Finance Test 4
If the foreign currency/dollar exchange rate for the Japanese yen is 115 yen/$, what does a yen cost in terms of US currency? a. $0.86 b. $0.087 c. 0.87 cents d. $1.15
c. 0.87 cents
What is the effective cost of an 11%, $100,000 one-year loan that has a compensating balance requirement of 10%? a. 11% b. 10% c. 12.2% d. 12.7%
c. 12.2%
If sales in 1999 were $100,000 and in 2000 sales were $125,000;If operating income in 1999 were $50,000 and in 2000 were $75,000;If net income in 1999 were $10,000 and in 2000 were projected to be $15,000;calculate DOL using 1999 as your base: a. 1 b. 0.5 c. 2 d. 6
c. 2
How to tell when to use Moderate, Aggressive, and Conservative
Moderate is when current liabilities = temporary current assets (TCA) Aggressive is when CL>TCA Conservative is when CL<TCA
if you are offered "3/10 Net 45" invoice terms on your purchase of inventory, what is your EAR cost of credit if you take the 45 days to pay a. 37% b. 1.37% c. 3% d. 10.42%
a. 37% (1 + (3/100-3)))^(365/(45-10)) -1
while on vacation in Fiji you won 50,000 FJD in the Fijan Powerball. How much do you have in US given 1.4 FJD/CHF and .95 US/CHF (CHF is swiss) a. $33,929 b. $66, 500 c. $73,684
a. $33,929 (.95$/CHF) X (CHF/1.4FJD) X 50,000FJD
if you just got back from Mazatlan with 5000 pesos in your pocket, how many US dollars could you get if the bank offered to exchange at 12.5 MXN/$ a. $400 b. $62,500 c. $40 d. $62.50
a. $400 5000 MXN X ($/12.5MXN)
Currently $1 is worth €0.83. What is the value of one euro in terms of the U.S. dollar? a. 1.20 U.S. dollars/1 euro b. 0.67euros/1 U.S. dollar c. 1.5 U.S. dollars/1 euro d. 1.5euros/1 U.S. dollar
a. 1.20 U.S. dollars/1 euro
Total variable costs are $15,000, sales $50,000, and fixed costs $15,000; calculate DOL. a. 1.75 b. .69 c. 1.45 d. 2
a. 1.75
Given total fixed costs of $50,000, what is your break even quantity if the selling price if $50, and the cost of each item is $25 a. 20,000 b. 10,000 c. 2,000 d. 500,000
a. 20,000 (500,000/(50-25))
What is the effective annual rate (EAR) on a discount loan of $10,000 if the interest is $450 and the loan is for 3 months a. 20.22% b. 19.25% c. 4.5% d. 4.7% e. 18.8%
a. 20.22% (1+(450/(1000-450)))^(4) -1
Given fixed costs of $200,000, variable costs of $6.00 per unit, and a sales price per unit of $7.00, calculate the break-even point in units. a. 200,000 b. 33,333 c. 15,385 d. 28,571
a. 200,000
Which of the following statements about commercial paper is false? a. Commercial paper is secured by collateral. b. Commercial paper has a maturity of less than 270 days. c. Commercial paper is sold on a discount basis. d. Commercial paper is a form of short-term financing where notes are sold to investors.
a. Commercial paper is secured by collateral.
Degree of operating leverage can best be defined as: a. DOL = % change EBIT% change in Sales b. DOL = % change Sales% change in EBIT c. DOL = change EBITchange in Sales d. DOL = % change Net Income% change in Sales
a. DOL = % change EBIT% change in Sales
Which of the following statements about temporary current assets is true? a. Temporary current assets reflect a seasonal increase in inventories, accounts receivables, and other current asset accounts. b. Temporary current assets are individual current asset items that turn over very quickly. c. Temporary current assets are fixed assets that are used for a one-time job. d. A temporary current asset is a valued temporary worker.
a. Temporary current assets reflect a seasonal increase in inventories, accounts receivables, and other current asset accounts.
