FIN4385 Final Exam

Issue costs of equity are high relative to those of debt.

true

In general, the capital structures used by non-financial U.S. firms:

vary significantly across industries.

The quality of reported earnings is a minor element in evaluating financial statement data.

False

Suppose you purchase a put option on XYZ stock when the stock price is $40. The option premium is $2, and the strike price is $39. What is your net profit on the put option if the stock price is $41 at maturity?

-$2

According to Jeremy Siegel, the real return on stocks over the long-term has averaged about: A. 6.7 percent B. 8.7 percent C. 10.4 percent D. 12.3 percent E. 14.8 percent

A

The systematic risk of the market is measured by: A. a beta of 1.0. B. a beta of 0.0. C. a standard deviation of 1.0. D. a standard deviation of 0.0. E. a variance of 1.0.

A

You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could: A. lower the degree of operating leverage. B. lower the contribution margin per unit. C. increase the initial cash outlay. D. increase the fixed costs per unit while lowering the contribution margin per unit. E. lower the operating cash flow of the project.

A

Florida Corp. is calculating the appropriate rate for discounting cash flows on a project valued using the APV method. Florida's target debt ratio (D/(D+E)) in market value terms is 50%, and the yield-to-maturity on its outstanding debt is 6%. A comparable firm has an equity beta of 1.4 and a debt ratio (D/(D+E)) of 40%. Assume a risk-free rate of 5% and a market risk premium of 8%. Florida's tax rate is 40%. What discount rate should Florida use? A 11.72% B. 18.44% C. 11.02% D. 7.66%

A 11.72%

Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings? A. $14,700 B. $17,500 C. $18,300 D. $20,600 E. $21,000 F. None of the above.

A. $14,700 Change in retained earnings = $437,500 × 0.048 × (1 - 0.30) = $14,700

Please refer to the pro forma financial statements for Royal Corporation above. If Royal Corporation plans to issue $100 in new equity in 2014, what should be the projection for shareholders' equity for 2014? A. $5,349 B. $5,436 C. $5,451 D. $5,536

A. $5,349

Which of the following would increase a company's need for external finance, all else equal? A. An increase in the dividend payout ratio B. A decrease in sales growth C. An increase in profit margin D. A decrease in the collection period

A. An increase in the dividend payout ratio

Which of the following statements are correct? I. Going-concern value of a firm is equal to the present value of expected future cash flows to owners and creditors. II. When an acquiring firm purchases a target firm's equity, the acquirer need not assume the target's liabilities. III. The market value of a public company reflects the worth of the business to minority investors. IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value. A. I and III only B. II and IV only C. II and III only D. I, II, and III only E. II, III, and IV only

A. I and III only

All of the following are steps of a financial statement analysis except: A. Prepare pro forma statements. B. Establish objectives of the analysis. C. Study the industry in which the firm operates. D. Develop knowledge of the firm and the quality of management.

A. Prepare pro forma statements.

Which one of the following is a source of cash? A. decrease in accounts receivable B. decrease in common stock C. decrease in long-term debt D. decrease in accounts payable E. increase in inventory

A. decrease in accounts receivable

Under the simplifying assumptions of Modigliani and Miller, an increase in a firm's financial leverage will: A. increase the variability in earnings per share. B. reduce the operating risk of the firm. C. increase the value of the firm. D. decrease the value of the firm.

A. increase the variability in earnings per share.

On a common-size balance sheet, all accounts are expressed as a percentage of A. total assets. B. sales. C. profits. D. equity. E. None of the options are correct.

A. total assets

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the: A. amount of total risk assumed and the market risk premium. B. market risk premium and the amount of systematic risk inherent in the security. C. risk free rate, the market rate of return, and the standard deviation of the security. D. beta of the security and the market rate of return. E. standard deviation of the security and the risk-free rate of return.

B

All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero? I. purchase of $1,400 of parts inventory needed to support the project II. loan of $125,000 used to finance the project III. depreciation tax shield of $1,100 IV. $6,500 of equipment needed to commence the project A. I and II only B. I and IV only C. II and IV only D. I, II, and IV only E. I, II, III, and IV

B

Assume that you invest in a portfolio of large-company stocks. Further assume that the portfolio will earn a rate of return similar to the average return on large-company stocks for the period 1926-2010. What rate of return should you expect to earn? A. less than 10 percent B. between 10 and 12.5 percent C. between 12.5 and 15 percent D. between 15 and 17.5 percent E. more than 17.5 percent

B

At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I. asset's standard deviation II. asset's beta III. risk-free rate of return IV. market risk premium A. I and III only B. II and IV only C. III and IV only D. I, III, and IV only E. I, II, III, and IV

B

Estimates of the rate of return on a security based on a historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term. A. overestimate; overestimate B. overestimate; underestimate C. underestimate; overestimate D. underestimate; underestimate E. accurately; accurately

B

Fixed costs: A. change as a small quantity of output produced changes. B. are constant over the short-run regardless of the quantity of output produced. C. are defined as the change in total costs when one more unit of output is produced. D. are subtracted from sales to compute the contribution margin. E. can be ignored in scenario analysis since they are constant over the life of a project.

B

If a stock portfolio is well diversified, then the portfolio variance: A. will equal the variance of the most volatile stock in the portfolio. B. may be less than the variance of the least risky stock in the portfolio. C. must be equal to or greater than the variance of the least risky stock in the portfolio. D. will be a weighted average of the variances of the individual securities in the portfolio. E. will be an arithmetic average of the variances of the individual securities in the portfolio.

B

Scenario analysis is defined as the: A. determination of the initial cash outlay required to implement a project. B. determination of changes in NPV estimates when what-if questions are posed. C. isolation of the effect that a single variable has on the NPV of a project. D. separation of a project's sunk costs from its opportunity costs. E. analysis of the effects that a project's terminal cash flows has on the project's NPV.

B

Sensitivity analysis determines the: A. range of possible outcomes given that most variables are reliable only within a stated range. B. degree to which the net present value reacts to changes in a single variable. C. net present value range that can be realized from a proposed project. D. degree to which a project relies on its fixed costs. E. ideal ratio of variable costs to fixed costs for profit maximization.

B

Systematic risk is measured by: A. the mean. B. beta. C. the geometric average. D. the standard deviation. E. the arithmetic average.

