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Correct Answers Are Marked in Yellow
Correct Answers Are Marked in Yellow
51 questions
A. The Behavioral Principle can be applied to situations where it is less cost effective.
B. The Signaling Principle says that actions convey information.
C. The Behavioral Principle can be applied to capital structure choice.
D. The Behavioral Principle is a direct application of the Signaling Principle.
2) There are three primary areas of corporate finance. Which of the below is (are) included among these
three areas?
4) Which of the following statements is (are) TRUE about the statement of cash flows?
6) Certain items in the income statement are called noncash items, wherein the cash flow for the
expense occurs outside of the reporting period. These include which of the following?
A. set-up costs
B. inventory
C. variable expenses
D. depreciation
7) __________ represent(s) the total claims of creditors and owners against the firm’s assets.
A. Stockholders’ equity
B. Working capital
C. Total Liabilities
D. Liabilities and stockholders’ equity
9) The current market value of an asset can be very different from its book value. Four factors affect the
likelihood of a difference between market and book values. These include which of the following?
A. it can help structure your thinking about business decisions AND provide some information that is
helpful in making business decisions.
B. it can help structure your thinking about business decisions.
C. it can provide foolproof information for picking stocks.
D. it can provide some information that is helpful in making business decisions.
A. the net amount (net book value) for something shown in quarterly accounting statements.
B. the length of an asset’s life when it is issued.
C. the price for which something could be bought or sold in a reasonable length of time, where
“reasonable length of time” is defined in terms of the item’s liquidity.
D. a technical accounting term that encompasses the conventions, rules, and procedures necessary to
define accepted accounting practice at a particular time.
13) Leverage ratios show the relative contribution of creditors and owners to the financing of the
company. An example of a leverage ratio is:
A. return on equity
B. equity multiplier
C. return on assets
D. cash ratio
14) Red Hot Chili’s had annual credit sales of $800,000 over the past year. During that time, average
receivables were $200,000. What was the days’ sales outstanding or average collection period (ACP)?
[HINT. ACP = (365 days)(average receivables) / (annual credit sales).]
A. 55 days
B. 91 days
C. 36 days
D. four days
15) A company has a net income (NI) of $200, interest expenses (INT) of $50, and depreciation (DEP) of
$50. The corporate tax rate (T) is 50%. What is the cash coverage ratio (CCR)? [HINT. CCR = (EBIT + DEP) +
INT where EBIT equals INT plus NI /(1 - T).]
A. 10.0
B. 3.0 times
C. 1.8 times
D. 1.2 times
16) Stony Products has an inventory conversion period (ICP) of about 60.83 days. The receivables
collection period (RCP) is 36.50 days. The payables deferral period (PDP) is about 30.42 days. What is
Stony's cash conversion cycle (CCC)?
A. about 69 days
B. about 68 days
C. about 67 days
D. about 66 days
17) __________ is the difference between the available or collected balance at the bank and the firm's
ledger balance.
18) Firms use several devices and procedures to manage float including __________.
A. Trade credit is also more flexible than other means of short-term financing.
B. The terms "2/10, net 30" mean the buyer can take a 2% cash discount if payment is made within 10
days (the discount period).
C. If no discount is offered, or if payment is made soon enough that the discount can be taken, there is
no cost to the firm for the use of the sup¬plier's trade credit.
D. Trade credit is the largest single source of short-term funds for businesses, representing approximately
two-third of the current liabilities of nonfinancial corporations.
A. Bank term loans always represent short-term loans with less than one-year maturity.
B. A revolving credit agreement represents a legal commitment to lend up to a specified maximum
amount any time during a specified period.
C. A 3-year revolving credit convertible into a 5-year term loan at the end of the third year is uncommon.
23) Suppose Office Supply Corporation sells personal copying machines at the rate of 900 units per year.
The cost of placing one order is $225, and it costs $50 per year to carry a copier in inventory. What is
Office Supply’s EOQ?
A. about 92 copiers.
B. about 90 copiers.
C. about 94 copiers.
D. about 88 copiers.
25) The net initial outlay can be broken down into various categories. These include which of the
following?
26) The net initial outlay can be broken down into various categories. These include which of the
following?
27) A corporation has been trying to decide if it should continue with a project. An argument in favor of
continuing is that a lot of money has already been spent on the project. What is the major problem with
this argument?
28) You expect to renovate a building you will pay $760,000 for and will lease it out for 20 years, after
which time you estimate you can sell the building for $250,000. You expect the lease to pay you
$110,000 per year. Finally, the cost of capital in this case is 13%. What is the value of the building in
today’s dollars when you sell it?
A. $121,695.57
B. $221,695.57
C. $21,695.57
D. $250,000.00
29) There are five basic concepts to keep in mind when calculating a project’s cash flows. These include
which (if any) of the following?
30) Compute the NPV for the following project. The initial cost is $10,000. The net cash flows are $3,800
for four years. The net salvage value is $2,000 when the project terminates. The cost of capital is 10%.
