Multiple Choice Answers

In finance, we assume that investors are generally: a. neutral to risk. b. averse to risk. c. fond of risk. d. none of the above. 2. The debt ratio is a measure of a firm’s: a. leverage. b. profitability. c. liquidity. d. efficiency. 3. If an investor were to sell 100 shares of Microsoft stock to another investor this would be referred to as what type of transaction? a. A primary market transaction b. A secondary market transaction c. A money market transaction d. A futures market transaction 4. The director of capital budgeting of Park Development Corporation is evaluating a project that will cost $200,000; it is expected to last for 10 years and produce after-tax cash flows of $44,503 per year. If the firm’s cost of capital is 14% and its tax rate is 40%, what is the project’s IRR? a. 8% b. 14% c. 18% d. -5% e. 12% 5. You intend on taking a vacation upon graduation in approximately three years. It will cost about $2,975, including hotel, food and travel expenses. You just received a $3,000 pre-graduation gift from a rich uncle that you intend to deposit in a long term CD that pays 6% interest. How much can you spend now and still have $2,975 available for the vacation upon graduation? a. $490 b. $2,537 c. $502 d. $2,463 e. $2,498 6. Assume that Calamar Corp. has sales of $7.5 million and accounts payable of $450,000. If Calamar is forecasting sales of $9 million next year, what will the firm’s forecasted accounts payable be? a. $540,000 b. $450,000 c. $405,000 d. $504,000 7. The preparation of a cash budget serves which of the following purposes? a. To estimate the amount and timing of cash flows that are needed in order to optimize the price of the firm’s common stock b. To calculate the amount of future cash flows that would be needed in order to achieve the optimal level of financing during the forecast period c. To determine the amount and timing of short-term financing that would be required for the operation of a business during the forecast period d. To estimate the amount of sales volume that would be required in order to achieve the break-even point 8. TQM has encouraged which of the following? a. Antagonistic relationships between suppliers and customers b. More shopping around for cheaper sources of inventory c. Multi-sourcing d. Closer, more advantageous relationships between suppliers and customers 9. When adjusting capital structure and financial leverage, as the use of debt financing increases: a. the cost of capital continuously decreases. b. the cost of capital remains constant. c. the cost of capital continuously increases. d. there is an optimal level of debt financing. 10. One reason for international investment is to reduce: a. portfolio risk. b. price-earnings (P/E) ratios. c. advantages in a foreign country. d. beta risk. 11. A firm is trying to estimate its cost of equity, and it has the following information. The firm has a beta of 0.90, and the firm estimates that the risk-free rate is 7% while the current expected market return is 12%. The firm has a marginal tax rate of 34%. What is the firm’s cost of equity? a. 13.0% b. 21.5% c. 11.5% d. 74.5% e. None of the above. 12. A firm sells on terms of 2/10, net 30. What is the cost of trade credit under these terms if the firm uses a 360 day accounting year? a. 66.3% b. 53.3% c. 42.0% d. 36.7% 13. Which of the following statements is true? a. Common stockholders are the true owners of a firm. b. Capital obtained from the sale of common stock will ultimately be repaid by the corporation. c. A corporation has a legal obligation to pay dividends on common stock. d. Dividends on common stock usually do not grow. e. Common stockholders have unlimited liability. 14. What is the value today of an investment that pays $500 every year for the next 15 years if the annual interest rate is 9%? a. $4,030 b. $7,500 c. $3,500 d. $7,000 Table 1 Smith Company Balance Sheet Assets: Cash and marketable securities $300,000 Accounts receivable 2,215,000 Inventories 1,837,500 Prepaid expenses 24,000 Total current assets $3,286,500 Fixed assets 2,700,000 Less: accumulated depreciation 1,087,500 Net fixed assets $1,612,500 Total assets $4,899,000 Liabilities: Accounts payable $240,000 Notes payable 825,000 Accrued taxes 42,500 Total current liabilities $1,107,000 Long-term debt 975,000 Owner’s equity 2,817,000 Total liabilities and owner’s equity $4,899,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold 4,312,500 Selling and administrative expense 1,387,500 Depreciation expense 135,000 Interest expense 127,000 Earnings before taxes $412,500 Income taxes 225,000 Net income $187,500 Common stock dividends $97,500 Change in retained earnings $90,000 15. Based on the information in Table 1, and using a 360-day year, the average A/R collection period is: a. 71 days. b. 84 days. c. 64 days. d. 125 days. 16. Based on the information in Table 1, the inventory turnover ratio is: a. 0.29 times. b. 2.35 times. c. 0.43 times. d. 3.47 times. 17. The XYZ Company is structuring their capital by selling $20 million in new debt and $30 million in new common stock. The required rate of return or cost of equity is 14%. If the after-tax cost of debt of 5.4%, what is the cost of capital? a. 12.0% b. 9.0% c. 10.6% d. 11.5% 18. What is the break even point in units of a company with a sales price of $95 per unit, fixed costs at $450,000 and a contribution margin of $19? a. 6090 b. 23700 c. 25000 d. 6200 19. Artie’s Soccer Ball Company is considering a project with the following cash flows: Initial outlay = $750,000 Incremental after-tax cash flows from operations Years 1-4 = $250,000 per year Compute the NPV of this project if the company’s discount rate is 12%. a. $9,337 b. $7,758 c. $4,337 d. $2,534 20. A project costs $10,000 and is expected to return after-tax cash flows of $3,000 each year for the next 10 years. This project’s payback period is: a. three years. b. three and one-third years. c. four years. d. Ten years