B

The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the: A. market risk premium. B. risk premium. C. systematic return. D. total return. E. real rate of return.

B

When using the equivalent annual cost as a basis for deciding which equipment should be purchased, the equipment under consideration must fit which two of the following criteria? I. differing productive lives II. differing manufacturers III. required replacement at end of economic life IV. differing initial cost A. I and II B. I and III C. I and IV D. II and IIII E. II and IV

B

Please refer to Oscar's financial statements above. All of Oscar's costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year? A. $949 B. $1,034 C. $1,113 D. $1,730 E. $2,670 F. None of the above.

B. $1,034

Please refer to Oscar's financial statements above. What was Oscar's increase in retained earnings during 2014? A. $450 B. $1,380 C. $1,830 D. $2,280 E. None of the above.

B. $1,380

Please refer to Oscar's financial statements above. What was Oscar's increase in retained earnings during 2014? A. $450 B. $1,380 C. $1,830 D. $2,280 E. None of the above.

B. $1,380

Please refer to the information for FM Foods above. Estimate FM's after-tax cost of debt capital. A. 2.21% B. 4.10% C. 4.55% D. 6.30% E. 7.00% F. None of the above.

B. 4.10% The correct approach is to use the YTM on the firm's bonds for the before-tax cost. Thus, after-tax cost = 6.3% × (1 - 0.35) = 4.10%.

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Which of the following formulas would correctly give the forecast for sales in cell C8?

B. =B8 + B8*B2

Pro forma free cash flows for a proposed project should I. exclude the cost of employing existing assets that could be sold anyway. II. exclude interest expense. III. include the depreciation tax shield related to the project. IV. exclude any required increase in operating current assets. A. I and II only B. II and III only C. II and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the options are correct.

B. II and III only

Pro forma free cash flows for a proposed project should: I. exclude the cost of employing existing assets that could be sold anyway. II. exclude interest expense. III. include the depreciation tax shield related to the project. IV. exclude any required increase in operating current assets. A. I and II only B. II and III only C. II and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the above.

B. II and III only

The weighted-average cost of capital for a firm is the: A. discount rate which the firm should apply to all of the projects it undertakes. B. rate of return a firm must earn on its existing assets to maintain the current value of its stock. C. coupon rate the firm should expect to pay on its next bond issue. D. minimum discount rate the firm should require on any new project. E. rate of return shareholders should expect to earn on their investment in this firm. F. None of the above.

B. rate of return a firm must earn on its existing assets to maintain the current value of its stock.

The excess return earned by a risky asset, for example with a beta of 1.4, over that earned by a risk-free asset is referred to as a: A. market risk premium. B. risk premium. C. systematic return. D. total return. E. real rate of return. F. None of the above.

B. risk premium.

Total risk is measured by _____, and systematic risk is measured by ____. A. beta; alpha B. standard deviation; beta C. standard deviation; variance D. WACC; beta E. beta; standard deviation F. None of the options are correct

B. standard deviation; beta

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share?

Book Value per share = equity/shares outstanding. 1,750,000/5,000,000=$3.50

Which of the following is NOT a likely financing policy for a rapidly growing business?

Borrow funds rather than limit growth, thereby limiting growth only as a last resort.

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. A. forecasting B. scenario C. sensitivity D. simulation E. break-even

C

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return. A. greater than B. equal to C. less than D. greater than or equal to E. unrelated to

C

What is the benefit-cost ratio for an investment with the following cash flows at a 14.5 percent required return?

1.02

The real rate of return on a stock is approximately equal to the nominal rate of return: A. multiplied by (1 + inflation rate). B. plus the inflation rate. C. minus the inflation rate. D. divided by (1 + inflation rate). E. divided by (1 - inflation rate).

C

Which of the following values will be equal to zero when a firm is producing the accounting break-even level of output? I. operating cash flow II. internal rate of return III. net income IV. payback period A. I only B. III only C. II and III only D. I and IV only E. I, II, and III only

C

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. providing both ketchup and mustard for its customer's use B. repairing the roof of the hot dog stand because of water damage C. selling fewer hot dogs because hamburgers were added to the menu D. offering French fries but not onion rings E. losing sales due to bad weather

C

Which one of the following costs was incurred in the past and cannot be recouped? A. incremental B. side C. sunk D. opportunity E. erosion

C

Which one of the following is most directly affected by the level of systematic risk in a security? A. variance of the returns B. standard deviation of the returns C. expected rate of return D. risk-free rate E. market risk premium

C

Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2010? A. The annual rate of return always exceeded the annual inflation rate. B. The average risk premium was 0.7 percent. C. The annual rate of return was always positive. D. The average excess return was 1.1 percent. E. The average real rate of return was zero.

C

Which one of the following statements related to risk is correct? A. The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio. B. Every portfolio that contains 25 or more securities is free of unsystematic risk. C. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio. D. Adding five additional stocks to a diversified portfolio will lower the portfolio's beta. E. Stocks that move in tandem with the overall market have zero betas.

C

Which one of the following time periods is associated with high rates of inflation? A. 1929-1933 B. 1957-1961 C. 1978-1981 D. 1992-1996 E. 2001-2005

C

Please refer to Oscar's financial statements above. Assume a constant debt-equity ratio, net profit margin and dividend payout ratio, and further assume all of Oscar's expenses, assets and current liabilities vary directly with sales. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent? A. $10,857.50 B. $10,931.38 C. $11,663.75 D. $15,587.50 E. $18,987.50 F. None of the above.

C. $11,663.75

Your grandmother invested a lump sum 26 years ago at 4.25 percent interest. Today, she gave you the proceeds of that investment which totaled $51,480.79. How much did she originally invest?

C. $17,444.86

You plan to buy a new Mercedes four years from now. Today, a comparable car costs $82,500. You expect the price of the car to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it? A. $98,340.00 B. $98,666.67 C. $99,517.41 D. $99,818.02 E. $100,023.16 F. None of the above.

C. $99,517.41 Future value = $82,500 × (1 + 0.048)4 = $99,517.41

Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is 1.6 and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is Komatsu's sustainable rate of growth? A. 1.91% B. 6.12% C. 10.83% D. 11.26% E. 12.74% F. None of the above.

