1) Convertible bonds are debt securities that can be converted into a firm’s stock at a
prespecified price.
2) As a rule, any cash flows that are not affected by the accept/reject criterion should
not be included in capital-budgeting analysis.
3) The value of a bond is equal to the present value of the bond’s interest payments plus
the present value of the bond’s maturity value, all discounted at the bond’s coupon rate.
4) If company A has a lower average collection period than company B, then company
A will have a higher accounts receivable turnover.
5) Primary market transactions cannot be undertaken in over the counter markets.
6) An indirect quote indicates the number of units of foreign currency that can be
bought for one unit of the home currency.
7) The terms of sale identify the possible discount for early payment, the discount
period, and the total credit period.
8) Forecasts of revenues and their related expenses are the basis on which firms forecast
their future financing needs.
9) The goal of cash management is to hold the minimum amount of cash necessary to
meet the firm’s obligations in a timely manner.
10) NPV assumes reinvestment of intermediate free cash flows at the cost of capital,
while IRR assumes reinvestment of intermediate free cash flows at the IRR.
11) The most critical aspect in determining the acceptability of a capital budgeting
project is the impact the project will have on the company’s net income over the
projects entire useful life.
12) If the interest rate is positive, then the future value of an annuity due will be greater
than the future value of an ordinary annuity.
13) A firm’s dividend policy includes two basic components: the dividend payout ratio
and the profit retention ratio.
14) It is possible for two companies to have the same financial performance, but their
financial statements can be different, depending on how and when the managers choose
to report certain transactions.
15) Beginning in 2007 the United States experienced its most severe financial crisis
since the
Great Depression of the 1930s.
16) A decrease in the level of production results in decreased fixed cost per unit.
17) Restrictive provisions in bond indenture agreements are designed to protect
bondholders and lessen the agency problems between bondholders and stockholders.
18) Convertible bonds decrease in value whenever the price of the company’s stock
increases.
19) For a firm to have its securities listed on an exchange, it must meet certain
requirements. These usually include measures of profitability, size, market value, and
public ownership.
20) An independent project should be accepted if it
A) produces a net present value that is greater than or equal to zero
B) produces a net present value that is greater than the equivalent IRR
C) has only one sign reversal
D) produces a profitability index greater than or equal to zero
21) Fiesta Taco Company purchases 30,000 boxes of ground beef each year. It costs $50
to place each order and $10.00 per year for each box held as inventory.
a.What is the average inventory held during the year?
b.What is the economic order quantity for the ground beef?
c.How many orders will be made each year?
22) The Modigliani and Miller hypothesis suggests that capital structure doesn’t matter.
All of the following conditions need to be met for this hypothesis to be TRUE
EXCEPT
A) corporate income is not subject to taxation
B) capital structure consists only of stocks and bonds
C) securities are traded in perfect or efficient markets
D) all corporate net income is paid out as dividends
23) You have been depositing money at the end of each year into an account drawing
8% interest. What is the balance in the account at the end of year four if you deposited
the following amounts?
YearEnd of Year Deposit
1$350
2$500
3$725
4$400
A) $1,622
B) $2,207
C) $2,384
D) $2,687
24) An inventory loan agreement in which the inventories pledged as collateral are
physically separated from the firm’s other inventory and placed under the control of a
third-party is called
A) a floating lien agreement
B) a chattel mortgage agreement
C) a field warehouse agreement
D) a securitized inventory loan arrangement
25) The average cost associated with each additional dollar of financing for investment
projects is
A) the incremental return
B) the marginal cost of capital
C) CAPM required return
D) the component cost of capital
26) The basic format of an income statement is
A) Sales – Expenses = Profits
B) Income – Expenses = EBIT
C) Sales – Liabilities = Profits
D) Assets – Liabilities = Profits
27) Money-market hedges and forward market hedges rely on the
A) interest rate parity theory
B) purchasing power parity theory
C) law of large numbers
D) capital asset pricing model
28) Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions
will increase the company’s current ratio?
A) The company collects $500,000 of its accounts receivable
B) The company sells $1 million of inventory on credit
C) The company pays back $50,000 of its long-term debt
D) The company writes a $30,000 check to pay off some existing accounts payable
29) To compound $100 quarterly for 20 years at 8%, we must use
A) 40 periods at 4%
B) 5 periods at 12%
C) 10 periods at 4%
D) 80 periods at 2%
30) You purchased 500 shares of A.M.J. Inc. common stock one year ago for $50 per
share. You received a dividend of $2 per share today and decide to take your profits by
selling at $54.50 per share. What is your holding period return?
A) 13.0%
B) 9.0%
C) 6.5%
D) 4.0%
31) You deposit $5,000 per year at the end of each of the next 25 years into an account
that pays 8% compounded annually. How much could you withdraw at the end of each
of the 20 years following your last deposit if all withdrawals are the same dollar
amount? (The twenty-fifth and last deposit is made at the beginning of the 20-year
period. The first withdrawal is made at the end of the first year in the 20-year period.)
A) $18,276
B) $27,832
C) $37,230
D) $43,289
32) Table 4-4
Wes Donnell, Inc.
