1) A stock repurchase plan that involves issuing long-term debt to fund the purchase of
the company’s stock may be used as a way to alter a corporation’s capital structure.
2) The risk/return tradeoff implies that the return on a riskless asset must be zero.
3) As inflation pushes interest rates up, the cost of carrying inventory rises.
4) Fixed operating costs include charges incurred from the firm’s use of debt financing.
5) When solving a problem involving an annuity due, you must select the “beg” or
beginning mode on your financial calculator.
6) The initial outlay includes the immediate cash outflow necessary to purchase the
asset and put it in operating order.
7) A firm’s dividend policy provides information pertaining to the firm’s payout ratio
and its stability.
8) The percent of sales forecasting method works well because it accounts for
economies of scale in assets such as inventory.
9) If a project uses an asset the corporation already owns, the cost of that asset for
capital budgeting purposes is zero to reflect the advantage the project has over projects
that require the purchase of new assets.
10) When solving time value of money problems using Excel, the type = 0 variable
means payments are made at the end of each period, and the type = 1 variable means
payments are made at the beginning of each period.
11) Subordinated debentures are more risky than unsubordinated debentures because
the claims of subordinated debenture holders are less likely to be honored in the event
of liquidation.
12) Foreign currency forward rates aid traders by reducing uncertainty regarding future
market fluctuations.
13) Zero balance accounts reduce disbursing float.
14) Hershey’s expects to sell $2 million of its new candy bar, although $200,000 of this
amount would have been spent on its existing candy bar. The $2 million is the
appropriate cash inflow for the new candy bar project, while the $200,000 will be
counted against the return on the old candy bar.
15) Historically, investments with the highest returns have the lowest standard
deviations because investors do not like risk.
16) Common-sized income statements are used to compare companies that have the
same amount of revenues.
17) Which of the following is NOT an acceptable method of measuring risk for capital
budgeting purposes?
A) modified internal rate of return
B) sensitivity analysis
C) using a risk-adjusted discount rate
D) proxy, or pure play method for estimating a project’s beta
18) Which of the following accounts does NOT belong in the liability section of a
balance sheet?
A) accruals
B) short-term debt
C) additional paid-in capital
D) long-term debt
19) LPD Logistics, Inc.’s projected sales for the first six months of 2010 are given
below.
Jan.$300,000April$350,000
Feb.$350,000May$500,000
Mar.$475,000June$400,000
20% of sales are collected in the month of the sale, 75% are collected in the month
following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of
sales. Purchases are made the month prior to the sales and are paid during the month the
purchases are made (i.e. goods sold in March are bought and paid for in February).
Total other cash expenses are $35,000/month. The company’s cash balance as of
February 1, 2010 will be $30,000. Excess cash will be used to retire short-term
borrowing (if any). LPD has no short term borrowing as of February 28, 2010. Assume
that the interest rate on short-term borrowing is 1% per month. The company must have
a minimum cash balance of $20,000 at the beginning of each month. What is LPD’s
projected cash balance as of April 1, 2010?
A) ($48,600)
B) ($58,036)
C) $14,238
D) $21,400
20) Spontaneous sources of funds refers to all of the below EXCEPT
A) accruals
B) a bank loan
C) accounts payable
D) common stock
21) Richenstein Enterprises is in the business of selling dishwashers. The firm needs
$192,000 to finance an anticipated expansion in receivables due to increased sales.
Richenstein’s credit terms are net 40, and its average monthly credit sales are $180,000.
In general, the firm’s customers pay within the credit period; thus, the firm’s average
accounts receivable balance is $240,000.
The comptroller of Richenstein Enterprises, Mr. Gee, approached their bank for the
needed capital, pledging the accounts receivable as collateral. The bank offered to make
the loan at a rate of 2 percent over prime plus a 1 percent processing charge on all
receivables pledged. The bank agreed to loan up to 80 percent of the face value of the
receivables pledged.
a.Estimate the cost of the receivables loan to Richenstein where the firm borrows the
$192,000. The prime rate is currently 13%.
b.Gee also requested a line of credit for $192,000 from the bank. The bank agreed to
grant the necessary line of credit at a rate of 4% over prime and required a 12%
compensating balance Gee currently maintains an average demand deposit of $40,000.
Estimate the cost of the line of credit to Richenstein.
c.Which source of credit should Richenstein Enterprises select?
22) Assume that you have $330,000 invested in a stock that is returning 11.50%,
$170,000 invested in a stock that is returning 22.75%, and $470,000 invested in a stock
that is returning 10.25%. What is the expected return of your portfolio?
A) 15.6%
B) 12.9%
C) 18.3%
D) 14.8%
23) Today is your 21st birthday and your bank account balance is $25,000. Your
account is earning 6.5% interest compounded quarterly. How much will be in the
account on your 50th birthday?
A) $159,795
B) $162,183
C) $163,832
D) $164,631
24) What is the name given to the equation that financial managers use to measure an
investor’s required rate of return?
