1) The cash conversion cycle is equal to the days of sales outstanding plus the days of
sales in inventory plus the days of payables outstanding.
2) Under current accounting rules, the plant and equipment account shows the historical
cost (purchase price) of, plus any subsequent improvements to, the plant and
equipment.
3) The cash budget is composed of four elements: cash receipts, cash disbursements,
depreciation, and the net change in cash for the period.
4) The capital asset pricing model uses three variables to evaluate required returns on
common equity: the risk free rate, the beta coefficient, and the market risk premium.
5) In general, common stock and preferred stock are both valued by calculating the
present value of all expected future cash flows, using the required return as the discount
rate.
6) The S&P 500 index must be used as the measure of market return in the CAPM or
the results are not theoretically accurate.
7) A firm’s cost of capital is not affected by the composition of the right-hand side of the
firm’s balance sheet, but rather is determined by the firm’s mix of assets.
8) For companies in competitive markets, the evolution and introduction of new
products may serve more to preserve market share than to expand it.
9) Under majority voting a majority (>50%) shareholder will just be able to elect a
simple majority of the board of directors.
10) The process of shelf-registration is beneficial to the issuing firm because it will
reduce the time needed for the firm to take an issue to market.
11) When the present financial ratios of a firm are compared with similar ratios for
another firm in the same industry it is called trend analysis.
12) Above the EBIT-EPS indifference point a more heavily levered financial plan will
produce greater EPS.
13) What is the present value of $11,463 to be received 7 years from today? Assume a
discount rate of 3.5% compounded annually and round to the nearest $1.
A) $5,790
B) $6,508
C) $7,210
D) $9,010
14) Manny and Irene will be retiring in fifteen years and would like to buy a Mexican
villa. The villa costs $500,000 today, and housing prices in Mexico are expected to
increase by 6% per year. Manny and Irene want to make fifteen equal annual payments
into an account, starting today, so there will be enough money to purchase the villa in
fifteen years. If the account earns 10% per year, what is the amount of each deposit?
A) $79,885
B) $72,623
C) $34,286
D) $32,947
15) You are considering the purchase of a common stock that paid a dividend of $2.00
yesterday. You expect this stock to have a growth rate of 15 percent for the next 3 years,
resulting in dividends of D1=$2.30, D2=$2.645, and D3=$3.04. The long-run normal
growth rate after year 3 is expected to be 10 percent (that is, a constant growth rate after
year 3 of 10% per year forever). If you require a 14 percent rate of return, how much
should you be willing to pay for this stock?
A) $89.75
B) $83.65
C) $56.46
D) $62.57
16) XRT, Inc. is issuing a $1,000 par value bond that pays 8.5% interest annually.
Investors are expected to pay $1,100 for the 12-year bond. The firm will pay $50 per
bond in flotation costs. What is the after-tax cost of new debt if the firm is in the 35%
tax bracket?
A) 8.23%
B) 4.55%
C) 4.70%
D) 7.45%
17) Working capital includes all of the following EXCEPT
A) cash
B) accounts receivable
C) accounts payable
D) inventories
18) Preferred stock is similar to a bond in the following way
A) preferred stock always contains a maturity date
B) both investments provide a stated income stream
C) both contain a growth factor similar to common stock
D) both provide interest payments
19) Which of the following statements about project standing alone risk is TRUE?
A) It ignores the fact that much of the risk of a project will be diversified away as the
project is combined with the firm’s other projects
B) It ignores the cash flows that are associated with a project that occur beyond the
payback period
C) It takes into consideration the effects of diversification of the firm’s shareholders
D) It provides the best measure of project risk for a large, widely-held company
20) Speculative, or non-investment-grade, bonds have an S&P bond rating of
A) C or less
B) CCC or less
C) BB or less
D) BBB or less
21) Which of the following statements is MOST correct regarding beta?
A) Beta must be calculated using at least 5 years of monthly returns data to be accurate
B) Beta can only be measured properly using daily returns
C) Beta for a particular company remains constant over time
D) Even professionals may not agree on the measurement of beta
22) According to the moderate view of capital costs and financial leverage, as the use of
debt financing increases
A) the cost of capital continuously decreases
B) the cost of capital remains constant
C) the cost of capital continuously increases
D) there is an optimal level of debt financing
23) Maximization of shareholder wealth
A) represents a zero sum game in which one corporation gains at the expense of others
B) provides benefits to society as scarce resources are directed to their most productive
use
C) is not a practical goal since it cannot be measured effectively
D) is achieved only if cash flows exceed accounting profits
24) Coppell Timber Company had total earnings last year of $5,000,000, but expects
total earnings to drop to $4,750,000 this year because of a slump in the housing
industry. There are currently 1,000,000 shares of common stock outstanding. The
company has $4,000,000 worth of investments to undertake this year. The company
finances 40 percent of its investments with debt and 60 percent with equity capital. The
company paid $3.00 per share in dividends last year.
a.If the company follows a pure residual dividend policy, how large a dividend will
each shareholder receive this year?
b.If the company maintains a constant dividend payout ratio each year, how large a
dividend will each shareholder receive this year?
c.If the company follows a constant dollar dividend policy, how large a dividend will
each shareholder receive this year?
