1) Because retained earnings are a form of internal financing, the dividend decision can
significantly affect a firm’s external financing requirements.
2) Investment A guarantees its holder $100 return. Investment B earns $0 or $200 with
equal chances (i.e., an average of $100) over the same period. Both investments have
equal risk.
3) Net operating profit after taxes (NOPAT) represents a firm’s earnings after deducting
both interest and taxes.
4) The ABC system is an inventory management technique for determining the optimal
order quantity for an item of inventory.
5) Financial leverage may be defined as the potential use of variable financial costs to
magnify the effects of changes in earnings before interest and taxes (EBIT) on a firm’s
earnings per share (EPS).
6) If a lease meets any of the FASB Standards No. 13 criteria, it should be shown as a
capitalized lease, meaning the present value of all its payments should be included as an
asset and corresponding liability on a firm’s balance sheet.
7) In a voluntary settlement, each creditor will be paid only 45 cents on a dollar
immediately. This is an example of ________.
A) a composition
B) a combination of a composition and extension
C) an extension
D) a liquidation
8) Table 3.2
Dana Dairy Products Key Ratios
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2013
Balance Sheet
Dana Dairy Products
December 31, 2013
The inventory turnover for Dana Dairy Products in 2013 was ________. (See Table 3.2)
A) 43
B) 5
C) 20
D) 25
9) A firm arranges a discount loan at a 12 percent interest rate, and borrows $100,000
for one year. The stated interest rate is ________ and the effective interest rate is
________.
A) 12.00%; 12.00%
B) 13.64%; 12.00%
C) 12.00%; 13.64%
D) 12.00%; 10.71%
10) Table 10.2
The cash flow pattern depicted is associated with a capital investment and may be
characterized as ________. (See Table 10.2)
A) an annuity and a conventional cash flow
B) a mixed stream and a nonconventional cash flow
C) an annuity and a nonconventional cash flow
D) a mixed stream and a conventional cash flow
11) A(n) ________ allows management to avoid or minimize losses on projects that
turn bad.
A) abandonment option
B) growth option
C) timing option
D) put option
12) A customer sends payment to a post office box which is emptied by a firm’s bank
daily. The bank then processes the payments and notifies the firm of the day’s
collections. This collection technique is known as ________.
A) a direct send
B) concentration banking
C) the lockbox system
D) controlled disbursing
13) A bond will sell ________ when the stated rate of interest exceeds the required rate
of return, ________ when the stated rate of interest is less than the required return, and
________ when the stated rate of interest is equal to the required return.
A) at a premium; at a discount; equal to the par value
B) at a premium; equal to the par value; at a discount
C) at a discount; at a premium; equal to the par value
D) equal to the par value; at a premium; at a discount
14) In economic conditions characterized by a scarcity of short-term funds, a firm
would best choose the ________ financing strategy.
A) aggressive
B) conservative
C) permanent
D) seasonal
15) The goal of an efficient portfolio is to ________.
A) achieve a predetermined rate of return for a given level of risk
B) maximize risk in order to maximize profit
C) minimize profit in order to minimize risk
D) minimize risk for a given level of return
16) Which of the following increases the chances of business failures?
A) current ratio of 2:1
B) decreasing days’ sales outstanding
C) solvency ratio of greater than 20%
D) corporate maturity
17) In a line of credit arrangement, a firm pays interest on ________.
A) the full line of credit
B) the total line of credit
C) only the amount actually borrowed
D) only the amount actually borrowed and commitment fees on any unused portion of
the loan
18) The General Chemical Company uses 150,000 gallons of hydro chloric acid per
month. The cost of carrying the chemical in inventory is 50 cents per gallon per year,
and the cost of ordering the chemical is $150 per order. The firm uses the chemical at a
constant rate throughout the year. It takes 18 days to receive an order once it is placed.
The reorder point is ________.
A) 7,500 gallons
B) 25,000 gallons
C) 90,000 gallons
D) 105,000 gallons