C. 10.83% Sustainable growth = PRAT = 0.045 × (1 - 0.15) × 1.6 × 1.77 = 10.83%

Please refer to the information for FM Foods above. Estimate FM's weighted-average cost of capital. A. 6.46% B. 6.58% C. 11.27% D. 11.32% E. 11.52% F. None of the above.

C. 11.27%

Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns? I. Estimated pro forma coverage ratios II. The recognition that financing decisions do not affect firm or shareholder value III. A range of earnings chart and proximity of expected EBIT to the breakeven value IV. A conservative debt policy that obviates the need to evaluate risk A. I only B. III only C. I and III only D. II and III only E. IV only F. None of the above.

C. I and III only

The interest tax shield has no value when a firm has: I. no taxable income. II. debt-equity ratio of 1. III. zero debt. IV. no leverage. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, and IV only F. None of the above.

C. I, III, and IV only

Which of the following statements are correct? I. Liquidation value of a firm is equal to the present worth of expected future cash flows from operating activities. II. When an acquiring firm purchases a target firm's equity, the acquirer must assume the target's liabilities. III. The market value of a public company reflects the worth of the business to minority investors. IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value. A. I and III only B. II and IV only C. II and III only D. I, II, and III only E. II, III, and IV only F. None of the above.

C. II and III only

Which of the following factors favor the issuance of equity in the financing decision? I. Market signaling II. Distress costs III. Management incentives IV. Financial flexibility A. I and II only B. I and III only C. II and IV only D. II, III, and IV only E. I, II, and IV only F. None of the above.

C. II and IV only

When making a capital budgeting decision, which of the following is/are NOT relevant? I. The size of a cash flow II. The risk of a cash flow III. The accounting earnings from a cash flow IV. The timing of a cash flow A. I only B. II only C. III only D. II and III only E. III and IV only F. They are all relevant.

C. III only

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a: A. pro forma income statement. B. sales projection. C. cash budget. D. receivables analysis. E. credit analysis. F. None of the above.

C. cash budget.

Which of the following should be included in the analysis of a new product? I. money already spent for research and development of the new product II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

D

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk. A. I and III only B. II and IV only C. I and IV only D. I, II and III only E. I, II, III, and IV

D

Which of the following variables will be at their highest expected level under a worst case scenario? I. fixed cost II. sales price III. variable cost IV. sales quantity A. I only B. III only C. II and III only D. I and III only E. I, III, and IV only

D

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? A. reward-to-risk matrix B. portfolio weight graph C. normal distribution D. security market line E. market real returns

D

Which one of the following is the best example of a diversifiable risk? A. interest rates increase B. energy costs increase C. core inflation increases D. a firm's sales decrease E. taxes decrease

D

Which one of the following will be used in the computation of the best-case analysis of a proposed project? A. minimal number of units that are expected to be produced and sold B. the lowest expected salvage value that can be obtained for a project's fixed assets C. the most anticipated sales price per unit D. the lowest variable cost per unit that can reasonably be expected E. the highest level of fixed costs that is actually anticipated

D

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? A. leverage B. risk C. break-even D. sensitivity E. cash flow

D

In a discounted cash flow analysis of Giant Corp.'s project described in the problem above, what would be the projected Year 2 free cash flow?

D. $1,750

In a discounted cash flow analysis of Giant Corp.'s project described in the problem above, what would be the projected Year 2 free cash flow? A. $1,300 B. $1,450 C. $1,700 D. $1,750

D. $1,750

Naomi plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How much will she have in her account at the end of 45 years? A. $1,806,429 B. $1,838,369 C. $2,211,407 D. $2,333,572 E. $2,508,316 F. None of the above.

D. $2,333,572

Use the indirect method to answer this question. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is cash flow from operating activities for Felix Company? A. $70 B. $320 C. $250 D. $240

D. $240

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market and there are no taxes or transactions costs and all else remains the same, what should the market value of the firm be after the repurchase? A. $1,000,000 B. $1,750,000 C. $3,250,000 D. $4,000,000 E. $5,000,000 F. None of the above.

D. $4,000,000

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000, and dividends were $44,640. What is Westcomb's sustainable growth rate? A. 15.79 percent B. 18.01 percent C. 15.32 percent D. 17.78 percent D. 18.24 percent

D. 18.24 percent

Please refer to the selected financial information for Boss Stores above. What is the actual sales growth rate for 2013?

D. 21.4%

Please refer to the selected financial information for Boss Stores above. What is the actual sales growth rate for 2013? A. - 17.6% B. - 7.9% C. 8.51% D. 21.4% E. None of the above.

D. 21.4%

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's times-interest-earned ratio for next year assuming the firm raises $40 million of new debt at an interest rate of 7 percent. A. 2.00 B. 3.09 C. 3.66 D. 4.35 E. None of the above.

D. 4.35

Hayesville Corporation had net income of $5 million this year on net sales of $125 million per year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held $75 million in total liabilities. It paid out $2 million in dividends for the year. What is Hayesville Corporation's sustainable growth rate? A. 3% B. 4% C. 5% D. 6%

D. 6% ROEbop × Retention ratio = (5/50) × 0.6 = 6%

Please refer to the financial information for Foodtek, Inc. above. Assuming that there were no financing cash flows during 2014 and basing your answer solely on the information provided, what were Foodtek's cash flows from operations (in $ millions) for 2014? A. 45 B. 110 C. 70 D. 80 E. 35 F. None of the above.

D. 80

Please refer to the information for FM Foods above. Estimate the appropriate weight of equity to be used when calculating FM's weighted-average cost of capital. A. 11.5% B. 19.3% C. 80.7% D. 88.5% E. 100.0% F. None of the above

D. 88.5% Market value of equity = $40 × 240 million = $9,600 million. Weight of equity = 9,600/(9,600 + 1,250) = 0.8848 or 88.5%.

In forecasting a firm's cash needs for some future period A. the percent-of-sales method is a "broad-brush" approach B. cash budgets are more exact than the percent-of-sales method C. a cash budget approach can deal effectively with both level and seasonal production schedules D. All of these

D. All of these

You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e., the company projected a financing surplus). Which of the following options, all else equal, would NOT correct the projected imbalance? A. A stock repurchase B. A decrease in accounts payable C. An increase in cash and marketable securities D. An increase in the retention ratio

D. An increase in the retention ratio

According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources, such as retained profits and excess cash. II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms prefer to issue new equity rather than source external debt. IV. A firm's capital structure is dictated by its need for external financing. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the options are correct.

