1) Mail float is the delay between the deposit of a check by a payee and the actual
availability of the funds.
2) One advantage of leasing is that in many cases, the return to the lessor is quite low so
the firm in need of an asset might be better off borrowing to purchase it.
3) Collection float is experienced by a payer and is a delay in the receipt of funds.
4) A sophisticated capital budgeting technique that can be computed by subtracting a
project’s initial investment from the present value of its cash inflows discounted at a
rate equal to a firm’s cost of capital is called net present value.
5) To assess whether any developments have occurred that are contrary to a company’s
financial policies, the financial manager should pay special attention to both the major
categories of cash flow and the individual items of cash inflow and outflow.
6) The ACH (automated clearing house) debits are preauthorized electronic withdrawals
from a payer’s account.
7) A single-payment note is a secured fund which can be obtained from a commercial
bank when a borrower needs additional funds for a short period.
8) Both theory and empirical evidence indicate that the capital structures of MNCs are
not different from those of purely domestic firms.
9) A holding company is a corporation which is controlled by one or more other
corporations.
10) Offshore Centers are cities or states that have achieved prominence as major centers
for Euromarket business.
11) The objective of capital rationing is to select the group of projects that provides the
highest overall net present value and does not require more dollars than are budgeted.
12) If the net cash flow is less than the minimum cash balance, financing is required.
13) In capital budgeting, risk is the degree of variability of cash flows.
14) Corporate venture capital funds are subsidiaries of financial institutions, particularly
banks, set up to help young firms grow and, it is hoped, become major customers of the
institutions.
15) Due to clientele effect, Modigliani and Miller argue that the shareholders get what
they expect and, thus, the value of a firm’s stock is unaffected by dividend policy.
16) Total assets less net fixed assets equals ________.
A) gross assets
B) current assets
C) depreciation
D) liabilities and equity
17) Which of the following is true of cash flows and risk?
A) Low cash flow and low risk result in an increase in share price
B) High cash flow and low risk result in an increase in share price
C) High cash flow and high risk result in an increase in share price
D) Lo cash flow and high risk result in an increase in share price
18) The two major sources of short-term financing are ________.
A) a line of credit and notes payable
B) accounts payable and accruals
C) a line of credit and term loans
D) accounts receivable and notes payable
19) Table 15.1
Irish Air Services has determined several factors relative to its asset and financing mix.
(a)The firm earns 10 percent annually on its current assets.
(b)The firm earns 20 percent annually on its fixed assets.
(c)The firm pays 13 percent annually on current liabilities.
(d)The firm pays 17 percent annually on long-term funds.
(e)The firm’s monthly current, fixed, and total asset requirements for the previous year
are summarized in the table below:
The firm’s annual financing costs of conservative financing strategy are ________. (See
Table 15.1)
A) $22,775
B) $26,075
C) $26,775
D) $21,175
20) The purpose of the debt covenant that requires maintaining a minimum level of net
working capital is to ________.
A) protect the lender by controlling the risk and marketability of the borrower’s security
investment 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) Which of the following is true of risk aversion?
A) Greater risk aversion results in lower required returns for each level of risk
B) A reduction in risk aversion causes the required return for each level of risk to
increase
C) In general, widely shared expectations of hard times ahead tend to cause investors to
become less risk averse
D) Changes in risk aversion, and therefore shifts in the SML, result from changing
preferences of investors
22) NICO Corporation had net fixed assets of $2,000,000 at the end of 2015 and
$1,800,000 at the end of 2014. In addition, the firm had a depreciation expense of
$200,000 during 2015 and $180,000 during 2014. Using this information, NICO’s net
fixed asset investment for 2015 was ________.
A) $20,000
B) $0
C) $380,000
D) $400,000
23) A firm’s year-end retained earnings balance are $670,000 and $560,000 for 2014
and 2015, respectively. The firm reported net profits after taxes of $100,000 in 2015.
The firm paid dividends of ________ in 2015.
A) $10,000
B) $100,000
C) $110,000
D) $210,000
24) Find the present value of the following stream of a firm’s cash flows, assuming that
the firm’s opportunity cost is 14 percent.
A) $131,068
B) $ 19,830
C) $ 14,850
D) $120,820
25) Tangshan Mining is attempting to acquire Zhengsen Mining. Selected financial data
is presented for both companies in the table below:
Tangshan Mining has sufficient authorized but unissued shares to carry out the
proposed merger.
(a)Calculate the EPS of Tangshan Mining and Zhengsen Mining before the merger.
(b)If the ratio of exchange is 1.8, what will be the earnings per share of the merged
company?
(c)Repeat part (a) if the ratio of exchange is 2.0.
(d)Repeat part (a) if the ratio of exchange is 2.2
(e)discuss the principal illustrated by your answers to parts (a) through (d)
26) Table 12.3
Tangshan Mining Company is considering investment in one of two mutually exclusive
projects M and N which are described below. Tangshan Mining’s overall cost of capital
is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent.
Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40.
Which project would be preferable if both projects were of average risk as the overall
firm and Tangshan Mining has a beta of 1.0? (See Table 12.3)
A) Project M because it has a higher NPV
B) Project N because it has a higher NPV
C) Project N because it has a higher IRR
D) Project M because it has a higher IRR
27) A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate
of return equals 6 percent. The estimated cost of common stock equity is ________.
A) 6 percent
B) 7.2 percent
C) 14 percent
D) 15.6 percent
28) The best way to adjust for the presence of fixed costs when using the simplified
approach for pro forma income statement preparation is ________.
A) to proportionately vary the fixed costs with the change in sales
B) to adjust for projected fixed-asset outlays
C) to disproportionately vary the costs with the change in sales
D) to break the firm’s historical costs into fixed and variable components
29) Aunt Tilly borrows $3,500 from the bank at 12 percent annually compounded
interest to be repaid in four equal annual installments. The interest paid in the first year
is ________.
A) $ 152
B) $ 277
C) $ 420
D) $1,152
30) Which of the following is a disadvantage of issuing preferred stock from the
common stockholders’ perspective?
A) There is a seniority of preferred stockholder’s claim over common stockholders
B) The preferred stockholders have superior voting rights in the selection of board of
directors
C) The preferred stockholders are always paid a higher proportion of dividend
payments
D) Issuance of preferred stocks will result in a higher risk, to the disadvantage of
common stockholders
31) An analyst should be careful when conducting ratio analysis to ensure that
________.
A) the overall performance of a firm is not judged on a single ratio
B) the role of inflation is ignored
C) ratios being compared should be calculated using financial statements dated at
different points in time during the year
D) different accounting procedures are used
32) To compensate for the uncertainty of future interest rates and the fact that the longer
the term of a loan the higher the probability that the borrower will default, the lender
typically ________.
A) charges a higher interest rate on long-term loans
B) reserves the right to change the terms of the loan at any time
C) includes excessively restrictive debt provisions
D) reserves the right to demand immediate payment at any time
33) Combining two assets having perfectly positively correlated returns will result in
the creation of a portfolio with an overall risk that ________.
A) remains unchanged
B) decreases to a level below that of either asset
C) increases to a level above that of either asset
D) lies between the asset with the higher risk and the asset with the lower risk
34) A deep-discount bond can be purchased for $312 and in 20 years it will be worth
$1,000. What is the rate of interest on the bond?
35) Consider the following projects, X and Y where the firm can only choose one.
Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y
also costs $600, and generates cash flows of $500 and $275 for the next 2 years,
respectively. Sketch a net present value profile for each of these projects. Which project
should the firm choose if the cost of capital is 10 percent? What if the cost of capital is
25 percent? Show all work.
36) Adam wants to determine the required return on a stock portfolio with a beta
coefficient of 0.5. Assuming the risk-free rate of 6 percent and the market return of 12
percent, compute the required rate of return.
37) In the preparation of a quarterly cash budget, the following revenue and cost
information have been compiled. Prepare and evaluate a cash budget for the months of
October, November, and December based on the information shown below.
The firm collects 60 percent of sales for cash and 40 percent of its sales one month
later.
Interest income of $50,000 on marketable securities will be received in December.
The firm pays cash for 40 percent of its purchases.
The firm pays for 60 percent of its purchases the following month.
Salaries and wages amount to 15 percent of the preceding month’s sales.
Sales commissions amount to 2 percent of the preceding month’s sales.
Lease payments of $100,000 must be made each month.
A principal and interest payment on an outstanding loan is due in December of
$150,000.
The firm pays dividends of $50,000 at the end of the quarter.
Fixed assets costing $600,000 will be purchased in December.
Depreciation expense each month of $45,000.
The firm has a beginning cash balance in October of $100,000 and maintains a
minimum cash balance of $200,000.
38) Given the following probability distribution for assets X and Y, compute the
expected rate of return, variance, standard deviation, and coefficient of variation for the
two assets. Which asset is a better investment?
39) The New York Soccer Association would like to accumulate $10,000 by the end of
4 years from now to finance a big soccer weekend for its members. The Association
currently has $2,500 and wishes to raise the balance by arranging annual fund-raising
events. How much money should they raise at each annual fund-raising event assuming
8 percent rate of interest?
40) Construct the DuPont system of analysis using the following financial data for Key
Wahl Industries and determine which areas of the firm need further analysis.
Key Financial Data
41) During her four years at college, Hayley received the following amounts of money
at the end of each year from her grandmother. She deposited her money in a savings
account paying 6 percent rate of interest. How much money will Hayley have on
graduation day?
42) Aunt Tilly’s Fur Company has been experiencing several years of financial
difficulty and, thus, has considered maintaining its dividend payment at $2.50
indefinitely. What is the value of its common stock if the required rate of return is 8.5
percent?