1) A stock repurchase plan can be viewed as both a financing decision and an
investment decision.
2) As the volume of production increases the variable cost-per unit of the product
decreases.
3) Advantages of the payback period include that it is easy to calculate, easy to
understand, and that it is based on cash flows rather than on accounting profits.
4) Three ways that savings can be transferred through the financial markets to those in
need of funds include direct transfers, indirect transfers using the investment banker,
and indirect transfers using the financial intermediary.
5) A company’s cost of capital is equal to a weighted average of its investors’ required
returns.
6) Shareholders may prefer a share repurchase program to dividends because dividends
are subject to taxation and increasing value per share due to repurchase programs is tax
deferred.
7) If a company’s cash balance increases during the year, and the company also reports
positive net income, then the company’s retained earnings balance must increase.
8) If a firm imposes a capital constraint on investment projects, the appropriate decision
criterion is to select the set of projects that has the highest positive net present value
subject to the capital constraint.
9) According to the expectations theory, the actual dividend must equal the expected
dividend, or else the stock price will decrease after the dividend amount is announced.
10) Proceeds from the issuance of new debt and principal payments upon maturity of
debt used to finance a project should be included in the calculation of the project’s
after-tax cash flows.
11) As a corporation’s investment opportunities increase, the dividend payout ratio
should decrease so that the corporation can avoid flotation costs.
12) If current interest rates are low, and therefore expected to increase in the future, a
firm wanting to reduce its interest rate risk would hold debt with longer maturities.
13) If an old asset is sold for less than its book value the resulting loss will save the
company taxes, hence lowering the cost of the project.
14) Payable-through drafts look like checks but are not drawn on a bank.
15) The guiding rule in deciding if a free cash flow is incremental is to look at the
company with, versus without, the new project.
16) Most stocks have betas between
A) -1.00 and 1.00
B) 0.00 and 1.00
C) 0.60 and 1.60
D) 1.00 and 2.00
17) Bellington, Inc. is considering the purchase of new, sophisticated machinery for a
special three-year project. The machinery requires a special lubricating oil that probably
will never be used, but must be available at all times should the machine break down.
Bellington purchases $2,000 of lubricating oil to keep on hand just in case it is needed.
At the end of the three-year project, it is expected the lubricating oil can be sold back to
the distributor for $2,000. Which of the following statements is MOST correct?
A) The lubricating oil is a sunk cost that should be excluded from the analysis
B) The $2,000 for the lubricating oil should be excluded from the analysis because it is
recovered at the end of three years, so the final cost is zero
C) The $2,000 represents an additional investment in working capital that should be
included in the capital budgeting analysis
D) The $2,000 for lubricating oil is simply an accounting entry and does not represent a
real cash flow
18) Table 4-1
Stewart Company
Balance Sheet
Based on the information in Table 4-1, the current ratio is
A) 1.92
B) 1.98
C) 2.86
D) 2.88
19) PrimaCare has a capital structure that consists of $7 million of debt, $2 million of
preferred stock, and $11 million of common equity, based upon current market values.
The firm’s yield to maturity on its bonds is 7.4%, and investors require an 8% return on
the firm’s preferred and a 14% return on PrimaCare’s common stock. If the tax rate is
35%, what is Parker’s WACC?
A) 7.21%
B) 8.12%
C) 10.18%
D) 12.25%
20) Net working capital refers to which of the following?
A) cash, accounts receivable, and inventory
B) notes payable, accruals, and accounts payable
C) current assets plus current liabilities
D) current assets divided by current liabilities
E) current assets minus current liabilities
21) Using the percentage of sales method of forecasting
A) all asset and liability accounts increase or decrease proportionally with sales
B) only asset accounts increase or decrease proportionally with sales
C) accounts payable and accrued expenses are the only liabilities that increase or
decrease proportionally with sales
D) all balance sheet accounts increase or decrease proportionally with sales
22) 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
23) Plimpton Sales presents income statements for the first three months of this year.
Revenues are $1,000,000 in January, $1,200,000 in February, and $1,400,000 in March,
while expenses total $800,000 in January, $900,000 February, and $1,000,000 in March.
Despite the positive net income, the controller believes Plimpton Sales needs to arrange
short-term financing of $300,000 to make payroll the next month. Which of the
following statements is MOST correct?
A) The controller must have made a mistake since the company’s net income for the
three months is $900,000
B) The company’s accounts receivable balance has decreased over the past three months
C) The company’s accounts payable balance has increased over the past three months
D) The company’s accounts receivable balance has increased and the accounts payable
balance has decreased over the past three months
24) With regard to the hedging principle, which of the following would be an
appropriate method to finance a minimum level of current assets required for year
round operations?
A) short-term notes payable
B) trade credit
C) common stock
D) revolving credit agreements that must be repaid in a period less than 1 year
25) A local lamp store expects to sell 2000 lamps in the coming year. It costs the store
$1.00 in carrying costs for each lamp and $10.00 for each order placed.
a.What is the economic order quantity for the lamps?
b.How many orders will be placed each year?
c.If the store wants a one-week safety stock and it takes one week to receive an order
after it has been placed, what should the inventory level be when a new order is placed?