If the foreign currency/ dollar exchange rate has moved from 10 Mexican pesos to 7, which of the following is likely to be true? a. The quarterly earnings of American companies with extensive Mexican operations have been increased. b. The quarterly earnings of American companies with extensive Mexican operations have been decreased. c. Travel to Mexico by Americans is now less expensive. d. American goods now cost more to Mexicans shopping in border cities.
a. The quarterly earnings of American companies with extensive Mexican operations have been increased.
Working capital includes all but which of the following: a. accounts payable b. accounts receivable c. marketable securities d. prepaid expenses
a. accounts payable
If the value of one currency goes down in value relative to that of a second currency, the second currency is: a. appreciating b. weakening c. depreciating d. more than one of the above
a. appreciating
For short-term funding (less than a year), firms usually use all but which of the following? a. bonds b. trade credit c. commercial paper d. revolving line of credit
a. bonds
Which of the following financing approaches is the most aggressive financing approach? a. financing temporary current assets, permanent current assets, and some long-term fixed assets with short-term debt b. financing temporary current assets with short-term debt, all other assets with long-term debt and/or equity c. financing temporary current assets, permanent current assets, and long-term fixed assets with long-term debt and/or equity d. financing all assets with equity
a. financing temporary current assets, permanent current assets, and some long-term fixed assets with short-term debt
Leverage in a business is caused by the presence of: a. fixed costs. b. fixed assets. c. high variable costs. d. varying sales.
a. fixed costs.
An optimal level of current assets is reached when: a. optimal levels of cash, inventory, and accounts receivable are achieved b. an optimal level of debt financing is achieved to fund current assets c. cash, a non-earning asset, is minimized d. maximum levels of all current assets are maintained
a. optimal levels of cash, inventory, and accounts receivable are achieved
A base level of inventory, cash, marketable securities, prepaid expenses, and accounts receivable is best described as: a. permanent current assets b. permanent net working capital c. fixed assets d. fluctuating assets
a. permanent current assets
Which of the following is the type of short-term loan banks most like to make to a borrower with seasonal financing needs? a. self-liquidating b. mortgage c. zero interest d. amortized
a. self-liquidating
With respect to debt financing, which of the following statements is most accurate from the perspective of the firm seeking funds? a. short-term loans are more risky and usually less expensive than long-term loans b. short-term loans are more risky and usually more expensive than long-term debt c. short-term loans are more risky and usually more expensive than equity d. short-term loans are less risky and usually less expensive than equity
a. short-term loans are more risky and usually less expensive than long-term loans
Firms with high fixed operating costs: a. tend to have low variable costs b. tend to have high variable costs c. tend to have low operating leverage d. tend to have low sales levels
a. tend to have low variable costs
You purchased a stock with euros in Germany. You will be hurt if: a. the U.S.$ strengthens relative to the euro b. the U.S.$ weakens relative to the euro c. the U.S. economy has a recession d. you are not impacted by the value of the home currency
a. the U.S.$ strengthens relative to the euro
The primary difficulty of relying on short-term credit for continuous financing needs is: a. the risk of increasing interest rates b. the higher interest rates c. the time it takes to arrange for it as compared to long-term financing d/ banks don't like to lend short-term for long-term financing needs
a. the risk of increasing interest rates
The assets associated with short-term operating activities, such as cash, accounts receivables, and inventory, are also called: a. working capital. b. circulating capital. c. net working capital. d. spontaneous long-term debt.
a. working capital.
With credit terms of 2/10, n30, the day a business must make a decision day about finding the funds to pay the account or waiting until the end of the net period is the: a. 2nd day. b. 10th day. c. 30th day. d. 20th day.
b. 10th day.
