1) Exchange rate risk exists for a party to a contract if the contract is denominated in a
foreign currency.
2) Because there are no fixed financing costs, a common stock plan line in an
EBIT-EPS analysis chart will have a less-steep slope than will a bond-plan line.
3) The net present value of a project will increase as the required rate of return is
decreased (assume only one sign reversal).
4) An increase in a corporation’s marginal tax rate will cause the corporation’s after tax
cost of debt to increase, other things remaining the same.
5) Forward rates, like spot rates, are quoted in both direct and indirect form.
6) The expected rate of return implied by a given market price equals the required rate
of return for investors at the margin.
7) NPV may be calculated on an Excel spreadsheet simply by entering the project’s free
cash flows into Excel’s NPV function.
8) Bonds generally have a maturity date while preferred stocks do not.
9) The profit and loss (income) statement is compiled on a cash basis.
10) Determination of safety stock involves a tradeoff between the risk of a stock-out
and increased costs of carrying additional inventory.
11) It is often the case that the planning process has its greatest value when the resulting
forecasts have the most error, because the planning process offers its greatest value
when the future is the most uncertain.
12) The initial outlay for a new project is an example of an opportunity cost.
13) The value of the Euro floats against other major international currencies, but has a
fixed value when compared to the currencies of the countries in the European Union,
such as the French Franc and the German Mark.
14) Operating return on assets captures the effect of taxes and financing costs, and
hence provides the broadest possible measure of profitability.
15) Inputs using an Excel spreadsheet are almost identical to those on a financial
calculator, except the interest rate is entered either as a decimal (.05) or a whole number
followed by a % sign (5%) rather than simply a whole number (5) as you would enter
using a financial calculator.
16) LaSalle Industries is considering the purchase of a new strapping machine, which
will cost $150,000, plus an additional $10,500 to ship and install. The new machine will
have a 5-year useful life and will be depreciated to zero using the straight-line method.
The machine is expected to generate new sales of $45,000 per year and is expected to
save $16,000 in labor and electrical expenses over the next 5-years. The machine is
expected to have a salvage value of $20,000. LaSalle’s income tax rate is 35%. What is
the machine’s IRR?
A) 15.75%
B) 18.86%
C) 19.15%
D) 20.03%
17) Which of the following loans provide the least amount of security to the lender?
A) chattel mortgage
B) factoring
C) floating lien
D) terminal warehouse agreement
18) The first step involved in predicting financing needs is
A) project the firm’s sales revenues and expenses over the planning period
B) estimating the levels of investment in current and fixed assets that are necessary to
support the projected sales
C) determining the firm’s financing needs throughout the planning period
D) estimating the cost of debt
19) All of the following are potential advantages of commercial paper EXCEPT
A) flexible repayment terms
B) lower interest rates than comparable sources of short-term financing
C) no compensating balance requirements
D) ability to borrow very large amounts
20) Which of the following is a limitation of the “percent of sales method” of preparing
pro forma financial statements?
A) A firm’s investment in accounts receivable is seldom related to sales volume
B) Not all assets and liabilities increase or decrease as a constant percent of sales
C) Inventory levels are seldom affected by changes in sales volume
D) The dividend payout ratio may change from one year to the next
21) QRW Corp. needs to replace an old lathe with a new, more efficient model. The old
lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.
(The old machine is being depreciated on a straight-line basis over a ten-year useful
life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new
lathe to the factory and get it installed. The old machine will be sold as scrap metal for
$2,000. The new machine is also being depreciated on a straight-line basis over ten
years. Sales are expected to increase by $8,000 per year while operating expenses are
expected to decrease by $12,000 per year. QRW’s marginal tax rate is 40%. Additional
working capital of $3,000 is required to maintain the new machine and higher sales
level. The initial outlay for the new machine is
A) $113,000
B) $112,200
C) $111,000
D) $109,800
22) Which of the following ratios would be the poorest indicator of how rapidly the
firm’s credit accounts are being collected?
A) times interest earned
B) average collection period
C) accounts receivable turnover ratio
D) cash conversion cycle
23) Last year Gator Getters, Inc. had $50 million in total assets. Management desires to
increase its plant and equipment during the coming year by $12 million. The company
plans to finance 40 percent of the expansion with debt and the remaining 60 percent
with equity capital. Bond financing will be at a 9 percent rate and will be sold at its par
value. Common stock is currently selling for $50 per share, and flotation costs for new
common stock will amount to $5 per share. The expected dividend next year for Gator
is $2.50. Furthermore, dividends are expected to grow at a 6 percent rate far into the
future. The marginal corporate tax rate is 34 percent. Internal funding available from
additions to retained earnings is $4,000,000.
a.What amount of new common stock must be sold if the existing capital structure is to
be maintained?
b.Calculate the weighted marginal cost of capital at an investment level of $12 million.
24) Which of the following statements about financial leverage is TRUE?
A) Financial leverage is the responsiveness of the firm’s EBIT to fluctuations in sales
B) Financial leverage involves the incurrence of fixed operating costs in the firm’s
income stream
C) Financial leverage is the responsiveness of the firm’s EPS to fluctuations in EBIT
D) Financial leverage reduces a firm’s risk
25) The inventory loan arrangement in which all of the borrower’s inventories are used
as collateral is termed a
A) terminal warehouse agreement
B) floating lien agreement
C) chattel mortgage agreement
D) field warehouse financial agreement
26) Which of the following is TRUE if dividend policy is irrelevant?
