1) On a purely theoretical basis, IRR is the better approach to capital budgeting than
NPV because IRR implicitly assumes that any intermediate cash inflows generated by
an investment are reinvested at the firm’s cost of capital.
2) An aging schedule breaks down accounts receivable into groups on the basis of the
first letter of the name of the company that owes on the account.
3) The risk-adjusted discount rate approach to evaluating projects with unequal lives
converts the net present value of unequal-lived, mutually exclusive projects into an
equivalent annual amount.
4) The Financial Accounting Standards Board (FASB) is the federal regulatory body
that governs the sale and listing of securities.
5) The risk-adjusted discount rate can be computed as the risk free rate plus the product
of a project’s beta and the market risk premium.
6) The annual percentage rate (APR) is the nominal rate of interest, found by
multiplying the periodic rate by the number of periods in one year.
7) The value of a firm measured as the sum of the values of its operating units if each
were sold separately is known as a firm’s breakup value.
8) Due to the difficulty of allocating costs to products in a multiproduct firm, the
breakeven model may fail to determine breakeven points for each product line.
9) A popular extension of materials requirement planning is inventory integration
automation II, which integrates data from numerous areas such as finance, accounting,
marketing, engineering, and manufacturing using a sophisticated computer system.
10) The internal rate of return assumes that a project’s intermediate cash inflows are
reinvested at a rate equal to the firm’s cost of capital.
11) Cash acquisitions of going concerns are best analyzed using ________.
A) an investment opportunity schedule
B) ratio analysis
C) capital budgeting techniques
D) the weighted marginal cost of capital theory
12) Initial cash outflows and subsequent operating cash inflows for a project are
referred to as ________.
A) necessary cash flows
B) relevant cash flows
C) perpetual cash flows
D) ordinary cash flows
13) In defending against a hostile takeover, the strategy involving the payment of a
large, debt-financed, cash dividend is the ________ strategy.
A) shark repellent
B) golden parachute
C) leveraged recapitalization
D) dividend restructuring
14) Xiao Li wishes to accumulate $50,000 by the end of 10 years by making equal
annual end-of-year deposits over the next 10 years. If Xiao Li can earn 5 percent on her
investments, how much must she deposit at the end of each year?
A) $3,975
B) $6,475
C) $5,000
D) $4,513
15) An advantage of a ________ is that it avoids giving shareholders false hopes.
A) constant-payout-ratio policy
B) regular dividend policy
C) low-regular-and-extra dividend policy
D) target dividend policy
16) What is the IRR for the following project if its initial after-tax cost is $5,000,000
and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1,
$2,900,000 in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?
A) 5.83%
B) 9.67%
C) 11.44%
D) 6.85%
17) A violation of preferred stock restrictive covenants usually permits preferred
shareholders to ________.
A) force the company into bankruptcy
B) suit against the shareholders
C) force the retirement of the preferred stock at or above its par value
D) force the company to repurchase the shares at a stated amount below par
18) 2/15 net 45 translates as ________.
A) 15 percent cash discount if paid in 2 days, net 45-day credit period
B) 45 percent of account due in 15 days, payment prior to day 15 receives a 2 percent
discount
C) 2 percent cash discount if paid prior to 15 days, if customer does not take a cash
discount, the balance is due in 45 days
D) 2 percent of the balance is due in 15 days, the remaining balance is due in 45 days
19) Tony’s Beach T-Shirts has fixed annual operating costs of $75,000. Tony retails his
T-shirts for $14.99 each and the variable cost per T-shirt is $4.99. Based on this
information, the breakeven sales level in units is ________.
A) 7,500
B) 15,030
C) 5,003
D) 3,754
20) Which of the following is an attribute of investment bankers?
A) They make long-term investments for banking institutions
B) They bear the risk of selling a security issue
C) They act as middlemen between the issuer and the banker
D) They provide the issuer with advice relating to the amounts of dividend to be paid
21) The ________ is an inventory management technique that minimizes inventory
investment by having materials inputs arrive at exactly the time they are needed for
production.
A) ABC system
B) FIFO method
C) MRP system
D) JIT system
22) If a firm decides to take the cash discount that is offered on goods purchased on
credit, the firm should ________.
A) pay as soon as possible
B) pay on the last day of the credit period
C) not take the discount no matter when the firm actually pays
D) pay on or before the last day of the discount period
23) ________ is a statistical measure of the relationship between any two series of
numbers.
A) Coefficient of variation
B) Standard deviation
C) Correlation
D) Probability
24) A financial manager’s investment decisions determine ________.
A) both the mix and the type of assets found on the firm’s balance sheet
B) both the mix and the type of liabilities found on the firm’s balance sheet
C) both the mix and the type of assets and liabilities found on the firm’s balance sheet
D) both the mix and the type of short-term and long-term financing
25) Tangshan Mining borrowed $100,000 for one year under a line of credit with a
stated interest rate of 7.5 percent and a 15 percent compensating balance. Normally, the
firm keeps almost no money in its checking account. Based on this information, the
effective annual interest rate on the loan is ________.
A) 7.5%
B) 8.0%
C) 8.8%
D) 7.2%
26) Through the effects of financial leverage, when EBIT increases, ________.
A) earnings per share will increase
B) earnings per share will decrease
C) fixed operating costs will decrease
D) fixed operating costs will increase
27) Table 11.4
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is
considering replacing an existing piece of equipment with a more sophisticated
machine. The following information is given.
The firm pays 40 percent taxes on ordinary income and capital gains.
Given the information in Table 11.4, compute the initial investment.
28) Table 13.1
What is the EPS under Financing Plan 1, if the firm projects EBIT of $200,000 and has
a tax rate of 40 percent? (See Table 13.1)
29) Calculate the present value of a $10,000 perpetuity at a 6 percent discount rate.
30) Asset A was purchased six months ago for $25,000 and has generated $1,500 cash
flow during that period. What is the asset’s rate of return if it can be sold for $26,750
today?
31) In their meeting with their advisor, Mr. and Mrs. O’Rourke concluded that they
would need $40,000 per year during their retirement years in order to live comfortably.
They will retire 10 years from now and expect a 20-year retirement period. How much
should Mr. and Mrs. O’Rourke deposit now in a bank account paying 9 percent to reach
financial happiness during retirement?
32) To finance a new line of product, the Tangshan Toys has issued a bond with a par
value of $1,000, coupon rate of 8 percent, and maturity of 30 years. Compute the price
of the bond if the opportunity cost is 11 percent.
33) Julie’s Tanning Systems has an estimated liquidation value (after all prior claims
have been satisfied) of $3,000,000, $1,500,000 from fixed assets, and $1,500,000 from
current assets. The firm’s value as a going concern is $4,000,000. The firm’s current
capital structure is as follows:
*Secured by fixed assets.
Prepare a table indicating the amount, if any, to be distributed to each claimant, in the
event of liquidation.
34) Table 10.5
Galaxy Satellite Co. is attempting to select the best group of independent projects
competing for the firm’s fixed capital budget of $10,000,000. Any unused portion of
this budget will earn less than its 20 percent cost of capital. A summary of key data
about the proposed projects follows.
Use the NPV approach to select the best group of projects. (See Table 10.5)