Balance Sheet
Wes Donnell, Inc.
Income Statement
For the year ended December 31, 2010
In addition to the information contained in Table 4-4, you know that the current ratio for
2010 is 4 and that the corporation paid $11,600 in dividends in 2010 . What is Wes
Donnell’s inventory turnover for 2010?
A) 0.13
B) 11.1
C) 9.3
D) 7.78
33) Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of
$500,000; long-term assets of $800,000; and long-term debt of $600,000. How much is
the firm’s total equity?
A) $1,200,000
B) $800,000
C) $900,000
D) $2,000,000
34) Which of the following best describes cash flow from financing activities?
A) Interest income, plus dividend income, minus taxes
B) Interest expense, minus dividends paid
C) Interest paid, plus dividends paid, plus increase (or minus decrease) in stock, plus
increase (or minus decrease) in debt
D) Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt,
minus interest paid, minus dividends paid
35) What is the greatest risk associated with cash management?
A) yields
B) insolvency
C) holding too much cash
D) managing float
36) LTM, Inc. has an issue of preferred stock whose par value is $1,000. The preferred
stock pays a 4.5% dividend. If investors require a 5.5% rate of return for these shares,
what price should the preferred stock sell for?
A) $611.11
B) $508.33
C) $409.09
D) $818.18
37) The break-even point in sales dollars is convenient if
A) the firm sells a large amount of one product
B) the firm deals with more than one product
C) the price per unit is very low
D) depreciation expense is high
38) 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 April?
A) $208,000
B) $176,000
C) $168,000
D) $98,000
39) The benefits of a lockbox system include all of the following EXCEPT
A) increased working cash
B) elimination of clerical functions
C) increase in total float
D) early knowledge of dishonored checks
40) Compute the discounted payback period for a project with the following cash flows
received uniformly within each year and with a required return of 8%:
Initial Outlay = $100
Cash Flows:Year 1 = $40
Year 2 = $50
Year 3 = $60
A) 2.10 years
B) 2.21 years
C) 2.33 years
D) 3.00 years
41) Minority shareholders have a greater chance of electing a member to the board of
directors if the company uses
A) cumulative voting
B) majority voting
C) minority voting
D) proxy voting
42) Which of the following is the least liquid?
A) U.S. Treasury bills
B) commercial paper
C) money market mutual funds
D) federal agency securities
43) In general, the least expensive source of capital is
A) debt
B) new common stock
C) preferred stock
D) retained earnings
44) Which of the following is NOT TRUE regarding the use of short-term debt?
A) It must be rolled over more often than long-term debt
B) There is uncertainty connected with interest costs on short-term debt from year to
year
C) The firm is subjected to greater liquidity risk when using short-term credit
D) Interest rates are usually higher on short-term debt
45) 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 May?
A) $185,000
B) $199,000
C) $119,000
D) $176,000
46) Dickerson Corporation’s common stock is currently selling for $38. Last year’s
dividend was $4.00 per share. Investors expect dividends to grow at an annual rate of 7
percent indefinitely. Flotation costs of 4% will be incurred when new stock is sold.
a.What is the cost of internal common equity?
b.What is the cost of new common equity?
47) Waterford Industries is considering the purchase of a new machine. It will replace
an existing but obsolete machine that will be sold for $50,000. The existing machine is
8 years old, cost $200,000, had a 10-year useful life, and is being depreciated to zero
using the straight-line method. Waterford’s income tax rate is 35%. What is the after-tax
salvage value of the old machine?
A) $42,000
B) $46,500
C) $50,000
D) $53,500
48) Which of the following accounts does NOT belong in the equity section of a
balance sheet?
A) retained earnings
B) paid-in-surplus
C) long-term debt
D) preferred stock
49) Bankers Corp has a very conservative Beta of .7, while Biotech Corp has a Beta of
2.1 . Given that the T-bill rate is 5%, and the market is expected to return 15%, what is
the expected return of Bankers Corp, Biotech Corp, and a portfolio composed of 60%
of Bankers Corp and 40% Biotech Corp?
a. Solve this problem first by weighting the Betas to calculate a portfolio Beta, and then
using CAPM to calculate the portfolio expected return.
b. Then solve the problem again by calculating the expected return of each asset and
weighting those returns to calculate the portfolio expected return.
c. Why is Biotech Corp’s expected return NOT three times that of Bankers Corp?
50) A bond’s yield to maturity depends upon all of the following EXCEPT
A) the individual investor’s required return
B) the maturity of the bond
C) the coupon rate
D) the bond’s risk as reflected by the bond rating
51) You have been accepted to study international economy at the European Central
Bank (ECB) in Frankfurt. You will need $10,500 every 6 months (beginning today) for
the next three years to cover tuition and living expenses. Mom and Dad have agreed to
pay for your education, and want to make one deposit today in a bank account earning
6% interest, compounded semiannually. How much must they deposit now so that you
can withdraw $10,500 at the beginning of each semester over the next 3 years?