A) Perfect capital markets exist
B) The clientele effect exists
C) The information effect exists
D) Tax deferral on capital gains exists
27) A textile manufacturer has cloth that has a $14 per yard carrying cost per year. This
cloth is used at a rate of 25,000 yards per year, and ordering costs are $10 per order.
a.What is the economic order quantity for this cloth?
b.What are the annual inventory costs for this firm if it orders in this quantity?
28) The inventory loan agreement in which the lender can increase his or her security
interest by having specific items of inventory identified in the loan agreement is called
A) a floating lien agreement
B) a chattel mortgage agreement
C) a field warehouse agreement
D) inventory identification agreement
29) If you compare the yield of a municipal bond with that of a negotiable certificate of
deposit, what is the equivalent before-tax yield of the certificate of deposit if the
municipal bond has a yield of 8% per year and the investor has a marginal tax rate of
28%?
A) 8.28%
B) 9.30%
C) 10.24%
D) 11.11%
30) A firm’s dividend payout ratio is
A) the ratio of dividends to sales
B) the ratio of dividends to market equity
C) the ratio of dividends to earnings
D) the ratio of dividends to book equity
31) You are considering the purchase of a share of Ranch’s common stock. You expect
to sell it at the end of 1 year for $32.00. You will also receive a dividend of $2.50 at the
end of the year. Ranch just paid a dividend of $2.25. If your required return on this
stock is 12%, what is the most you would be willing to pay for it now?
A) $28.57
B) $33.05
C) $20.83
D) $30.80
32) Cumulative preferred stock
A) requires dividends in arrears to be carried over into the next period
B) has a right to vote cumulatively
C) has a claim to dividends before bonds
D) has a higher required return than common stock
33) Your son is born today and you want to make him a millionaire by the time he is 50
years old. You deposit $10,700 in an investment account and want to know what annual
interest rate must you earn in order to have the account value equal to $1,000,000 on
your son’s 50th birthday.
A) 17.8%
B) 12.4%
C) 9.5%
D) 6.2%
34) Other things being equal, investors will value which of the following bonds the
highest?
A) callable bonds
B) convertible bonds
C) bonds that are both callable and convertible
D) unsecured, callable bonds
35) Kokapeli, Inc. has a target capital structure of 40% debt and 60% common equity,
and has a 40% marginal tax rate. If the firm’s yield to maturity on bonds is 7.5% and
investors require a 15% return on the firm’s common stock, what is the firm’s weighted
average cost of capital?
A) 7.20%
B) 10.80%
C) 12.00%
D) 12.25%
36) Which of the following statements concerning net income is MOST correct?
A) Net income represents cash available to pay dividends
B) Net income represents sales minus operating expenses at a specific point in time
C) Negative net income reduces a company’s cash balance
D) Net income represents income that may be reinvested in the firm or distributed to its
owners
37) You are ready to retire. A glance at your 401(k) statement indicates that you have
$750,000. If the funds remain in an account earning 9.0%, how much could you
withdraw at the beginning of each year for the next 25 years?
A) $55,620
B) $70,050
C) $35,830
D) $2,500
38) When a corporation designs an investment strategy for investing temporary excess
cash balances in marketable securities, it must consider a variety of factors. Which of
the following is the least important?
A) liquidity
B) financial risk
C) achieving the highest yield
D) maintaining the safety of principal
39) You just graduated and landed your first job in your new career. You remember that
your favorite finance professor told you to begin the painless job of saving for
retirement as soon as possible, so you decided to put away $2,000 at the end of each
year in a Roth IRA. Your expected annual rate of return on the IRA is 7.5%. How much
will you accumulate at retirement after 40 years of investing (note: this may assume
that you are even retiring early)?
A) $94,426
B) $247,921
C) $1,088,632
D) $454,513
40) A company that has an unpredictable cash flow, and is holding cash because of
things that might happen due to this uncertainty, is holding a larger minimum cash
balance due to which type of motive?
A) transaction
B) precautionary
C) speculative
D) common sense
41) DYI Construction Co. is considering a new inventory system that will cost
$750,000. The system is expected to generate positive cash flows over the next four
years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year
three, and $180,000 in year four. DYI’s required rate of return is 8%. What is the
modified internal rate of return of this project?
A) 10.87%
B) 11.57%
C) 13.68%
D) 15.13%
42) Table 4-2
Drummond Company
Balance Sheet
Based on the information in Table 4-2, the inventory turnover ratio is
A) 1.29 times
B) 2.37 times
C) 4.43 times
D) 2.99 times
43) Forward rates are all of the following EXCEPT
A) quoted in both direct and indirect form
B) quoted at a premium or discount
C) beneficial to risk-reduction
D) equal to future spot rates
44) Lockbox arrangement benefits include
A) increased working capital from shorter receivables/cash transformation time
B) elimination of bank charges for handling and audit functions
C) increased cash flows from delays in uncollectible check processing
D) all of the above are benefits from this arrangement
45) Which of the following is NOT considered in the calculation of incremental cash
flows?
A) tax saving due to increased depreciation expense
B) interest payments if new debt is issued
C) increased dividend payments if additional preferred stock is issued
D) B and C
46) How can investors reduce the risk associated with an investment portfolio without
having to accept a lower expected return?
A) Wait until the stock market rises
B) Increase the amount of money invested in the portfolio
C) Purchase a variety of securities; i.e., diversify
D) Purchase stocks that have exceptionally high standard deviations
47) Studio 55, Inc. has an issue of preferred stock that pays a dividend of $4.00. The
preferred stockholders require a rate of return on this stock of 9%. At what price should
the preferred stock sell for? Round off to the nearest $0.10.
A) $36.00
B) $44.40
C) $62.50
D) $88.80