A) the standard deviation
B) the capital asset pricing model
C) the coefficient of variation
D) the MIRR
25) Krause Precision Tools, Inc. will use an estimated 700,000 small processors in its
manufacturing process next year. The carrying cost of processor inventory is $3.00 per
unit and the cost of reordering processors is $100 per order. What is Krause’s economic
ordering quantity for small processors?
A) 6,340
B) 6,831
C) 7,118
D) 7,300
26) Joe, a risk-averse investor, is trying to choose between investment A and investment
B. If investment A is riskier than investment B and Joe selects investment A anyway,
then
A) the actual return for investment A will be higher than the actual return for investment
B
B) the actual return for investment A will be higher than the expected return for
investment B
C) the expected return for investment A will be higher than the actual return for
investment B
D) the expected return for investment A will be higher than the expected return for
investment B
27) Suppose the current exchange rates are 1.3215 dollars per euro, and 84.19 yen per
dollar. What is the current exchange rate between yen and euros?
A) 86.356 yen per euro
B) 147.571 yen per euro
C) 151.696 yen per euro
D) 111.257 yen per euro
28) The viewpoint that high dividends increase stock values is based on which of the
following principles?
A) time value of money
B) risk-return trade-off
C) taxes bias business decisions
D) the agency problem
29) Which of the following statements is MOST correct concerning flotation costs?
A) Flotation costs are the same for common stock, preferred stock and bonds because
they reflect mainly printing costs and legal fees
B) Flotation costs are generally higher for bonds rather than stocks because the dollar
amounts involved are much higher, allowing for economies of scale
C) Flotation costs as a percentage of gross proceeds increase as the size of the security
issue increases
D) Flotation costs are higher for common stocks than for preferred stocks and bonds
due to the higher level of risk associated with owning common stock
30) Assume that the British pound is worth 1.6242 U.S. dollars. If a new Jaguar costs
$138,000, what is the cost in British pounds?
A) 201,000
B) 84,965
C) 71,642
D) 119,998
31) Assume that an investor is offered a choice of a risk-free government bond or a
high-risk corporate stock. Further assume that the expected return is the same for both.
According to one of the axioms of finance, which investment would be chosen?
A) the corporate stock
B) the government bond
C) neither, the investor would be indifferent
D) none of the above
32) Nike Corp. buys on 3/10, net 30 days. What is the nominal cost of interest if Nike
does not take advantage of the trade discount offered? Assume a 360-day year.
A) 12.0%
B) 22.3%
C) 55.7%
D) 66.3%
33) Trade credit is an example of which of the following sources of financing?
A) spontaneous
B) temporary
C) permanent
D) discretionary
34) Salashar, Inc.’s balance sheet is as follows:
Cash $1,000,000Current Liabilities$1,300,000
Other Current Assets$2,000,000Long-term Debt$4,100,000
Long-term Assets$8,000,000Common Stock$5,000,000
Retained Earnings$ 600,000
Total Assets$11,000,000Total Liab. And Equity$11,000,000
Salashar decides to pay a dividend. Which of the following statements is MOST
correct?
A) The dividend cannot exceed $1,000,000, the amount of cash available
B) The dividend cannot exceed $1,700,000, the amount of net working capital
C) The dividend cannot exceed $600,000, the amount of retained earnings
D) The dividend cannot exceed $11,000,000, the amount of total assets
35) What information does a firm’s income statement provide to the viewing public?
A) an itemization of all of a firm’s assets and liabilities for a defined period of time
B) a complete listing of all of a firm’s cash receipts and cash expenditures for a defined
period of time
C) a report of revenues and expenses for a defined period of time
D) a report of investments made and their cost for a specific period of time
36) CraftCo, Inc.’ projected sales for the first six months of 2012 are given below:
Jan.$500,000April$490,000
Feb.$740,000May$740,000
Mar.$380,000June$610,000
40% of sales are collected in cash at time of sale, 50% are collected in the month
following the sale, and the remaining 10% are collected in the second month following
the sale. Cost of goods sold is 60% of sales. Purchases are made in the month prior to
the sales, and payments for purchases are made in the month of the sale. Total other
cash expenses are $40,000/month. The company’s cash balance as of February 28, 2012
will be $25,000. Excess cash will be used to retire short-term borrowing (if any).
CraftCo, Inc. has no short term borrowing as of February 28, 2012. Assume that the
interest rate on short-term borrowing is 1% per month. The company must have a
minimum cash balance of $15,000 at the beginning of each month. What is CraftCo,
Inc.’ projected cash balance at the end of March 2012?
A) $301,000
B) $329,000
C) $352,000
D) $361,000
37) Manny and Irene will be retiring in fifteen years and would like to buy a Mexican
villa. The villa costs $500,000 today, and housing prices in Mexico are expected to
increase by 6% per year. Manny and Irene want to make fifteen equal annual payments
into an account, starting today, so there will be enough money to purchase the villa in
fifteen years. If the account earns 10% per year, what is the amount of each deposit?