D. I, II, and IV only

Which of the following actions would help a firm's growth problem if its actual sales growth exceeds its sustainable rate of growth? I. Increase prices II. Decrease financial leverage III. Decrease dividends IV. Prune away less-profitable products A. I and II only B. I and III only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the above.

D. I, III, and IV only

Which of the following is an acceptable method to report total comprehensive income? A. On the face of the balance sheet. B. Total comprehensive income does not have to be reported. C. In the operating section of the cash flow statement. D. In the statement of stockholders' equity.

D. In the statement of stockholders' equity.

Which of the following would NOT be considered a use of cash?

Depreciation

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000 and dividends were $44,640. What is Westcomb's sustainable growth rate? A. 15.32 percent B. 15.79 percent C. 17.78 percent D. 18.01 percent E. 18.24 percent

E. 18.24 percent Change in Equity = Retained earnings = $72,000 - $44,640 = $27,360Sustainable growth rate = g* = Change in Equity/Equitybop = $27,360/$150,000 = 18.24%Alternative: g* = R × ROEbop = (72,000 - 44,640)/72,000 × 72,000/150,000 = 0.38 × 0.48 = 0.1824

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000 and dividends were $44,640. What is Westcomb's sustainable growth rate? A. 15.32 percent B. 15.79 percent C. 17.78 percent D. 18.01 percent E. 18.24 percent

E. 18.24 percent Change in Equity = Retained earnings = $72,000 - $44,640 = $27,360 Sustainable growth rate = g* = Change in Equity/Equitybop = $27,360/$150,000 = 18.24% Alternative: g* = R × ROEbop = (72,000 - 44,640)/72,000 × 72,000/150,000 = 0.38 × 0.48 = 0.1824

Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish's times-burden-covered ratio if Squamish sells 2 million new shares at $20 a share. A. 1.03 B. 1.38 C. 1.60 D. 1.89 E. 2.10 F. None of the above.

E. 2.10

Please refer to the financial information for Foodtek, Inc. above. During 2014, what was the cost of merchandise (in $ millions) produced by Foodtek? A. 223 B. 194 C. 252 D. 228 E. 218 F. None of the above.

E. 218

XYZ Co. has forecasted June sales of 400 units and July sales of 700 units. The company maintains ending inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's required production? A. 725 units B. 750 units C. -0- units D. 425 units E. 775 units

E. 775 units

Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below?

E. February, March, and April

Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below? A. October, November, and December B. November, December, and January C. December, January, and February D. January, February, and March E. February, March, and April

E. February, March, and April

Which of these ratios are the determinants of a firm's sustainable growth rate? I. Assets-to-equity ratio II. Profit margin III. Retention ratio IV. Asset turnover ratio

E. I, II, III, and IV

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

Which of the following statements related to market efficiency tends to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for the typical investor to earn above-average returns without taking above-average risks. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely strong-form efficient. A. I and III only B. II and IV only C. I and IV only D. I, III, and IV only E. I, II, and III only

E. I, II, and III only

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for cost of goods sold in cell C9? A. =B9*B3 B. =B9 + B9*B3 C. =B8*B3 D. =B9*B2 E. None of the above.

E. None of the above.

The sustainable growth rate A. assumes there is no external financing of any kind. B. assumes all income is retained by the firm. C. None of the options are correct. D. assumes no additional long-term debt is available. E. assumes the debt-equity ratio is 1.0. F. assumes the debt-equity ratio is constant.

F. the debt-equity ratio is constant.

The IRR is the discount rate at which an investment's NPV equals its initial cost.

FALSE

A company's price-to-earnings ratio is always equal to one minus its earnings yield.

False

A company's return on assets will always equal or exceed its profit margin.

False

A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were sold during 2017.

False

A drawback of forecasting using spreadsheets is that typical spreadsheet programs are not equipped to deal with the circularity involving interest expense and debt.

False

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.

False

In business valuation, a typical discount for lack of marketability is about 10 percent.

False

In reality, the cost of equity is always less than the cost of debt because firms are not obligated to pay out cash to shareholders.

False

In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off".

False

One advantage of ROE is that it is a risk-adjusted measure of performance.

False

Scenario analysis involves changing one input to a financial forecast, whereas sensitivity analysis involves changing multiple inputs.

False

The IRR and NPV always yield the same investment recommendations

False

The IRR is the discount rate at which an investment's NPV equals its initial cost.

False

The M&M irrelevance proposition assures financial managers that their choice between equity or debt financing will ultimately have no impact on firm value.

False

The accrual principle requires that revenue not be recognized until payment from a sale is received.

False

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?

I, II, III, and IV

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover

I, II, and IV only

Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test

II and IV only

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000 and dividends were $44,640. What is Westcomb's sustainable growth rate?

E. 18.24 percent

In evaluating a business firm it is essential that the financial analyst consider the qualitative as well as the quantitative components of earnings for an accounting period.

True

In recent years, U.S. companies as a whole have repurchased more equity than they have issued.

True

In recent years, U.S. companies as a whole have repurchased more equity than they have issued.

True

The allowance for doubtful accounts is a type of account that can be manipulated to over or under estimating bad debt expense and so influence earnings.

True

The sustainable growth rate is the only growth rate in sales that is consistent with stable values of the profit margin, retention rate, asset turnover, and leverage (assets/equitybop).

True

The times-interest-earned ratio always equals or exceeds the times-burden-covered ratio.

True

When a company is in financial distress, its shareholders may have an incentive to undertake excessively risky investments.

True

When projected cash flows are in nominal dollars, they should be discounted with a nominal discount rate.

True

On a common-size balance sheet, all accounts are expressed as a percentage of

total assets.

All else equal, increasing the assumed payables period in a financial forecast will decrease external funding required.

true

Cash budgets are less informative than pro forma financial statements.

true

Debt financing results in lower after-tax earnings relative to equity financing.

true

Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding.

true

If the maturity of a company's liabilities is less than that of its assets, the company incurs a refinancing risk.

true

In recent years, U.S. companies as a whole have repurchased more equity than they have issued.

true

The profit margin for 2012 is:

-94%

Please refer to Oscar's financial statements above. What was Oscar's increase in retained earnings during 2014?