A. $3,411.52
B. $1,7065.76
C. $2,000.00
D. $13,411.52
31) The CAPM uses a firm’s __________ to tell us its required rate of return.
A. standard deviation
B. beta
C. correlation coefficient
D. all of the options apply
32) Merck's required return for equity (re) is 14%. Its required return for debt (rd) is 8%, its debt-to-total
value ratio (L) is 35%, and its marginal tax rate (T) is 40%. Calculate Merck's WACC.
A. 10.58%
B. 10.78%
C. 10.68%
D. 10.48%
33) The weighted average cost of capital (WACC) can be computed using the formula: WACC = (1 - L)re +
L(1 - T)rd. Which of the following statements is TRUE?
A. T*D / rd represents the present value of the stream of interest tax shields.
B. The value of a leveraged firm when considering only the tax effect can be presented in a simplified
formula as given by: VL = VU + T*D.
C. I¯(1 - T) / r represents the present value of the firm's operating cash flow stream, calculated as though
the firm had no debt
D. all of the options apply
35) Jonathan's Tidbits is an entertainment service. It has an unleveraged required return of r = 23%.
Jonathan's rebalances its leverage each year to a target of L = 0.52 and T* = 0.20. Jonathan can borrow
currently at a rate of rd = 16%. What is Jonathan's WACC?
A. about 21.54%
B. about 19.54%
C. about 21.24%
D. about 22.24%
36) There are five basic considerations involved in a firm's choice of capital structure. These include
__________.
37) Lawrence Refinancing (LR) has a $100M (M = million) bond issue outstanding, which is scheduled to
mature in a single lump sum 18 years (N) from today. This issue has a 10% coupon rate (r = 5%
semiannual). LR can call bonds at a strike price (P) of $1,060 each. LR can issue $100M new 18-year
noncallable debt at par value if they carry an 8% coupon rate (r' = 4% semiannual). LR's marginal income
tax rate (T) is 40%. What is the after-tax interest savings per period?
A. $0.61M
B. $0.59M
C. $0.60M
D. $0.62M
38) The four main classes of long term corporate debt include __________.
A. tax exempt
B. secured
C. unsecured
D. all of the options apply
39) Updike Refinancing has a $200M (M = million) bond issue outstanding. This issue has a 10% coupon
rate (r = 5% semiannual). Updike can issue $200M new 20-year noncallable debt at par value if they carry
an 8.40% coupon rate (r' = 4.20% semiannual). LR's marginal income tax rate (T) is 30%. What is Updike’s
semiannual after-tax cost of the new debt?
A. 2.94%
B. 4.12%
C. 3.20%
D. 2.50%
40) For a conventional project, the NPV is -$2M (M = million). Leasing generates the following after-tax
cash flows: CF0 (or P0) = $126M, CFAT1-10 = $20M, and the salvage value (SAL) at t = 10 is $20M. If the
appropriate discount rate is 11% for CFAT1-10 and 14% for SAL, should we accept this project?
A. Reject the project because the total net present value is about -$1M.
B. Accept the project because the total net present value is over -$0.82M.
C. Reject the project because the NPV and NAL are both negative.
D. Accept the project because the NAL is greater than $2M.
41) For a conventional project, the NPV is -$1,907,113. Leasing generates the following after-tax cash
flows: CF0 (or P0) = $50M (M = million), CFAT1-7 = $10.3M, and the salvage value (SAL) at t = 7 is $2M. If
the appropriate discount rate is 12% for CFAT1-7 and 15% for SAL, should we accept this project?
A. human capital.
B. capital structure AND capital expenditures.
C. capital structure.
D. capital expenditures.
A. A post-audit is a set of procedures for evaluating a capital budgeting decision after the fact.
B. all of the options apply.
C. Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from
outside sources.
D. Hard capital rationing refers to the rationing imposed internally by the firm.
45) Suppose Captain John’s can raise the price of its specialty loaf from $0.70 to $0.75 without absorbing
any extra costs. At this price it would sell 3 million loaves which is the capacity of the current plant. If it
doesn’t raise its price, it could sell more loaves but would have to expand its production capacity.
Captain John’s tax rate is zero. Captain John decides to expand. Is this a good or bad decision?
A. It is a good decision if the NPV of expansion is greater than $150,000.
B. It is a bad decision because we will lose customers.
C. It is a bad decision because we lose $150,000 in revenue.
D. It is a good decision because we will not lose customers.
46) Due to asymmetric information, the market fears that a firm issuing securities will do so when the
stock is __________.
47) __________ says to look to comparable acquisitions for guidance regarding a reasonable price to pay
for an acquisition.
48) __________ says to forecast the firm’s cash flows, and analyze the incremental cash flows of
alternative decisions.
49) Over the planning horizon, the cash flow break-even point is the point below which the firm will
need to __________.
50) Benefits a firm hopes to realize from the planning process include.
51) In the cash budget for your company, you have a negative net cash flow equal to -$62,000 for
January. January’s beginning cash balance is $200,000. What is the available balance for the month?
A. $138,000
B. $150,000
C. $262,000.
D. $62,000