A) $54,187
B) $55,797
C) $57,449
D) $56,639
52) As part of its expansion project, A.J. Industries Equipment Division has expanded
its office space by 200 square feet. The company’s administrative overhead is allocated
based on the square footage of each business segment. Although the total administrative
overhead for the company will remain the same, the Equipment Division will be
charged more for administrative overhead. For the Equipment Division expansion
project, the administrative overhead is an example of a(n)
A) incremental cash flow
B) sunk cost
C) opportunity cost
D) incremental opportunity cash flow
53) The TRUE owners of the corporation are the
A) holders of debt issues of the firm
B) preferred stockholders
C) board of directors of the firm
D) common stockholders
54) The “percentage” used in the percent of sales calculation can come
A) from the most recent financial statement item as a percent of current sales
B) from an average computed over several years
C) from an analyst’s judgment
D) from any of the above or a combination of the above
55) Your company is considering the replacement of an old delivery van with a new one
that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The
old van is being depreciated using the simplified straight-line method over a useful life
of 8 years. The old van could be sold today for $7,000. The new van has an invoice
price of $80,000, and it will cost $6,000 to modify the van to carry the company’s
products. Cost savings from use of the new van are expected to be $28,000 per year for
5 years, at which time the van will be sold for its estimated salvage value of $18,000.
The new van will be depreciated using the simplified straight-line method over its
5-year useful life. The company’s tax rate is 35%. Working capital is expected to
increase by $5,000 at the inception of the project, but this amount will be recaptured at
the end of year five. What is the terminal cash flow?
A) $23,000
B) $18,000
C) $17,250
D) $16,700
56) Universal Financial, Inc. has total current assets of $1,200,000; long-term debt of
$600,000; total current liabilities of $500,000; and long-term assets of $800,000. How
much is the firm’s net working capital?
A) $1,000,000
B) $900,000
C) $600,000
D) $700,000
57) You hold a portfolio with the following securities:
Expected
SecurityValueBetaReturn
Driscol Corporation20%3.2036.0%
Evening Corporation40%1.6020.0%
Frolic Corporation40%.206.0%
What is the expected return for the portfolio?
A) 17.60%
B) 20.67%
C) 23.54%
D) 28.59%
58) Perrine Industrial Inc. just paid a dividend of $5 per share. Future dividends are
expected to grow at a constant rate of 7% per year. What is the value of the stock if the
required return is 16%?
A) $33.44
B) $55.56
C) $59.44
D) $65.87
59) Jackson Corp $1,000 par value bonds currently sell for $752.18. The coupon rate is
7 percent, paid semiannually. If the bonds have 6 years before maturity, what is the
yield to maturity on the bonds?
60) Your son will be attending an expensive university in 12 years. You deposit $5,000
per year for 12 years, beginning today. How much money will be in the college fund 12
years from now if the fund earns 8% per year?
61) Brett’s, Inc. expects to have $35 million in credit sales during the coming year. In
spite of a national distributing system, all remittances are sent to the home office. A
proposed system can eliminate 3 days of float, releasing funds which, when invested,
will earn 6.5 percent. What annual savings can Brett’s, Inc. expect if the system is
implemented? Use a 365-day year.
62) Worthington, Inc. is planning to issue $7,500,000 in 120-day maturity notes
carrying a rate of 11 percent per year. Worthington’s commercial paper will be placed at
a cost of $35,000. What is the effective cost of credit to Worthington?
63) Premium Seed Sales, Inc. expects to generate sales of $22,000,000 in the coming
year. All sales are done on a credit basis, net 45 days. Premium Seed has estimated that
it takes an average of three days for payments to reach their central office and an
additional two days to process the payments. What is the opportunity cost of the funds
tied up in the mail and processing? Premium Seed uses a 360-day year in all
calculations and can invest free funds at 6.5%.
64) Is it possible for a company that has negative net income and negative operating
cash flow to end the year with an increase in cash and an increase in stock price?
Explain your answer.
65) Table 3-3
Marlett Company
Financial Information
Based on the information in Table 3-3, prepare a statement of cash flows for 2010 .
Assume that there were no changes in any other asset or liability accounts, and that the
ending cash balance for 2009 was $100 .
66) Your friend Ricky took a finance class and learned about the risk/return tradeoff.
Wanting a high return, Ricky invested in a risky, start-up technology company. A year
later the company went bankrupt and Ricky lost his entire investment. Ricky is furious
with his finance professor for misleading him, claiming he was taught that higher return
goes with higher risk. Explain how Ricky misinterpreted the risk/return tradeoff.
67) Documents uncovered after the Exxon Valdez oil spill in Alaska revealed that
Exxon could have used double-hulled oil tankers that would have prevented the spill,
but the cost of refitting their fleet of single-hulled tankers was considered too high.
Exxon determined that the cost of cleaning up an oil spill would be less than the cost of
refitting the ships, thus increasing shareholder value. Several years after the oil spill,
however, Exxon was fined billions of dollars for the spill. How do the costs of the clean
up and the fines pertain to a discussion of maximizing shareholder value and ethical
responsibility?
68) Complete the following balance sheet using the information given. Round account
balances to the nearest dollar.
