jim realized that he was
missing the company’s net profits after taxes for the current year. Find the company’s
net profits after taxes using the following information.
Return on total assets = 2%
Total asset turnover = 0.5
Cost of goods sold = $105,000
Gross profit margin = 0.30
24) Discuss the limitations of ratio analysis and the cautions which must be taken when
reviewing a cross-sectional and time-series analysis.
25) Calculate the future value of $6,490 received today and deposited for five years in
an account which pays interest of 14 percent compounded semiannually.
26) Table 7.1
Xiao Xin owns stock in a company which has paid the annual dividends shown in Table
7.1. Calculate the growth rate of these dividends.
27) Tom is evaluating the growth rate in dividends of a company over the past 6 years.
What is the annual compound growth rate if the dividends are as follows:
28) A firm wishes to establish a fund which, in 10 years, will accumulate to
$10,000,000. The fund will be used to repay an outstanding bond issue. The firm plans
to make deposits, which will earn 12 percent, to this fund at the end of each of the 10
years prior to maturity of the bond. How large must these deposits be to accumulate to
$10,000,000?
29) Ag Silver Mining, Inc. has $500,000 of earnings before interest and taxes at the
year end. Interest expenses for the year were $10,000. The firm expects to distribute
$100,000 in dividends. Calculate the earnings after taxes for the firm assuming a 40
percent tax on ordinary income.
30) Table 11.1
Fine Press is considering replacing the existing press with a more efficient press. The
new press costs $55,000 and requires $5,000 in installation costs. The old press was
purchased 2 years ago for an installed cost of $35,000 and can be sold for $20,000 net
of any removal costs today. Both presses are depreciated under the MACRS 5-year
recovery schedule. The firm is in 40 percent marginal tax rate.
Calculate the tax effect from the sale of the existing asset. (See Table 11.1)
31) Ted has 10 shares of Grand Company. Based on the company’s dividend policy, Ted
will receive a total of $450 a year in perpetuity. What is the value of each share if the
rate of interest is 8 percent?