1) The breakeven point in dollars can be computed by dividing the contribution margin
into the variable operating costs.
2) National entry control systems are comprehensive rules, regulations, and incentives
introduced by host governments to regulate inflows of foreign direct investment from
MNCs and at the same time extract more benefits from their presence.
3) Operating cash flow (OCF) is equal to a firm’s net operating profits after taxes minus
all non-cash charges.
4) If a project’s IRR is greater than the cost of capital, the project should be rejected.
5) Leverage results from the use of equity to magnify returns to a firm’s owners.
6) Chapter 7 of the Bankruptcy Reform Act of 1978 outlines the procedures for
reorganizing a failed (or failing) firm, whether its petition is filed voluntarily or
involuntarily.
7) The more predictable a firm’s cash inflows, the more net working capital it will need.
8) When computing the number of deposits needed to accumulate to a future sum, it
will take longer if the interest rate decreases, holding the future value and deposit size
constant.
9) When the constant-growth valuation model is used to find the cost of common stock
equity capital, it can easily be adjusted for flotation costs to find the cost of new
common stock; the capital asset pricing model (CAPM) does not provide a simple
adjustment mechanism.
10) A sophisticated capital budgeting technique that can be computed by solving for the
discount rate that equates the present value of a project’s inflows to the present value of
its outflows is called net present value.
11) Non-cash charges are expenses that involve an actual outlay of cash during the
period but are not deducted on the income statement.
12) As per dividend relevance theory, current dividend payments are believed to reduce
investor’s uncertainty, therebyall else being equalplacing a lower value on a firm’s stock
after its payment.
13) An increase in current assets increases net working capital, thereby reducing the
risk of insolvency.
14) ________ involves the sale of accounts receivable.
A) Trust receipt loan
B) Factoring
C) Field warehouse arrangement
D) Pledging of accounts receivable
15) A firm is analyzing a relaxation of credit standards that is expected to increase sales
10 percent. The firm is currently selling 400 units at an average sale price per unit of
$575, and the variable cost per unit is $400 at the current sales volume. The average
cost per unit is $425. What is the additional profit contribution from sales if credit
standards are relaxed?
A) $23,000
B) $16,000
C) $6,000
D) $7,000
16) Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount.
The firm is considering a 3 percent cash discount for payment within 10 days. The
firm’s current average collection period is 90 days, sales are 400 films per year, selling
price is $25,000 per film, variable cost per film is $18,750, and the average cost per
film is $21,000. The firm expects that the change in credit terms will result in a minor
increase in sales of 10 films per year, that 75 percent of the sales will take the discount,
and the average collection period will drop to 30 days. The firm’s bad debt expense is
expected to become negligible under the proposed plan. The bad debt expense is
currently 0.5 percent of sales. The firm’s required return on equal-risk investments is 20
percent. (Assume a 360-day year.)
What are the savings of marginal bad debts under the proposed plan? (See Table 15.7)
A) $500,000
B) $50,000
C) $10,000
D) $5,000
17) A firm has prepared the coming year’s pro forma balance sheet resulting in a plug
figure in a preliminary statementcalled the external financing requiredof $230,000. The
firm should prepare to ________.
A) repurchase common stock totaling $230,000
B) arrange for a loan of $230,000
C) do nothing; the balance sheet balances
D) invest in marketable securities totaling $230,000
18) In a(n) ________, a firm specifies a range of prices that it is willing to repurchase
shares and the quantity of shares that it desires.
A) Dutch auction
B) tender offer
C) American option
D) self-tender offer
19) An important cash inflow in the analysis of initial cash flows for a replacement
project is ________.
A) taxes
B) the cost of the new asset
C) installation cost
D) the sale value of the old asset
20) Yongman Electronics has decided to invest $10,000,000 in a new headquarters and
needs to determine the best way to finance the construction. The firm currently has
$50,000,000 of 10 percent bonds and 4,000,000 common shares outstanding. The firm
can obtain the $10,000,000 of financing through a 10 percent bond issue or the sale of
1,000,000 shares of common stock. The firm has a 40 percent tax rate.
(a)What is the degree of financial leverage for each plan at $25,000,000 of EBIT?
(b)What is the financial breakeven point for each plan?
21) Table 4.3
The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for
the coming months of January through May. Historically, 75 percent of sales are for
cash with the remaining 25 percent collected in the following month. The ending cash
balance in January is $3,000.