1,830 - 450 = 1,380

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2016 period)?

1. Common stocks, 2. long-term corporate bonds, 3. long-term government bonds, 4. short-term government bills

Assume a 365-day year for your calculations. The inventory turnover, based on cost of goods sold, at the end of 2012 is:

5.2

Which of the following would increase a company's need for external finance, all else equal?

A. An increase in the dividend payout ratio

Which of the following would not be considered a cost of financial distress? Which of the following would not be considered a cost of financial distress? A. Lack of interest tax shields B. Bankruptcy costs C. Excessive risk-taking by shareholders D. Loss of customers or suppliers

A. Lack of interest tax shields

When will a firm record goodwill on its books? A. When the company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired. B. When the firm donates property to charities. C. When it is determined that there has been a loss of value of long-term assets. D. When fixed assets are impaired.

A. When the company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired.

Selling and administrative expenses include which of the following income statement items? A. Salaries, insurance, interest. B. Salaries, rent, advertising. C. Rent, interest, cost of goods. D. Advertising, research & development, amortization.

B. Salaries, rent, advertising.

The need for an increase or decrease in short-term borrowing can be predicted by A. ratio analysis. B. a cash budget. C. an income statement. D. trend analysis

B. a cash budget

CHAPTER 3

CHAPTER 3

Mike just purchased a bond which pays $40 each year in interest. The $40 interest payment is also called the:

Coupon

Which of the following are examples of diversifiable risk? I. An earthquake damages Oakland, California. II. The federal government imposes an additional $1,000 fee on all business entities. III. Employment taxes increase nationally. IV. Toymakers are required to improve their safety standards. A. I and III only B. II and IV only C. II and III only D. I and IV only E. I, III, and IV only F. None of the above.

D. I and IV only

Which one of the following types of analysis is the most complex to conduct? A. scenario B. break-even C. sensitivity D. degree of operating leverage E. simulation

E

Which of the following is NOT an important step in the financial evaluation of an investment opportunity?

Estimate the accounting rate of return for the investment.

What is an appropriate estimate of Havasham's terminal value as of the end of 2014, using the perpetual-growth equation as your estimate? A. $161 million B. $363 million C. $3,690 million D. $3,888 million E. $5,357 million F. None of the above.

F. None of the above. FCF2015 = 155 × (1 + 0.04) = $161 million. Terminal value2014 = FCF2015/(KW - g) = $161 million/(0.082 - 0.04) = $3,833 million.

As a noncash expense, depreciation is irrelevant in the determination of a project's cash flows.

FALSE

You can construct a sources and uses statement for 2017 if you have a company's year-end balance sheets for 2017 and 2018.

False

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling II. Distress costs III. Tax benefits IV. Financial flexibility

I and III only

Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns? I. Estimated pro forma coverage ratios II. The recognition that financing decisions do not affect firm or shareholder value III. A range of earnings chart and proximity of expected EBIT to the breakeven value IV. A conservative debt policy that obviates the need to evaluate risk

I and III only

Which of the following can affect a firm's sustainable rate of growth? I. Asset turnover ratio II. Profit margin III. Dividend policy IV. Financial leverage

I, II, III, and IV

Which of the following factors favor the issuance of equity in the financing decision? I. Market signaling II. Distress costs III. Management incentives IV. Financial flexibility

II and IV only

Which one of the following is a use of cash?

Increase in inventory

Klamath Corporation has asset turnover of 3.5, a profit margin of 5.2%, and a current ratio of 0.5. What is Klamath Corporation's return on equity?

Insufficient information to find ROE

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt, but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance?

Interest tax shield = interest rate × amount of debt × tax rate = 0.07 × 20,000,000 × 0.40= $560,000

Which of the following statements regarding junk bonds is true?

Junk bonds have higher priority in bankruptcy than preferred stock.

Which of the following would not be considered a cost of financial distress?

Lack of interest tax shields

Which of the following statements best describes how the company's short-term liquidity changed from 2011 to 2012?

Link's short-run liquidity has deteriorated considerably, but from a high initial base.

Milano Corporation has experienced growth of 20% for each of the last 5 years. Over this 5-year period, Milano's return on equity has never exceeded 15%, its profit margin has held steady at 5%, and its total asset turnover has not changed. Over the 5-year period, Milano paid no dividends and issued no new equity. Based on this information, which of the following can you most likely infer about Milano's performance over the past 5 years?

Milano's leverage has increased.

Milano Corporation has experienced growth of 20% for each of the last 5 years. Over this 5- year period, Milano's return on equity has never exceeded 15%, its profit margin has held steady at 5%, and its total asset turnover has not changed. Over the 5-year period, Milano paid no dividends and issued no new equity. Based on this information, which of the following can you most likely infer about Milano's performance over the past 5 years?

Milano's leverage has increased. Note first that g > g* because g = 20% and g*<15%. With g > g* one of PRAT must increase. P has held steady at 5%, R has remained at 100%, A has not changed. Thus T (leverage) must have increased.

Which of the following is NOT an implication of the pecking order theory of capital structure?

More-profitable firms (all else equal) should have higher debt ratios.

Please refer to Oscar's financial statements above. All of Oscar's costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year?

Pro forma accounts receivable = $940 × (1 + 0.10) = $1,034

The most popular yardstick of financial performance among investors and senior managers is the:

ROE

Which one of the following statements does NOT describe a problem with using ROE as a performance measure?

ROE is a forward-looking, one-period measure, while business decisions span the past and present.

Hayesville Corporation had net income of $5 million this year on net sales of $125 million per year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held $75 million in total liabilities. It paid out $2 million in dividends for the year. What is Hayesville Corporation's sustainable growth rate?

ROEbop × Retention ratio = (5/50) × 0.6 = 6%

The price of a call option tends to be lower when which of the following is higher (all else equal)?

The strike price

Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future?

The value of a dollar in the future will be compounded more than the value of a dollar today.

Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan?

Times-burden-covered ratio

A company experiencing balanced growth does not generate cash surpluses or cash deficits.

True

When reporting financial performance for tax purposes, U.S. companies prefer to use accelerated depreciation methods over the straight-line method.