25) All of the following will increase the discretionary financing needed EXCEPT
A) decrease the net profit margin
B) decrease the dividend payout ratio
C) decrease the sales growth rate
D) decrease the spontaneous financing
26) When a company repurchases its own common stock, it is likely that
A) the stock price will increase because the company views the stock as undervalued
B) the stock price will decrease because the company is creating artificial demand for
its stock
C) the stock price will remain the same as this is simply an internal transaction
D) the board of directors will be fired for incompetence
27) Plato Industries’ projected sales for the first six months of 2012 are given below:
Jan.$250,000April$300,000
Feb.$340,000May$350,000
Mar.$280,000June$380,000
20% of sales are collected in cash at time of sale, 50% are collected in the month
following the sale, and the remaining 30% are collected in the second month following
the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to
the sales, and payments for purchases are made in the month of the sale. Total other
cash expenses are $70,000/month. The company’s cash balance as of February 28, 2012
will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato
has no short term borrowing as of February 28, 2012 . Ignore any interest on short-term
borrowing. The company must have a minimum cash balance of $40,000 at the
beginning of each month. What is Plato Industries’ ending cash balance (before
borrowing) in March?
A) $12,000
B) $8,000
C) $3,000
D) ($28,000)
28) Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new
ships. The bonds pay 4.85% interest, semiannually. Today’s required rate of return is
9.7%. How much should these bonds sell for today? Round off to the nearest $1.
A) $771.86
B) $732.93
C) $660.45
D) $598.33
29) Shareholder wealth maximization means
A) maximizing earnings per share
B) maximizing dividends per share
C) maximizing the price of existing common stock
D) maximizing stockholders equity
30) The category of securities with the highest historical risk premium is
A) large company stocks
B) small company stocks
C) government bonds
D) small company corporate bonds
31) All else equal, an increase in beta results in
A) an increase in the cost of retained earnings
B) an increase in the cost of newly issued common stock
C) an increase in the after-tax cost of debt
D) an increase in the cost of common equity, whether or not the funds come from
retained earnings or newly issued common stock
32) ABC Corporation began operations on January 1st of this year with a cash balance
of $250,000. ABC had sales of $200,000 for the month of January, all on credit. ABC
allows its customers 30 days to pay. ABC’s expenses for January equal $150,000, and
ABC’s ending balance in accounts payable at January 31st is $50,000. In its cash budget
for January, ABC’s ending cash balance should be equal to
A) $300,000 because of GAAP accrual accounting rules
B) $150,000
C) $200,000
D) $100,000
33) You hold a portfolio made up of the following stocks:
Investment ValueBeta
Stock L$8,0002.0
Stock M$18,0001.5
Stock N$14,000.4
If the market’s expected return is 14%, and the risk free rate of return is 5%, what is the
expected return of the portfolio?
A) 17.010%
B) 16.700%
C) 15.935%
D) 14.698%
34) Which of the following is an unsecured short-term bank loan made for a specific
purpose?
A) mortgage bond
B) line of credit
C) revolving credit agreement
D) transaction loan
35) Stock A has the following returns for various states of the economy:
State of
the EconomyProbabilityStock A’s Return
Recession10%-30%
Below Average20%-2%
Average40%10%
Above Average20%18%
Boom10%40%
Stock A’s expected return is
A) 5.4%
B) 7.2%
C) 8.2%
D) 9.6%
36) Which of the following is (are) FALSE?
A) The constant dividend payout ratio policy seeks to pay a constant percentage of
earnings each year.
B) The stable dollar dividend per share policy seeks to maintain a relatively stable
percentage dividend over time.
C) The small, regular dividend plus a year-end extra policy pays a small, regular
dividend plus a year-end extra dividend in good years.
D) The constant dividend payout ratio policy will result in more variability in dividends
than the stable dollar dividend per share policy.
37) All of the following elements of a cash management program will likely contribute
to an increase in the value of the firm EXCEPT
A) collect cash more quickly
B) slow down cash disbursements
C) prepare more accurate cash flow forecasts
D) increase cash balances for precautionary reasons
38) What is the name given to the equation that financial managers use to measure an
investor’s required rate of return?
A) the standard deviation
B) the capital asset pricing model
C) the coefficient of variation
D) the MIRR
39) Blastdale Corp. is considering borrowing $15,000 for a 60-day period. The firm will
repay the $15,000 principal amount plus $200 in interest. What is the effective annual
rate of interest? Use a 360-day year.
A) 7.2%
B) 8.0%
C) 8.2%
D) 10.5%
40) Table 4-2
Drummond Company
Balance Sheet
The times interest earned ratio is
A) 11.48
B) 5.25
C) 4.88
D) 8.65
41) You are considering a security with the following possible rates of return:
a. Calculate the expected rate of return.
b. Calculate the standard deviation of the returns.
42) Transit float is caused by
A) the time necessary for a deposited check to clear the banking system and become
usable funds to the company
B) the time funds are not available, through the company’s bank account, until its
payment check has cleared the banking system
C) the elapsed time from the moment a customer mails his remittance check until the
firm begins to process it
D) the time required for the firm to process remittance checks