A) $79,885
B) $72,623
C) $34,286
D) $32,947
38) Raindrip Corp. can purchase a new machine for $1,875,000 that will provide an
annual net cash flow of $650,000 per year for five years. The machine will be sold for
$120,000 after taxes at the end of year five. What is the net present value of the
machine if the required rate of return is 13.5%.
A) $558,378
B) $513,859
C) $473,498
D) $447,292
39) Butler Automotive developed a new diagnostic testing procedure that is expected to
increase sales by $10,000 per month. As more drivers bring in their vehicles, Butler
expects to also do more oil changes and brake repairs. As a result, inventory levels of
oil and brake parts must be increased by $5,000. Revenues from oil changes and brake
jobs are expected to increase by $4,000 per month. An example of an increase in net
working capital requirements from the new diagnostic testing procedure is the
A) increase in inventory levels of oil and brake parts of $5,000
B) increase in revenue of $10,000 per month for the diagnostic testing
C) increase in revenues from oil changes and brake jobs of $4,000 per month
D) increase in all activities totaling $19,000 per month
40) 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
41) Higher flotation costs will result in all of the following EXCEPT
A) higher after-tax cost of debt
B) higher weighted average cost of capital
C) higher cost of retained earnings
D) higher cost of common equity when new common shares are sold
42) What information does a firm’s balance sheet provide to the viewing public?
A) a report of investments made and their cost for a specific period of time
B) a complete listing of all of a firm’s cash receipts and cash expenditures for a defined
period of time
C) a report of revenues and expenses for a defined period of time
D) an itemization of all of a firm’s assets, liabilities, and equity as of the balance sheet
date
43) The EBIT-EPS indifference point
A) identifies the EBIT level at which the EPS will be the same regardless of the
financing plan
B) identifies the point at which the analysis can use EBIT and EPS interchangeably
C) identifies the level of earnings at which the management is indifferent about the
payments of dividends
D) identifies the sales level at which EBIT equals EPS
44) Which of the following statements concerning the constant growth dividend
valuation model is true?
A) The required rate of return must exceed the growth rate
B) The dividend growth rate must be bigger than 8%
C) The growth rate must increase every year
D) The required rate of return must be equal to the growth rate for dividends
45) The goal of the firm should be
A) maximization of profits (net income per share)
B) maximization of shareholder wealth
C) maximization of market share
D) maximization of sales
46) Stock repurchases may be used for all of the following EXCEPT
A) a means for providing an internal investment opportunity
B) to improve earnings per share
C) to decrease the corporation’s debt ratio
D) to eliminate a minority ownership group of stockholders
47) J.B. Corporation is considering the purchase of equipment that has an invoice price
of $450,000. The equipment was recommended by a consulting firm that did an
analysis for J.B. Corporation. J.B. paid the consulting firm $12,000 for its report. The
cost of shipping and installation is $50,000. The equipment will be depreciated on a
straight-line basis over its useful life of 10 years, assuming no salvage value. The
equipment will replace existing assets that have a current book value of $100,000 and
which could be sold for $150,000. Additional net working capital of $15,000 will be
required to maintain the equipment and to support higher sales. J.B.’s marginal tax rate
is 40%. Calculate the initial outlay required to fund this project.
48) Bill starts a retirement fund at age 21 and plans on depositing equal annual amounts
on each birthday, starting at age 21, and ending at age 60. He wants to have $2 million
at age 60. John starts his fund on his 30th birthday. He wants to deposit equal annual
amounts on each birthday starting on his 30th birthday and ending on his 60th birthday.
John wants to have $2 million at age 60. If the investment funds earn 10% per year,
calculate the amounts the Bill and John respectively will have to save each year
(rounded to the nearest dollar) to meet their goals. Comment on the difference.
49) The expected return for the market portfolio is 13%, the expected return on U.S.
Treasury Bills is 2%, and the expected return on AAA-rated short-term corporate bonds
is 7%. Calculate the required return for a stock with a beta equal to 1.5.
50) Bill wants to buy a new boat in 7 years. He expects the new boat will cost $28,000.
Bill has $18,000 in an investment account today. What rate of return must Bill earn on
his investments to be able to buy the boat on time?
51) A zero coupon bond is selling for $476. The bond has a face value of $1,000 and
matures in 8 years. Your friend asks you if he should buy the bond. He tells you his
required return is 9 percent. Would you recommend he buy the bond or not? Explain
your answer.
52) U.S Technologies preferred stock sells for $80 and pays $9 each year in dividends.
What is the expected rate of return?
53) You purchase $10,000 worth of supplies every 90 days and never take the trade
discount of 2/10 net 30. How much could you save each (360-day) year if you took the
discount?
54) A bond will pay $5,000 at maturity in 9 years. It also makes semiannual interest
payments of $400 until maturity. If the discount rate is 7% compounded semiannually,
what should be the market price of the bond?
55) Given the information below, calculate the company’s cash balance at the end of the
year.