True

Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?

asset turnover

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets?

balance sheet

The sustainable growth rate:

can never be greater than the return on equity.

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a

cash budget

One way to manage an actual growth rate above a sustainable growth rate is to decrease prices.

false

Individuals who continually monitor the financial markets seeking mispriced securities.

make the markets increasingly more efficient.

Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan?

times burden covered ratio

Which one of the following is a source of cash? A. increase in accounts receivable B. decrease in notes payable C. decrease in common stock D. increase in inventory E. increase in accounts payable

E. increase in accounts payable

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. income statement B. balance sheet C. cash flow statement D. sources and uses statement E. market value statement

A. income statement

In some instances, additional debt financing can encourage managers to act more in the interests of owners.

true

The accounting rate of return is deficient as a figure of merit because it is insensitive to the timing of cash flows

True

Please refer to the financial information for Foodtek, Inc.above. During 2017, what was the cost of merchandise (in millions of dollars) produced by Foodtek?

$218

A project will produce after-tax operating cash inflows of $3,200 a year for 5 years. The after- tax salvage value of the project is expected to be $2,500 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent?

$2,168.02 NPV = 11668.02 - 9,500 = $2,168.02

Naomi plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How much will she have in her account at the end of 45 years?

$2,333,572

At the end of 2017, Stacky Corp. had $500,000 in liabilities and a debt-to-assets ratio of 0.5. For 2017, Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2017?

$3,000,000

Consider the following premerger information about a bidding firm (Buyitall Inc.) and a target firm (Tarjay Corp.). Assume that neither firm has any debt outstanding. Buyitall Tarjay Shares outstanding 1,500 1,100 Price per share $32 $26 Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600. What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash

$400

You are to receive an annuity of $1,000 per year for 10 years. You will receive the first payment two years from today. At a discount rate of 10%, what is the present value of this annuity?

$5,585.97 0 for future value solve for pv

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥122 at year-end. What was your U.S. dollar holding period return on the bond?

13% The holding period return in yen was [3%*100,000 + 10,000]/100,000 = 13 percent.

Please refer to the selected financial information for Boss Stores above. What is the actual sales growth rate for 2016?

21.4%

Assume a 365-day year for your calculations. The days' sales in cash at the end of 2012 is:

219.6

Assume a 365-day year for your calculations. The payables period in days, based on cost of goods sold, at the end of 2012 is:

24.3

The Limited collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect:

60 percent of March sales.

In a discounted cash flow analysis of Giant Corp.'s project described in the problem above, what would be the projected Year 1 free cash flow?

600

Principal is exchanged in interest rate swaps but not in currency swaps.

False

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August?

August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643

BUDGETING

BUDGETING

Which of the following securities has a purely FIXED claim against a firm's cash flows?

Bonds

A project has a projected IRR of negative 100 percent. Which one of the following statements must also be true concerning this project? A. The discounted payback period equals the life of the project. B. The operating cash flow is positive and equal to the depreciation. C. The net present value of the project is negative and equal to the initial investment. D. The payback period is exactly equal to the life of the project. E. The net present value of the project is equal to zero.

C

The IRR and NPV always yield the same investment recommendations.

False

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? A. net working capital policy B. capital structure policy C. dividend policy D. capital budgeting policy E. capacity utilization policy F. None of the above.

C. dividend policy

Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal?

Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products.

A beta greater than 1 is indicative of an above-average level of diversifiable (unsystematic) risk.

False

Which of the following is NOT a typical reason for differences between profits and cash flow?

Goodwill

The gross margin for 2012 is:

None of the above

Please refer to the selected financial information for Boss Stores above. What is the difference between Boss's sustainable growth rate and its actual growth rate for 2014?

Sustainable growth = g* = PRAT = 0.0274 × 0.94 × 0.99 × 2.14 = 5.47% Alternatively, g* = Change in Equity/Equitybop = (222.57 - 211.03)/211.03 = 5.47% Actual growth = g = Change in Sales/Salesbop = (446.84 - 411.78)/411.78 = 8.51% g* - g = 5.47% - 8.51% = -3.04%

The accounting rate of return is deficient as a figure of merit because it is insensitive to the timing of cash flows.

TRUE

One way to manage an actual growth rate below the sustainable growth rate is to repurchase shares.

True

Return on assets can be calculated as profit margin times asset turnover.

True

Shelf registration is possible for both debt and equity issues.

True

A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing activities, or financing activities.

True

Acquisitions create shareholder value, on average.

True

Principal amounts are usually exchanged

in currency swaps.

A balance sheet reports the value of a firm's assets, liabilities, and equity

at any point in time.

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a:

cash budget.

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?

dividend policy

A drawback of forecasting using spreadsheets is that typical spreadsheet programs are not equipped to deal with the circularity involving interest expense and debt.

false

An annual financial forecast for 2013 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2013

false

Which one of the following is a source of cash?

increase in accounts payable

Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm's financial ratios?

increase in the inventory turnover rate

Depreciation expense:

reduces both taxes and net income.

Which of the following statements is correct if a firm's pro forma financial statements project net income of $12,000 and external financing required of $5,000?

C. Retained earnings cannot grow by more than $12,000.

Unitron Corp. is considering project Z, which costs $50 million and offers an annual after-tax cash flow of $7.5 million in perpetuity. The project is in an industry that has greater market risk than Unitron's typical projects. Unitron's company weighted-average cost of capital, based on its typical projects, is 15%. Should Unitron Corp. accept project Z? A. Yes, because the NPV of the project is positive. B. Yes, because a zero-NPV project is marginally acceptable. C. No, because a zero-NPV project is a waste of resources. D. No, because the NPV of the project is negative.

D. No, because the NPV of the project is negative. Use the equation for a perpetuity to solve for the IRR: 7.5/IRR = 50 IRR = 15% Since the IRR is 15%, it would have an NPV of zero at a WACC of 15%. However, this project is riskier than the firm's average projects, so the WACC would be higher than 15%, which would make the NPV negative.

Which of the following statements regarding interest tax shields is correct? A. Taxes are reduced by the amount of a firm's interest-bearing debt. B. Taxable income is reduced by the amount of a firm's interest-bearing debt. C. Taxes are reduced by the amount of the interest on a firm's debt. D. Taxable income is reduced by the amount of the interest on a firm's debt.