If the yen/$ foreign currency rate is 115 and the peso/$ rate is 10, what is the yen/peso cross rate? a. 1,150 yen/peso b. 11.5 yen/peso c. 115 yen/peso d. 8.7 yen/peso
b. 11.5 yen/peso
What is the EAR of a $5000, 1 month loan if the monthly interest is $60 a. 14.40% b. 15.39% c. 1.2% d. 12.00%
b. 15.39% (1+(60/5000))^(12) -1
What is the annual effective cost of trade discounts missed with terms of 1/10, n30? a. 44.6% b. 20.13% c. 1% d. 18%
b. 20.13%
Calculate the effective annual interest rate of foregoing the discount and paying on the 30th day when the terms are 2/cash, n 30. Use a 365-day year: a. 30.13% b. 27.86% c. 25.78% d. 29.77%
b. 27.86%
Calculate the cost of 1.5 million, 120 day, 3.5% discount Commerical Paper a. 3.60% b. 3.63% c. $17,500 d. 1.18%
b. 3.63%
Given fixed costs of $100,000, variable costs of $7.00 per unit, and a sales price per unit of $10.00, calculate the break-even point in units. a. 10,000 b. 33,333 c. 14,286 d. 5,882
b. 33,333
The U.S.$ is worth 90 yen; the U.S.$ is also worth 10 Mexican pesos. What is the value of the yen in terms of the peso? a. 90 yen/1 peso b. 9 yen/1 peso c. Mex$1/ 19yen d. Mex$0.111/ 1 yen
b. 9 yen/1 peso
Which of the following statements about net working capital is true? a. A high level of net working capital is associated with a low current ratio. b. A high level of net working capital is associated with relatively low levels of short-term financing. c. A low level of net working capital is associated with an all equity-financed company. d. A low level of net working capital is associated with a high level of long-term financing.
b. A high level of net working capital is associated with relatively low levels of short-term financing.
The common stock of major foreign companies is put into a trust and traded on U.S. stock exchanges, denominated in dollars. These units, representing claims on common stock, are called: a. indenture trust. b. American depository receipts. c. automated depository services. d. trust receipts financing.
b. American depository receipts.
Which of the following best defines the maturity matching principle associated with financing working capital needs? a. Finance short-term asset needs with long-term funds. b. Match the maturity of sources of funds with that of uses of funds. c. Finance long-term asset needs with short-term funds. d. Finance seasonal inventory needs with five-year bank loans.
b. Match the maturity of sources of funds with that of uses of funds.
If an American investor has earned an annual 10% on his European portfolio denominated in euros but the euro/dollar rate has changed from 0.8 to 0.9, what impact has foreign exchange risk had on the investor's portfolio return? a. The dollar has strengthened, raising the rate of return above 10%. b. The dollar has strengthened, lowering the rate of return below 10%. c. The dollar has weakened, raising the rate of return above 10%. d. The dollar has weakened, lowering the rate of return above 10%.
b. The dollar has strengthened, lowering the rate of return below 10%.
Maximizing shareholder value may create what ethical issue for corporations with plants in developing countries? a. The large salaries paid to managers, compared to workers, plus the environmental costs in areas where environmental regulations are nonexistent b. The low wages paid to workers, often children, plus the environmental costs to the local country where environmental laws may be nonexistent c. The products are luxury goods when the country needs basic food goods, etc., and the low wages paid to workers, often children d. The requirements that local plants use local labor and restrictions on how and when earnings can be transferred to the base country
b. The low wages paid to workers, often children, plus the environmental costs to the local country where environmental laws may be nonexistent
If a given country's currency is weakening; importers from other countries will ____________of that country's goods. a. buy less b. buy more c. buy the same amount d. buy a fluctuating amount
b. buy more
An exchange rate between two currencies which is calculated by using a common third currency is known as a(n): a. direct rate b. cross rate c. currency rate d. unknown rate
b. cross rate
Net working capital equals: a. total assets - (total liabilities + equity) b. current assets - current liabilities c. temporary current assets - permanent current assets d. total assets - total liabilities
b. current assets - current liabilities
Firms with relatively low fixed operating costs and high variable operating costs can best be described as: a. having a high degree of operating leverage b. having a low degree of operating leverage c. having a normal degree of operating leverage d. having no operating leverage
b. having a low degree of operating leverage
Two advantages of using debt in the capital structure of a corporation from the shareholders' perspective are: a. interest is tax deductible and bond holders have a residual claim on the assets in case of liquidation. b. interest is tax deductible and the firm has the opportunity to leverage income to a higher level through the use of fixed cost debt. c. interest is paid first and the company has the opportunity to leverage income to a higher level through the use of fixed cost debt. d. interest is a noncash cost and is deductible.
b. interest is tax deductible and the firm has the opportunity to leverage income to a higher level through the use of fixed cost debt.
