1) Notes payable and bonds payable are spontaneous liabilities.
2) A 100% stock dividend and a 2-for-1 stock split will result in the same number of
shares of stock being held by investors after the transaction is completed.
3) If sales double, the break-even model assumes that total variable costs will double.
4) The bid-asked spread is much lower for currencies that are infrequently traded in
order to compensate banks for providing the service.
5) Timelines are used for simple time value of money problems, but cannot be used for
more complex problems.
6) When the accounts receivable of a firm have been factored, bad debt losses remain
the responsibility of the borrowing firm and must be made good.
7) SEC regulations require that corporate stock repurchases must be done in the open
market so that all shareholders have an equal opportunity to sell their shares.
8) Marketable securities are only those security investments the firm can convert into
cash balances within one year.
9) A bond is a long-term promissory note issued by the firm.
10) If a project is acceptable using the NPV criterion, then it will also be acceptable
using the discounted payback period since both methods use discounted cash flows to
make the accept/reject decision.
11) A security with a reasonably stable price will have a lower required rate of return
than a security with an unstable price.
12) Financial structure is equal to non-interest bearing liabilities, such as accounts
payable and accruals, plus capital structure, which includes short- and long-term debt,
preferred stock, and common equity.
13) Economic value added includes a charge for the cost of equity that is not included
on financial statements prepared according to GAAP.
14) Limited liability for a corporation’s common shareholders is a protective provision
that aids the corporation in raising funds.
15) Because most preferred stocks are perpetuities, their value can be determined by
dividing the annual dividend by an investor’s required return.
16) All of the following securities are sold in money markets EXCEPT
A) common stock
B) commercial paper
C) 3-month U.S. Treasury Bills
D) 6-month certificates of deposit
17) Assume that the tax on dividends and the tax on capital gains is the same. All else
equal, what would a prudent investor prefer?
A) The prudent investor would be indifferent between receiving dividends or capital
gains
B) The prudent investor would prefer dividendsa dollar today is always worth more
than a dollar to be received in the future
C) The prudent investor would prefer capital gainsthe capital gain tax liability can be
deferred until gains are realized
D) More information is needed
18) Determine the effective annualized cost of forgoing the trade discount on terms 2/15
net 65 .
A) 11.30%
B) 14.69%
C) 32.6%
D) 48.98%
19) What information does a firm’s balance sheet provide to the viewing public?
A) a report of investments made and their cost for a specific period of time
B) a complete listing of all of a firm’s cash receipts and cash expenditures for a defined
period of time
C) a report of revenues and expenses for a defined period of time
D) an itemization of all of a firm’s assets, liabilities, and equity as of the balance sheet
date
20) Which of the following accounts belongs on the asset side of a balance sheet?
A) depreciation expense
B) accounts payable
C) inventory
D) accruals
21) The CEO of High Tech International decides to change an accounting method at the
end of the current year. The change results in reported profits increasing by 5%, but the
company’s cash flows are not changed. If capital markets are efficient, then
A) the stock price will not be affected by the accounting change
B) the stock price will increase due to higher profits
C) the stock price will increase only if the accounting change will also result in higher
profits in the next year
D) the stock price will decrease because accounting method changes are not permitted
under generally accepted accounting principles
22) Bob invested $2,000 in an investment fund on his 21st birthday. The fund pays 7%
interest compounded semiannually. Bob is celebrating his 50th birthday today. Bob
decides he wants to retire on his 60th birthday and he wants to withdraw $75,000 per
year, the first withdrawal on his 60th birthday and the last withdrawal on his 90th
birthday. Bob expects to receive $100,000 from his employer on his 55th birthday in
recognition of his long service to the company. Assume Bob has not taken any money
out of his investment fund since he initially funded it on his 21st birthday, and that he
will deposit the $100,000 from his employer into the investment fund on his 55th
birthday. The investment fund will be used to pay for Bob’s retirement.
If Bob makes no additional deposits into his investment fund, how much will be
available for retirement at age 60?
Since the amount in (a) is insufficient to meet his retirement goals, Bob decides to
deposit equal annual amounts into the investment fund beginning on his 51st birthday
and ending on his 59th birthday, so that he can meet his retirement goals. How much
will each deposit be?