D. Taxable income is reduced by the amount of the interest on a firm's debt.

The sustainable growth rate of a firm is best described as the: A. minimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing.F. None of the above.

D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.

In the percent-of-sales method, if (A/S) and (L/S) both increase: A. RNF goes up. B. RNF stays the same. C. RNF goes down. D. more information is needed.

D. more information is needed.

The most common approach to developing pro forma financial statements is called the: A. cash budget method. B. financial planning method. C. seasonality approach. D. percent-of-sales method. E. market-oriented approach. F. None of the above.

D. percent-of-sales method.

Total risk is measured by _____ and systematic risk is measured by ____. A. beta; alpha B. beta; standard deviation C. WACC; beta D. standard deviation; beta E. standard deviation; variance F. None of the above.

D. standard deviation; beta

A company purchases a new $10 million building financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet?

Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

[The following information applies to the questions displayed below.] Link, Inc.Selected financial data ($ thousands) 2016 2017Income statement and related items Sales$160,835 $274,219 Cost of goods sold 141,829 209,628 Net income (91,432) (257,981)Cash flow from operations (35,831) (12,538) Balance sheet items Cash$236,307 $164,952 Marketable securities 209,670 22,638 Accounts receivable 12,645 21,655 Inventory 3,971 40,556 Total current assets 462,593 249,801 Accounts payable 17,735 13,962 Accrued liabilities 27,184 76,596 Total current liabilities 44,919 90,558 Please refer to the financial data for Link, Inc. above. Link's gross margin for 2017 is 31%.

None of the Answers above

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for cost of goods sold in cell C9?

None of the above.

The only way a company can grow at a rate above its current sustainable growth rate is by increasing leverage.

false

Small-company stocks, as the term is used in the textbook, are best defined as the: A. 500 newest corporations in the U.S. B. firms whose stock trades OTC. C. smallest twenty percent of the firms listed on the NYSE. D. smallest twenty-five percent of the firms listed on NASDAQ. E. firms whose stock is listed on NASDAQ.

C

The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is: A. operating at the accounting break-even point. B. operating at the financial break-even point. C. facing hard rationing. D. operating with zero leverage. E. operating at maximum capacity.

C

The bid price always assumes which one of the following? A. A project has a one-year life. B. The aftertax net income of the project is zero. C. The net present value of the project is zero. D. Any assets purchased will have a positive salvage value at the end of the project. E. Assets will be depreciated based on MACRS.

C

Please refer to Oscar's financial statements above. All of Oscar's costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year?

$1,034

A $1,000 par value bond with a fixed 10% rate of interest pays coupons semiannually. What amount will the bondholder receive on the bond's maturity date?

$1,050

Please refer to Oscar's financial statements above. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the projected addition to retained earnings for next year?

$1,380 × (1 + 0.03) = $1,421.40

Please refer to Oscar's financial statements above. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the PROJECTED ADDITION to retained earnings for next year?

$1,421.40

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's: A. incremental cash flows. B. internal cash flows. C. external cash flows. D. erosion effects. E. financing cash flows.

A

The intercept point of the security market line is the rate of return which corresponds to: A. the risk-free rate. B. the market rate. C. a return of zero. D. a return of 1.0 percent. E. the market risk premium.

A

The excess return is computed as the: A. return on a security minus the inflation rate. B. return on a risky security minus the risk-free rate. C. risk premium on a risky security minus the risk-free rate. D. the risk-free rate plus the inflation rate. E. risk-free rate minus the inflation rate.

B

The expected risk premium on a stock is equal to the expected return on the stock minus the: A. expected market rate of return. B. risk-free rate. C. inflation rate. D. standard deviation. E. variance.

B

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? A. underlying value principle B. stand-alone principle C. equivalent cost principle D. salvage principle E. fundamental principle

B

To convince investors to accept greater volatility, you must: A. decrease the risk premium. B. increase the risk premium. C. decrease the real return. D. decrease the risk-free rate. E. increase the risk-free rate.

B

Which of the following statements are true based on the historical record for 1926-2010? I. Risk and potential reward are inversely related. II. Risk-free securities produce a positive real rate of return each year. III. Returns are more predictable over the short-term than they are over the long-term. IV. Bonds are generally a safer investment than are stocks. A. I only B. IV only C. II and III only D. II and IV only E. II, III, and IV only

B

Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock B. $1,200 paid to repair a machine last year C. $20,000 project that must be forfeited if another project is accepted D. $4,500 reduction in current shoe sales if a store commences selling sandals E. $1,800 increase in comic book sales if a store commences selling puzzles

B

Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications? A. IRR B. ACRS C. AAR D. straight-line to zero E. straight-line with salvage

B

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? A. degree of sensitivity B. degree of operating leverage C. accounting break-even D. cash break-even E. contribution margin

B

Which one of the following risks is irrelevant to a well-diversified investor? A. systematic risk B. unsystematic risk C. market risk D. nondiversifiable risk E. systematic portion of a surprise

B

Which one of the following should earn the most risk premium based on CAPM? A. diversified portfolio with returns similar to the overall market B. stock with a beta of 1.38 C. stock with a beta of 0.74 D. U.S. Treasury bill E. portfolio with a beta of 1.01

B

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2010? A. U.S. Treasury bill returns never exceeded a 9 percent return in any one year during the period. B. U.S. Treasury bills provided a positive rate of return each and every year during the period. C. Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period. D. Long-term government bonds outperformed U.S. Treasury bills every year during the period. E. National deflation occurred at least once every decade during the period.

B

Which one of the following statements is correct concerning a portfolio beta? A. Portfolio betas range between -1.0 and +1.0. B. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. C. A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. D. A portfolio of U.S. Treasury bills will have a beta of +1.0. E. The beta of a market portfolio is equal to zero.

B

In a cash budget, the cumulative cash balance is equal to: A. cumulative loan balance plus the ending cash balance. B. net cash flow plus the beginning cash balance. C. net cash flow minus the beginning cash balance. D. cumulative loan balance minus the ending cash balance.