The financial manager's major financing decision is selecting the debt/equity mix that: a. maximizes the sales of the firm. b. maximizes the value of the firm. c. maximizes the net income of the firm. d. minimizes the risk assumed by the firm.
b. maximizes the value of the firm.
The Greek drachma has strengthened against the U.S.$. Other things equal, Greek people will buy: (Pretend the Greek's still use drachmas not euros) a. less U.S. goods b. more U.S. goods c. the same amount of U.S. goods d. a fluctuating amount of U.S. goods
b. more U.S. goods
We decide to increase our firm's working capital. Which of the following would accomplish this? a. pay down accounts payable b. sell stock & proceeds in bank c. shut down the factory for a week and sell off inventory at cost d. collect all open accounts receivable
b. sell stock & proceeds in bank
Working capital assets are generally: a. illiquid. b. short term. c. long-term. d. mostly cash.
b. short term.
An exchange rate: a. specifies how many units of one country's currency can be exchanged for the same number of the other country's currency b. specifies how many units of one country's currency can be exchanged for one unit of the other country's currency c. represents a one for one trade of one currency in terms of another currency d. is an expression of how market baskets are exchanged.
b. specifies how many units of one country's currency can be exchanged for one unit of the other country's currency
If, in the last month, the foreign currency/$ exchange rate has increased from 115 yen per dollar to 120 yen per dollar, the dollar has: a. weakened. b. strengthened. c. depreciated. d. fallen.
b. strengthened.
A $10,000, 12% one-year stated rate loan, made on a discount basis, has an annual effective rate of: a. 12%. b.! 13.6%. c. 14%. d. 11%.
b.! 13.6%.
What is Hogtastic Ham's Degree of Operating Leverage at a sales level of 50,000 hams? FC = $686,997, VC = $8.65, and hams sell at $35 a. 38.36 b. 3.00 c. 2.09 d. 2.92
c. 2.09 (sales - total vc) / (sales - total vc - fc)
What is the unit breakeven point for a business selling calculators at $40 per unit, a variable cost of $10, and total fixed costs of $2 million? The current sales level is 80,000 units per year. a. 50,000 calculators b. 200,000 calculators c. 66,667 calculators d. 80,000 calculators
c. 66,667 calculators
An aggressive working capital policy would have which of the following ratios (assuming a profitable company)? a. A high current ratio and a low-average ROE b. A high current ratio and a high-average ROE c. A low current ratio and a high-average ROE d. A low current ratio and a low-average ROE
c. A low current ratio and a high-average ROE
Financing permanent working capital needs with long-term financing tends to "match" financing with uses of funds and reduces the chance of illiquidity, but long-term financing has two disadvantages. They are: a. long-term financing tends to have more refinancing risk and costs more. b. long-term financing has higher flotation costs and more refinancing risk. c. Equity financing has a higher cost than debt financing and long-term debt usually has higher interest rates than short-term debt. d. long-term financing is cheaper than short-term financing and has higher flotation costs.
c. Equity financing has a higher cost than debt financing and long-term debt usually has higher interest rates than short-term debt.
If a Big Mac from McDonald's costs $3 in the United States and 360 yen in Japan, what theory of exchange rate pricing explains this pricing if the yen/dollar exchange rate is 120 yen per U.S. dollar? a. International fisher effect b. Interest rate parity theory c. Purchasing power parity theory d. Arbitrage effect theory
c. Purchasing power parity theory
you company reaches break even when: a. net income exceeds EBIT b. EBIT = Net Income c. Sales = Variable costs + Fixed costs d. EBIT = Variable costs - Fixed costs
c. Sales = Variable costs + Fixed costs
A corporation with operations in more than one country is called: a. an intranational corporation. b. a private corporation. c. a multinational corporation. d. a multi-international corporation.
c. a multinational corporation.