Assume a 50-week year.
26) All of the following are examples of political risk for a U.S. company investing in a
foreign country EXCEPT
A) expropriation of plant and equipment
B) the problem of blocked funds
C) substantial changes in foreign country tax laws
D) government requirements that ownership must be limited to U.S. citizens
27) When a company repurchases its own common stock, it is likely that
A) the stock price will increase because the company views the stock as undervalued
B) the stock price will decrease because the company is creating artificial demand for
its stock
C) the stock price will remain the same as this is simply an internal transaction
D) the board of directors will be fired for incompetence
28) Apollo Corp. reported the following balance sheet:
Apollo Corp.’s debt ratio is
A) 32.17%
B) 37.62%
C) 39.45%
D) 42.95%
29) How much money do I need to place into a bank account that pays a 1.08% rate in
order to have $500 at the end of 7 years?
A) $332.54
B) $751.81
C) $463.78
D) $629.51
30) The increase in owners equity for a given period is equal to
A) positive net cash flow minus dividends
B) net income minus dividends
C) sales minus dividends
D) gross profit minus distributions to shareholders
31) When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity
financing plan
A) the debt financing plan line will graph with a steeper slope than the equity financing
plan line
B) the debt financing plan line will have a lower level of EBIT at EPS = 0
C) the line of the two financing plans will intersect on the EBIT axis
D) the slope of the equity financing plan line will be steeper than the debt financing
plan line below the intersection of the two lines
32) A company that increases its liquidity by holding more cash and marketable
securities is
A) likely to achieve a higher return on equity because of higher interest income
B) likely to achieve a lower return on equity because of the smaller rates of return
earned on cash and marketable securities compared to the firm’s other investments
C) going to maximize firm value because risk is decreased
D) going to have to sell common stock to raise the cash to become more liquid
33) Financial leverage is distinct from operating leverage since it accounts for
A) use of debt and preferred stock
B) variability in fixed operating costs
C) variability in sales
D) changes in EBIT
34) Kingston Corp. is considering a new machine that requires an initial investment of
$480,000 installed, and has a useful life of 8 years. The expected annual after-tax cash
flows for the machine are $89,000 for each of the 8 years and nothing thereafter.
a.Calculate the net present value of the machine if the required rate of return is 11
percent.
b.Calculate the IRR of this project.
c.Should Kingston accept the project (assume that it is independent and not subject to
any capital rationing constraint)? Explain your answer.
35) 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
36) Stock A has the following returns for various states of the economy:
State of
the EconomyProbabilityStock A’s Return
Recession9%-72%
Below Average16%-15%
Average51%16%
Above Average14%35%
Boom10%85%
Stock A’s expected return is
A) 9.9%
B) 12.7%
C) 13.8%
D) 16.5%
37) If a firm extends 4/10, net 60-day terms of sale, what is the cost in terms of nominal
APR? Assume a 360-day year.
A) 29.40%
B) 30.0%
C) 23.99%
D) 27.86%
38) Commercial banks that also provide investment banking services are called
A) conglomerate banks
B) multi-purpose banks
C) investment enhanced banks
D) universal banks
39) Use the “percent of sales method” of preparing pro forma financial statements to
determine the projection for next year’s inventory. Make the following assumptions:
current year’s sales are $27,800,000; current year’s cost of goods sold is $17,528,000;
sales are expected to rise by 30%. The firm’s investment in inventory in the current year
is $5,890,200. What is the projection for next year’s inventory?
A) $7,657,260
B) $6,981,250
C) $5,845,500
D) $4,526,600
40) All of the following may influence a firm’s dividend payment EXCEPT
A) investment opportunities
B) investor transaction costs
C) common stock par value
D) flotation costs
41) A budget
A) records the amount and timing of the firm’s past financing needs
B) provides a basis for taking corrective action in the event that budgeted figures do not
match actual or realized figures
C) remains independent of the human resource performance evaluation task
D) only makes sense for annual periods of time
42) The residual dividend theory suggests that dividends will only be paid
A) if the tax rate on capital gains is higher than the tax rate on dividends
B) if the corporation has more positive NPV projects than it can fund
C) if interest rates available to shareholders are higher than the required return on the
company’s stock
D) if current retained earnings exceed the equity portion of the firm’s capital budget
43) If you were to use the standard deviation as a measure of investment risk, which of
the following has historically been the highest risk investment?
A) common stock of large firms
B) U.S. Treasury bills
C) common stock of small firms
D) long-term government bonds
44) Credit and collection policies affect all of the following EXCEPT
A) level of sales
B) length of time before credit sales are collected
C) terms of sales
D) pricing policies
45) What is the term for a graphical representation of the relationship between interest
rates and the maturities of debt securities?
A) term curve
B) maturity chart
C) yield curve
D) inflationary expectations
46) 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
47) If Cindy deposits $12,000 into a bank account that pays 6% interest compounded
semiannually, what will the account balance be in seven years?
A) 18,151
B) 14,356
C) 16,987
D) 15,555