Multiple Choice Answers

1. Which of the following reasons is most responsible for corporations being the most important form of business organization in the United States? a. 0 Corporations have limited life. b. 0 Stockholders have unlimited liability. c. 0 Corporations are subject to less government regulation than the other forms of business organization. d. 0 Corporations have the ability to raise larger sums of capital than the other forms of business organization. Objective: Explain how financial markets work in the United States.

2. Which of the following is NOT an advantage of a private placement (as compared to a public offering)? a. 0 Greater financing flexibility b. 0 Lower flotation costs c. 0 Lower interest costs d. 0 Quicker availability of funds Objective: Assess the role of ethics and compliance in the finance environment.

3. Which of the following is a characteristic of an efficient market? a. 0 Small number of individuals. b. 0 Opportunities exist for investors to profit from publicly available information. c. 0 Security prices reflect fair value of the firm. d. 0 Immediate response occurs for new public information. Objective: Evaluate financial performance using financial ratios.

4. Which of the following is included in the denominator of the times-interest-earned ratio? a. 0 Lease payments b. 0 Principal payments c. 0 Interest expense d. 0 Gross profit Week Two: Financial Planning Objective: Describe the relationship between strategic planning and financial planning.

5. Which of the following statements is true? a. 0 The future value of an annuity would be greater if funds are invested at the beginning of each period instead of at the end of each period. b. 0 An annuity is a series of equal payments that are made, or received, forever. c. 0 The effective annual rate (APR) of a loan is higher the less frequently payments are made. d. 0 The future value of an annuity would be greater if funds are invested at the end of each period rather than at the beginning of each period. Objective: Prepare a cash budget.

6. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October? a. 0 $25,000 b. 0 $15,000 c. 0 $35,000 d. 0 None of the above Objective: Perform a break-even analysis.

7. Potential applications of the break-even model include: a. 0 replacement for time-adjusted capital budgeting techniques. b. 0 pricing policy. c. 0 optimizing the cash-marketable securities position of a firm. d. 0 none of these Objective: Calculate present value and future value of cash flows.

8. If you invest $750 every six months at 8% compounded semi-annually, how much would you accumulate at the end of 10 years? a. 0 $10,065 b. 0 $10,193 c. 0 $22,334 d. 0 $21,731 Week Three: Working Capital Management and Capital Budgeting Objective: Evaluate effective working capital management techniques.

9. According to the hedging principle, permanent assets should be financed with _______ liabilities. a. 0 permanent b. 0 spontaneous c. 0 current d. 0 fixed Objective: Evaluate alternative capital projects.

10. Consider a project with the following cash flows: After-Tax After-Tax Accounting Cash Flow Year Profits from Operations 1 $799 $ 750 2 $150 $1,000 3 $200 $1,200 Initial outlay = $1,500 Terminal cash flow = 0 Compute the profitability index if the company’s discount rate is 10%. a. 0 15.8 b. 0 1.61 c. 0 1.81 d. 0 0.62 Objective: Analyze risks associated with capital projects.

11. Aroma Candles, Inc. is evaluating a project with the following cash flows. Calculate the IRR of the project. (Round to the nearest whole percentage.) Year Cash Flows 0 ($120,000) 1 $ 30,000 2 $ 70,000 3 $ 90,000 a. 0 18% b. 0 23% c. 0 28% d. 0 33% Objective: Identify the decision-making factors in lease versus buy.

12. A machine costs $1,000, has a three-year life, and has an estimated salvage value of $100. It will generate after-tax annual cash flows (ACF) of $600 a year, starting next year. If your required rate of return for the project is 10%, what is the NPV of this investment? (Round your answerwer to the nearest $10.) a. 0 $490 b. 0 $570 c. 0 $900 d. 0 -$150 Week Four: Long-Term Financing Objective: Identify the impact of financing strategies on cost of capital.

13. When calculating the average cost of capital, which of the following has to be adjusted for taxes? a. 0 Common stock b. 0 Retained earnings c. 0 Debt d. 0 Preferred stock Objective: Calculate the weighted average cost of capital (WACC) of a firm.

14. Armadillo Mfg. Co. has a target capital structure of 50% debt and 50% equity. They are planning to invest in a project which will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds. No new outside equity will be issued. If the required rate of return on the firm’s stock is 15% and its marginal tax rate is 40%, compute the firm’s cost of capital. a. 0 13.5% b. 0 12.5% c. 0 7.2% d. 0 11.1% Objective: Compare and contrast initial public offering (IPO) and mergers & acquisitions growth strategies.

15. Lever Brothers has a debt ratio (debt to assets) of 60%. Management is wondering if its current capital structure is too aggressive. Lever Brothers’s present EBIT is $3 million, and profits available to common shareholders are $1,440,000, with 228,571 shares of common stock outstanding. If the firm were to instead have a debt ratio of 20%, reduced interest expense would cause profits available to stockholders to increase to $1,680,000, but 457,143 common shares would be outstanding. What is the difference in EPS at a debt ratio of 20% versus 60%? a. 0 $-1.76 b. 0 $-2.63 c. 0 $-3.14 d. 0 $-4.37

Week Five: International Finance Objective: Describe the factors that contribute to foreign exchange risk.

17. I. T. Canwait, Inc., a U.S.-based multinational, has just sold cans to a Japanese company, I. C. Spots, Inc. Spots will pay for the order in 60 days. I. T. Canwait is now exposed to which kind of risk? a. 0 Transaction b. 0 Translation c. 0 Operating d. 0 Financial Objective: Compare and contrast methods to mitigate foreign exchange rate risk.

18. The rate that a subsidiary or parent of the multinational corporation charges other divisions of the firm for its products is called a(n): a. 0 forward price. b. 0 transaction price. c. 0 transfer price. d. 0 exchange price. Objective: Analyze the impact of globalization on financial decisions.

19. A wide bid/ask spread could indicate which of the following? a. 0 The presence of arbitrageurs b. 0 Large-volume transactions are taking place c. 0 Frequent trading of a currency d. 0 Infrequent trading of a currency