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1) A corporate controller is an officer responsible for a firm's financial activities such as
financial planning and fund raising, making capital expenditure decisions, and
managing cash, credit, the pension fund, and foreign exchange.
2) Futures and options are opportunities that are embedded in capital budgeting projects
that enable managers to alter their cash flows and risks in a way that affects project
acceptability.
3) In U.S., during the past 75 years, on an average the return on U.S. Treasury bills has
exceeded the inflation rate.
4) With the ACH (automated clearing house) credits, disbursement float is sacrificed
because ACH transactions immediately draw down a company's payroll account on pay
day.
5) Eurodollar deposits are deposits of currency that are not native to the country in
which the bank is located.
6) If a firm is subject to capital rationing, it has only a fixed number of dollars available
for capital expenditures and numerous projects compete for these dollars.
7) The payback period of a project that costs $1,000 initially and promises after-tax
cash inflows of $300 for the next three years is 3.33 years.
8) A firm can raise capital by issuing securities such as convertibles, warrants, and calls
and puts.
9) The payback period is generally viewed as an unsophisticated capital budgeting
technique, because it does not explicitly consider the time value of money by
discounting cash flows to find present value.
10) Average age of inventory can be calculated as inventory divided by 365.
11) If a firm's credit period is decreased, the sales volume, the investment in accounts
receivable, and the bad debt expenses can be expected to increase.
12) Capital gain is the portion of the sale price that is in excess of the initial purchase
price.
13) As the financial leverage multiplier increases, this may result in ________.
A) an increase in the net profit margin and return on investment, due to the decrease in
interest expense as debt decreases
B) an increase in the net profit margin and return on investment, due to the increase in
interest expense as debt increases
C) a decrease in the net profit margin and return on investment, due to the increase in
interest expense as debt increases
D) a decrease in the net profit margin and return on investment, due to the decrease in
interest expense as debt decreases
14) The effect of exercising a warrant on a firm's capital structure ________.
A) reduces leverage less than a converting a convertible security
B) increases leverage as much as a converting a convertible security
C) reduces leverage more than a converting a convertible security
D) is unrelated to a converting a convertible security
15) Shares of stock currently owned by a firm's shareholders are called ________.
A) authorized shares
B) issued shares
C) outstanding shares
D) treasury shares
16) Which of the following is true of a conglomerate merger?
A) It occurs when a firm acquires a supplier or a customer
B) It involves the combination of firms in unrelated businesses
C) It is achieved by acquiring a firm that is in the same general industry but neither in
the same line of business nor a supplier or customer
D) It results in the expansion of a firm's operations in a given product line and at the
same time eliminates a competitor
17) An investor is considering buying 500 shares of ABC Company at $32 per share.
Analysts agree that the firm's stock price may increase to $45 per share in the next 4
months. As an alternative, the investor could purchase a 120-day call option at a
striking price of $30 for $5,000. At what stock price would the investor break even?
A) $35
B) $40
C) $42
D) $45
18) What annual rate of return would Grandma Zoe need to earn if she deposits $1,000
per month into an account beginning one month from today in order to have a total of
$1,000,000 in 30 years?
A) 4.55%
B) 5.28%
C) 5.98%
D) 6.23%
19) Long-term debt instruments used by both government and business are known as
________.
A) preferred stocks
B) T-bills
C) bonds
D) equities
20) An IRR approach to capital rationing involves graphically plotting project IRRs in
descending order against total dollar investment on an ________ graph.
A) ANPV
B) NPV
C) RADR
D) IOS
21) Comparing net present value and internal rate of return ________.
A) always results in the same ranking of projects
B) always results in the same accept-reject decision
C) may give different accept-reject decisions
D) is only necessary on independent projects
22) Payback is considered an unsophisticated capital budgeting because it ________.
A) gives explicit consideration to the timing of cash flows and therefore the time value
of money
B) gives explicit consideration to risk exposure due to the use of the cost of capital as a
discount rate
C) does not gives explicit consideration on the recovery of initial investment and
possibility of a calamity
D) it does not explicitly consider the time value of money
23) Which of the following is a positive approach of coping with political risk?
A) control of transportation to external markets
B) control of downstream processing
C) license or patent restrictions under international agreement
D) joint venture with government or local private sector
24) Which of the following is used to analyze a firm's financial performance over
different years?
A) time-series analysis
B) break-even analysis
C) gap analysis
D) marginal analysis
25) Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive
projects, A and B. The relevant cash flows for each project are given in the table below.
The cost of capital for use in evaluating each of these equally risky projects is 10
percent.
The annualized NPV of Project B is ________. (See Table 12.6)
A) $11,673
B) $12,947
C) $38,227
D) $21,828
26) Ted Corporation expects to generate free-cash flows of $200,000 per year for the
next five years. Beyond that time, free cash flows are expected to grow at a constant
rate of 5 percent per year forever. If the firm's average cost of capital is 15 percent, the
market value of the firm's debt is $500,000, and Ted has a half million shares of stock
outstanding, what is the value of Ted stock?
A) $2.43
B) $3.43
C) $1.43
D) $0.00
27) 3/10 net 45 EOM translates as ________.
A) a 10 percent cash discount may be taken if paid in three days; if no cash discount is
taken, the balance is due in 45 days
B) a 3 percent cash discount may be taken if paid in 10 days; if no cash discount is
taken, the balance is due 45 days after transaction is complete
C) a 3 percent cash discount may be taken if paid in 10 days; if no cash discount is
taken, the balance is due 45 days after the end of the month
D) a 3 percent discount may be taken on 10 percent of the purchase if the account is
paid within 45 days after the end of the month
28) An increase in fixed operating costs will result in ________.
A) a decrease in the degree of operating leverage
B) an increase in the degree of operating leverage
C) a decrease in the degree of financial leverage
D) an increase in the degree of financial leverage
29) Danny's Distributing, Inc. has completed an analysis of check-clearing times of five
key suppliers. On a weekly basis, the firm has a $50,000 check disbursed to each of
these suppliers, totaling $250,000. In examining the check-clearing times of each
supplier, the firm revealed:
Given this information, what recommendation would you give the firm with respect to
paying its suppliers weekly? Explain.
30) China Manufacturing Agents, Inc. is preparing a five-year plan. Today, sales are
$1,000,000. If the growth rate in sales is projected to be 10 percent over the next five
years, what will the dollar amount of sales be in year five?
31) Compute the value of a share of common stock of Lexi's Cookie Company whose
most recent dividend was $2.50 and is expected to grow at 3 percent per year for the
next 5 years, after which the dividend growth rate will increase to 6 percent per year
indefinitely. Assume 10 percent required rate of return.
32) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent
coupon interest rate outstanding. The issue pays interest semiannually and has 10 years
remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12
percent rate of return. What is the value of these Hewitt Packing Company bonds?
33) Uncle Tim's Inventions has an expected dividend next year of $3.60 and a required
return of 12 percent. Assuming the dividends will be paid indefinitely, calculate the
value of a share of common stock assuming a zero growth rate of dividends.
34) Should financing costs such as the returns paid to bondholders and stockholders be
considered in computing after-tax operating cash flows? Why or why not?
35) Marc has purchased a new car for $15,000. He paid $2,500 as down payment and
he paid the balance by a loan from his hometown bank. The loan is to be paid on a
monthly basis for two years charging 12 percent interest. How much are the monthly
payments?