The net cash flow for February is ________. (See Table 4.3)
A) -$1,250
B) -$1,000
C) $5,750
D) $750
22) Which of the following is an example of noncash charges?
A) depreciation
B) accruals
C) interest expense
D) dividends paid
23) The beta associated with a risk-free asset ________.
A) is greater than 1
B) is less than 1
C) is equal to 0
D) is between 0 and 1
24) ________ reflects the return that must be earned on the given project to compensate
the firm’s owners adequately.
A) Internal rate of return
B) Cost of capital
C) Risk-adjusted discount rate
D) Average rate of return
25) The existence of ________ allows multinationals to take advantage of unregulated
financial markets to invest and raise short-term funds in a variety of countries and to
protect themselves from foreign exchange exposure.
A) a strong U.S. dollar
B) the International Monetary Fund
C) Eurocurrency markets
D) European Economic Council
26) Which of the following is an example of agency cost?
A) costs incurred for setting up an agency
B) failure of making the best investment decision
C) payment of income tax
D) payment of interest
27) Generally, the order of cost, from the least expensive to the most expensive, for
long-term capital of a corporation is ________.
A) new common stock, retained earnings, preferred stock, long-term debt
B) common stock, preferred stock, long-term debt, short-term debt
C) preferred stock, new common stocks, common stock, retained earnings
D) long-term debt, preferred stock, retained earnings, new common stock
28) ________ projects have the same function; the acceptance of one ________ the
others from consideration.
A) Capital; eliminates
B) Independent; does not eliminate
C) Mutually exclusive; eliminates
D) Replacement; eliminates
29) Making financing decisions includes ________.
A) determining the appropriate mix of short-term and long-term financing
B) deciding on which individual securities to select for investment
C) analyzing quarterly budget and performance reports
D) improving the productivity of manufacturing products
30) The annual rate of return is referred to as the ________.
A) discount rate
B) marginal rate
C) risk-free rate
D) marginal cost
31) In a ________, new shares are sold to the existing shareholders.
A) private placement
B) public offering
C) rights offering
D) direct placement
32) A(n) ________ is neither debt nor equity but derives its value from an underlying
asset.
A) derivative security
B) hybrid security
C) financing lease
D) operating lease
33) Which of the following is a reason that makes NPV a better approach to capital
budgeting on a purely theoretical basis?
A) It measures the benefits relative to the relative amount invested
B) The reinvestment rate assumed by this method is reasonable
C) Financial decision makers are inclined to higher rates of return
D) Interest rates are expressed as annual rates of return
34) Tina’s Apple Company would like to manufacture and market a new packaging.
Tina’s has sold an issue of commercial paper for $1,500,000 and maturity of 90 days to
finance the new project. Compute the annual interest rate on the issue of commercial
paper if the value of the commercial paper at maturity is $1,650,000 (assuming 360
days in a year).
35) A record collector has agreed to sell her entire collection to a historical museum in
three years at a price of $100,000. The current risk-free rate is 7 percent. At what price
should she value her collection today?
36) Julie’s X-Ray Company paid $2.00 per share in common stock dividends last year.
The company’s policy is to allow its dividend to grow at 5 percent for 4 years and then
the rate of growth changes to 3 percent per year from year five and on. What is the
value of the stock if the required rate of return is 8 percent?
37) Ashley is planning to attend college when she graduates from high school 7 years
from now. She anticipates that she will need $10,000 at the beginning of each of the
four college years to pay for tuition and fees, and have some spending money. Ashley
has made an arrangement with her father to do the household chores if her dad deposits
$3,500 at the end of each year for the next 7 years in a bank account paying 8 percent
interest. Will there be enough money in the account for Ashley to pay for her college
expenses? Assume the rate of interest stays at 8 percent during the college years.
38) Explain liquidity, default risk, and maturity risk premiums.
39) Gerry Jacobs, a financial analyst for Best Value Supermarkets, has prepared the
following sales and cash disbursement estimates for the period August through
December of the current year.
Ninety percent of sales are for cash, the remaining 10 percent are collected one month
later. All disbursements are on a cash basis. The firm wishes to maintain a minimum
cash balance of $50. The beginning cash balance in September is $25. Prepare a cash
budget for the months of October, November, and December, noting any needed
financing or excess cash available.
40) Calculate the amount of accounts receivable assuming that a pro forma balance
sheet dated at the end of May was prepared from the information presented. (See Table
4.3)