Working capital is the amount of a. LT debt b. equity c. cash and near-cash assets d. current liabilities
c. cash and near-cash assets
Financing an automated plant with debt adds financial leverage to operating leverage and increases the __________ leverage by a multiplier effect. a. operating b. financial c. combined d. business
c. combined
Each country should concentrate on producing that product which it does well. This is called the law of: a. absolute advantage b. communicative advantage c. comparative advantage d. trade disadvantage
c. comparative advantage
Which of the following types of loans will require you to borrow the highest amount in order to obtain the use of $4,000? a. simple interest b. discount interest c. discount interest with a 5% compensating balance d. Whether interest is simple, discount, or if there is a compensating balance doesn't matter.
c. discount interest with a 5% compensating balance
Whenever fixed costs are greater than zero, DOL is: a. less than 1 b. equal to 0 c. greater than 1 d. nonexistent
c. greater than 1
Discount interest ______ the effective annual interest rate on a loan while compensating balances ______ it. a. decreases; decreases b. decreases; increases c. increases; increases d. increases; decreases
c. increases; increases
A leveraged buyout (LBO) has the immediate effect of: a. increasing operating leverage. b. increasing business risk. c. increasing financial leverage. d. increasing the number of shareholders.
c. increasing financial leverage.
The effective annual interest rate of a loan: a. is equal to the nominal rate b. equals the nominal annual rate divided by the number of compounding periods per year c. is greater than the nominal annual rate if there is compounding more than one time per year d. is less than the nominal annual rate if there is compounding more than one time per year
c. is greater than the nominal annual rate if there is compounding more than one time per year
As businesses increase the proportion of debt in the capital structure from zero to nearly one hundred percent debt, the WACC first declines through moderate uses of debt then increases after some minimum point. The minimum point of the WACC points to the debt/firm value ratio that: a. maximizes the total deductible interest. b. minimizes the size of the firm. c. maximizes the market value of the firm. d. maximizes total sales for the firm.
c. maximizes the market value of the firm.
The business should select the level of working capital or current assets that: a. maximizes sales for the firm. b. maximizes profits for the firm. c. maximizes the value of the firm. d. minimizes the cost of debt financing.
c. maximizes the value of the firm.
The level of net working capital is affected by all but which of the following: a. notes payable b. cash c. retained earnings d. marketable securities
c. retained earnings
Short-term financing is favored because it is cheaper than long-term and readily available. However, there are two disadvantages to short-term debt. They are: a. short-term financing is available from many competing institutions and has high costs. b. short-term financing must be paid or rolled over quite often and has very high costs. c. short-term financing must be paid or rolled over quite often and the rates may vary suddenly. d. short-term financing often requires pledging collateral and the rates are usually higher than long-term.
c. short-term financing must be paid or rolled over quite often and the rates may vary suddenly.
The amount of financing sought is least influenced by which of the following? a. availability of funds b. cost of funds c. the Federal Reserve district where the firm is located d. investment opportunities
c. the Federal Reserve district where the firm is located
The greater the degree of operating leverage, a. the lower the business risk. b. the higher the business and financial risk. c. the higher the business risk. d. the higher the operating profit.
c. the higher the business risk.
Problems associated with repatriating profits earned in another country include which of the following? a. the foreign economy gets stronger b. repatriating is only done with dividends, not cash c. the home currency strengthens d. the exchange rate holds steady
c. the home currency strengthens
The sales break-even point is defined as: a. the level of sales that a firm must reach to cover fixed costs b. the level of income that a firm must reach to cover variable costs c. the level of sales that a firm must reach to cover total operating costs d. the point where operating income equals fixed costs
c. the level of sales that a firm must reach to cover total operating costs
Some level of gross working capital is "permanent" in that: a. the accounts seldom turn over. b. they are always financed with long-term funds. c. there is a minimum level of current assets at any given point in time. d. some customers pay very late.
c. there is a minimum level of current assets at any given point in time.