23) The common stock for El Viss Company currently sells for $20 per share. The firm
just paid a dividend of $1.50, and the dividend three years ago was $1.30. Dividends
per share are anticipated to grow at the same rate in the future as they have over the past
three years. Flotation costs for new shares will be 6% of the selling price. Calculate the
following:
a.the cost of retained earnings
b.the cost of external equity capital
24) If two firms have the same current dividend and the same expected growth rate,
their stocks must sell at the same current price or else the market will not be in
equilibrium.
A) FALSE, because the required return could be different
B) TRUE, because we are using a dividend valuation model
C) TRUE if markets are semi-strong form efficient
D) TRUE if investors are risk-averse
25) Capital budgeting is concerned with
A) whether a company’s assets should be financed with debt or equity
B) managing a firms cash budgeting procedures
C) what long-term investments a firm should undertake
D) planning sales of a corporation’s equity capital
26) High Inc. has an accounts receivable turnover ratio of 7.3. Low Company has an
accounts receivable turnover ratio of 5. Assuming that High and Low have the same
sales level, which of the following statements is correct?
A) High’s average collection period is less than Low’s
B) Low’s average collection period is less than High’s
C) High has a higher accounts receivable balance on average than does Low Company
D) Low Company has (on average) a lower accounts receivable balance than does High
27) A construction firm that accumulates cash in anticipation of a significant drop in
lumber costs is an example of the ________ motive for holding cash.
A) transaction
B) speculative
C) hedging
D) precautionary
28) Is it possible for the cash budget and the pro forma income statement to have
different results?
A) yes, because revenues and expenses included in each statement are different
B) yes, because revenues and expenses are accounted for over different time periods
C) no, because they contain the same variables, while just using different formats
D) no, because the cash budget and the pro forma income statement provide forecasts
for the same time period
29) The return on the market portfolio is currently 12%. Mobile Phone Corporation
stockholders require a rate of return of 30% and the stock has a beta of 3.2 . According
to CAPM, determine the risk-free rate.
A) 9.80%
B) 6.50%
C) 4.64%
D) 3.82%
30) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects
its credit sales 30% in the month of sale, 60% one month after the sale, and 10% two
months after the sale.
Cash SalesCredit Sales
January$50,000$50,000
February$70,000$110,000
March$55,000$95,000
April$78,000$130,000
May$80,000$105,000
June$75,000$148,000
What are Matterhorn’s total cash receipts for the month of March?
A) $99,500
B) $119,000
C) $150,000
D) $154,500
31) Beaver Corporation stock is currently selling for $58.00. It is expected to pay a
dividend of $5.00 at the end of the year. Dividends are expected to grow at a constant
rate of 7.5% indefinitely. Compute the required rate of return on Beaver Corporation
stock.
A) 12.48%
B) 15.65%
C) 13.64%
D) 16.12%
32) A company that forgoes the discount when credit terms are 2/10 net 60 due to
insufficient cash flow would be better off to borrow funds and take the discount as long
the company could borrow the funds at any rate
A) less than 16.33%
B) less than 15.47%
C) less than 14.69%
D) less than 12.00%
33) Which of the following forms of organizations have earnings that are taxed twice,
once as business income and once as personal income as the earnings are distributed to
the owners in the form of dividends?
A) corporations
B) general partnerships
C) limited partnerships
D) both A and C
34) Your company is able to arrange financing at either a rate of 12.75% annually, or at
a rate of 12% compounded monthly. Assuming financing is needed for one year, which
rate is the best?
A) 12% compounded monthly, because the annual percentage yield is 12.68%
B) Both rates are effectively the same, so your company should be indifferent between
the two
C) 112.75% annually because the annual percentage yield for 12% compounded
monthly is greater than 12.75%
D) 12.75% annually, because even though the annual percentage yield is higher, interest
if paid only once per year at year end
35) Dew Drop In, Inc. announces is quarterly dividend will increase from $3.80 to
$4.00. After the announcement, the price of Dew Drop In, Inc.’s stock drops. The most
likely explanation is that
A) the stock market is a perfect market
B) investors are irrational
C) investors were expecting a larger increase
D) Dew Drop In, Inc.’s debt ratio decreased
36) A wildcat oil driller has enough capital to invest in only one project, that is, to drill
one well in an East Texas oil field. A major oil company is drilling 100 wells in the
same field. The probability of successfully striking oil is 10% for any well drilled in this
field. Which of the following statements is MOST correct concerning the risk involved
in these capital budgeting projects?