A firm that uses short-term financing to finance most of its assets, all else equal, is: a. using a conservative approach b. using a moderate approach c. using an aggressive approach d. using a combination approach
c. using an aggressive approach
If variable costs = $10.00 per unit; and the selling price = $13.00 per unit, and the break-even point in units = 100,000, calculate the fixed costs. a. $33,333 b. $ 4,348 c. $50,000 d. $300,000
d. $300,000
If you, in the United States, have purchased a million Canadian dollars worth of auto parts, payable in 90 days in Canadian dollars, how could you hedge your foreign exchange risk? a. Sell a forward contract of CD$1 million Canadian dollars, payable in 90 days. b. Buy a forward contract for $1 million U.S. dollars, payable in 90 days. c. Buy a forward contract for $1 million Canadian dollars, payable in 120 days. d. Buy a forward contract for $1 million Canadian dollars, payable in 90 days.
d. Buy a forward contract for $1 million Canadian dollars, payable in 90 days.
Which one of the following statements about long-term financing versus short-term financing is false? a. Long-term financing usually fixes the rate paid and the interest expense for the future. b. While the transaction costs are high, they average out to be lower over the long period of financing. c. Long-term financing is a more conservative form of financing the growth of fixed assets. d. Long-term financing is generally less expensive than short-term financing.
d. Long-term financing is generally less expensive than short-term financing.
Which of the following statements is false? a. Fixed operating costs are assumed to be constant over a level of production. b. The level of profit at the breakeven point is zero. c. Variable costs vary with sales. d. The breakeven point (units sold) is inversely related to the level of fixed costs.
d. The breakeven point (units sold) is inversely related to the level of fixed costs.
When a borrower pledges accounts receivable or inventory for a loan, which of following best describes the purpose of the collateral? a. The collateral is used to pay off the loan at maturity. b. The collateral, pledged as security for the loan by the lender, will pay off the loan if the borrower does not pay. c. The collateral, pledged as security for the loan by the borrower, will pay off the loan if the lender does not pay. d. The collateral, pledged as security for the loan by the borrower, will be used to pay off the loan if the borrower fails to pay the loan as agreed.
d. The collateral, pledged as security for the loan by the borrower, will be used to pay off the loan if the borrower fails to pay the loan as agreed.
An "aggressive" working capital financing policy would likely have: a. low levels of short-term financing relative to current assets. b. higher levels of long-term financing relative to current assets. c. a greater proportion of assets financed by equity. d. a high proportion of assets financed by short-term financing.
d. a high proportion of assets financed by short-term financing.
when we increase our working capital it has what effect on the firm a. increase the firm's current assets b. increase the flexibility of the firm c. decreases the potential ROA of the firm d. all of above e. none of above
d. all of above
Last week the exchange rate between the Euro and US was $1.60/Euro. Today the exchange rate is $1.70/Euro. which of the following are true a. the $ is now weaker compared to Euro b. the Euro is now stronger compared to $ c. US made cars are now cheaper in Italy d. all of the above e. none of the above
d. all of the above
Financial leverage is caused by the presence of __________ and __________ the variability of ____________ for any change in operating income. a. fixed operating costs; decreases; EBIT b. fixed financing costs; increases; EBIT c. fixed financing costs; decreases; net income d. fixed financing costs; increases; net income
d. fixed financing costs; increases; net income
A _______ is an informal agreement between a bank and a borrower listing the limit of lending during the next year, where a _________ is a formal agreement to lend up to a specified level with a fee paid for this service. a. revolving credit agreement; line of credit b. promissory note; revolving credit agreement c. self-liquidating loan; line of credit d. line of credit; revolving credit agreement
d. line of credit; revolving credit agreement
The trade off of holding cash versus a high returning fixed asset is called: a. the net working capital trade off b. profitability versus net working capital trade off c. liquidity versus permanent current asset trade off d. liquidity versus profitability trade off
d. liquidity versus profitability trade off
Short-term financing is normally cheaper than long-term financing because it: a. is less risky for the borrower b. has interest costs which are certain c. has fewer transaction costs d. usually has lower interest rates
d. usually has lower interest rates
Which of the following is a major problem with using inventory for collateral for short-term loans? a. costs greater than those associated with equity financing b. locating lenders c. factoring d. valuing the inventory
d. valuing the inventory