A) The risk for the wildcat driller is the same as the risk for the major oil company
since they are both drilling in the same oil field
B) The appropriate risk for the wildcat driller is systematic risk
C) The appropriate risk for the major oil company is contribution-to-firm risk, if all
shareholders of the firm are well diversified
D) The best measure of risk for the wildcat oil driller is project standing alone risk
37) Given the following financial statements for ARGON Corporation, what is the
company’s after-tax cash flow from operations?
A) $10,000
B) $270,000
C) $120,000
D) $295,000
38) QRW, Inc. has a retained earnings balance of $2,000,000. The company reported
net income of $600,000, sales of $4,000,000, and has 200,000 shares of common stock
outstanding. The company announced a dividend of $2.00 per share. Therefore the
company’s dividend payout ratio is
A) 66.7%
B) 50%
C) 20%
D) 10%
39) Plantain, Inc. declared a dividend of $1 per share on March 1. The ex-dividend date
is March 15th, and the payment date is April 1st. The most likely record date is
A) February 27th.
B) March 17th.
C) March 13th.
D) March 29th.
40) Harold considers investing in an LM Corp. bond and decides not to purchase the
bond. Which of the following statements is MOST correct?
A) The intrinsic value of the bond for the investor is less than the market value of the
bond
B) The liquidation value of the bond is greater than the market value of the bond
C) The intrinsic value of the bond for the investor is less than the par value of the bond
D) The intrinsic value of the bond for the investor is greater than the book value of the
bond
41) Spandra Electronics wants to raise money by selling stock. After talking to several
investment banking firms, Spandra decides to hire Goldman Sachs to sell 5 million
shares of its common stock. Goldman sells 4.5 million shares and returns the rest to
Spandra. This is an example of
A) a privileged subscription with a standby agreement
B) a commission or best-efforts agreement
C) a privileged subscription with a standby agreement
D) a competitive bid purchase
42) What are the most important types of current assets? List your answer in order of
declining liquidity.
43) The Bike Store orders $2000 worth of supplies every 30 days. If they take
advantage of the 3/10 net 30 discount offered by their supplier, how much would they
save over the year? Assume a 360-day year.
44) If you wish to accumulate $200,000 in the child’s college fund after 18 years, and
can invest at a 7.5% annual rate, how much must you invest at the end of each year if
the first deposit is made at the end of the first year?
45) You wish to accumulate $10,000 by depositing $481.46 per month into a savings
account that earns 4.75% compounded monthly. How many monthly deposits must you
make?
46) The corporate treasurer of Wooden Furniture Inc. is considering the purchase of
either a municipal obligation with a 6.1% coupon or a corporate bond with a 9.5%
return. Both bonds have a $1,000 par value. The company is currently in the 35%
marginal tax bracket. Which security should the treasurer recommend?
47) The cash budget for Parker Processed Meats, Inc. is given below for the fourth
quarter of 2010:
Parker Processed Meats, Inc.
Cash Budget for the Three Months Ending December 31, 2010
The expected sales for the period are as follows:
Oct.: $116,000 Nov.: $127,000 Dec.: $95,000
The total depreciation expense for the period will be $12,000.
An interest payment on outstanding debt of $13,000 will be made in December. Using
the information given above, construct a pro forma income statement for the final
quarter of 2010 .
48) Your parents are complaining about the price of items today compared to what they
cost years ago. If an automobile that cost $12,000 in 1980 costs $40,000 in 2010,
calculate the annual growth rate in the automobile’s price.
49) Memory, Inc. expects earnings per share this year to be $8. If earnings per share
grow at an average annual rate of 6 percent and if Baker pays 60 percent of its earnings
as dividends, what will the expected dividend per share be in 7 years?