B. net cash flow plus the beginning cash balance

The weighted-average cost of capital for a firm is the A. minimum discount rate the firm should require on any new project. B. rate of return a firm must earn on its existing assets to maintain the current value of its stock. C. None of the options are correct. D. coupon rate the firm should expect to pay on its next bond issue. E. discount rate which the firm should apply to all of the projects it undertakes. F. rate of return shareholders should expect to earn on their investment in this firm.

B. rate of return a firm must earn on its existing assets to maintain the current value of its stock

A firm is considering an average-risk project with an IRR of 6%. The firm's cost of debt (KD) is 5%, its cost of equity (KE) is 12%, and its tax rate (t) is 20%. The target debt ratio (D/(D+E)) for the project, in market values, is 0.5. The firm should A. accept the project only if it can be completely financed with debt. B. reject the project regardless of the financing method. C. accept the project only if it can be completely financed with equity. D. accept the project regardless of the financing method.

B. reject the project regardless of the financing method.

The capital asset pricing model (CAPM) assumes which of the following? I. a risk-free asset has no systematic risk. II. beta is a reliable estimate of total risk. III. the reward-to-risk ratio is constant. IV. the market rate of return can be approximated. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

C

The contribution margin per unit is equal to the: A. sales price per unit minus the total costs per unit. B. variable cost per unit minus the fixed cost per unit. C. sales price per unit minus the variable cost per unit. D. pre-tax profit per unit. E. aftertax profit per unit.

C

The degree of operating leverage is equal to: A. the percentage change in quantity divided by the percentage change in OCF. B. the percentage change in sales divided by the percentage change in OCF. C. 1 + FC/OCF. D. 1 + VC/OCF. E. 1 - (FC + VC)/OCF.

C

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the: A. number of shares owned of each stock. B. market price per share of each stock. C. market value of the investment in each stock. D. original amount invested in each stock. E. cost per share of each stock held.

C

The primary purpose of portfolio diversification is to: A. increase returns and risks. B. eliminate all risks. C. eliminate asset-specific risk. D. eliminate systematic risk. E. lower both returns and risks.

C

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: A. marginal spending. B. capital preservation. C. soft rationing. D. hard rationing. E. marginal rationing.

C

Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) A. Sale price + (Sales price - Book value) × T B. Sale price + (Sales price - Book value) × (1 - T) C. Sale price + (Book value - Sale price) × T D. Sale price + (Book value - Sale price) × (1 - T) E. Sale price × (1 - T)

C

Variable costs can be defined as the costs that: A. remain constant for all time periods. B. remain constant over the short run. C. vary directly with sales. D. are classified as non-cash expenses. E. are inversely related to the number of units sold.

C

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project: A. will never pay back. B. has a zero net present value. C. is operating at a higher level than if it were operating at its cash break-even level. D. is operating at a higher level than if it were operating at its financial break-even level. E. is lowering the total net income of the firm.

C

Which of the following statements is correct in relation to a stock investment? I. The capital gains yield can be positive, negative, or zero. II. The dividend yield can be positive, negative, or zero. III. The total return can be positive, negative, or zero. IV. Neither the dividend yield nor the total return can be negative. A. I only B. I and II only C. I and III only D. I and IV only E. IV only

C

Which one of the following best describes pro forma financial statements? A. financial statements expressed in a foreign currency B. financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales C. financial statements showing projected values for future time periods D. financial statements expressed in real dollars, given a stated base year E. financial statements where all accounts are expressed as a percentage of last year's values

C

Which one of the following best describes the concept of erosion? A. expenses that have already been incurred and cannot be recovered B. change in net working capital related to implementing a new project C. the cash flows of a new project that come at the expense of a firm's existing cash flows D. the alternative that is forfeited when a fixed asset is utilized by a project E. the differences in a firm's cash flows with and without a particular project

C

Which one of the following categories of securities had the highest average return for the period 1926-2010? A. U.S. Treasury bills B. large company stocks C. small company stocks D. long-term corporate bonds E. long-term government bonds

C

Which one of the following earned the highest risk premium over the period 1926-2010? A. long-term corporate bonds B. U.S. Treasury bills C. small-company stocks D. large-company stocks E. long-term government bonds

C

Which one of the following events would be included in the expected return on Sussex stock? A. The chief financial officer of Sussex unexpectedly resigned. B. The labor union representing Sussex' employees unexpectedly called a strike. C. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. D. The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. E. The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.

C

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? A. EBIT + D B. EBIT - T C. NI + D D. (Sales - Costs) × (1 - D) × (1- T) E. (Sales - Costs) × (1 - T)

C

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2010? Rank from highest to lowest. A. large company stocks, U.S. Treasury bills, long-term government bonds B. small company stocks, long-term corporate bonds, large company stocks C. small company stocks, long-term corporate bonds, intermediate-term government bonds D. large company stocks, small company stocks, long-term government bonds E. intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills

C

Which one of the following is a project cash inflow? Ignore any tax effects. A. decrease in accounts payable B. increase in inventory C. decrease in accounts receivable D. depreciation expense based on MACRS E. equipment acquisition

C

Which one of the following is a risk that applies to most securities? A. unsystematic B. diversifiable C. systematic D. asset-specific E. total

C

Which one of the following is defined by its mean and its standard deviation? A. arithmetic nominal return B. geometric real return C. normal distribution D. variance E. risk premium

C

Which one of the following is most indicative of a totally efficient stock market? A. extraordinary returns earned on a routine basis B. positive net present values on stock investments over the long-term C. zero net present values for all stock investments D. arbitrage opportunities which develop on a routine basis E. realizing negative returns on a routine basis

C

Principal amounts are usually exchanged A. in currency swaps. B. in interest rate swaps. C. in both currency swaps and interest rate swaps. D. in neither currency swaps nor interest rate swaps.

C. in both currency swaps and interest rate swaps.

The best financing choice is the one that: A. sets the debt-to-assets ratio equal to 1. B. trades off the tax disadvantage of debt against the signaling effects of equity. C. maximizes expected cash flows. D. ignores the false comfort of financial flexibility. E. results in the lowest possible financial distress costs.

C. maximizes expected cash flows.

In the development of the pro forma financial statements, the last step in the process is the development of the: A. pro forma income statement B. cash budget C. pro forma balance sheet D. capital budget

C. pro forma balance sheet

Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the:

Par Value

Which one of the following correctly defines the retention ratio?

additions to retained earnings divided by net income

The sustainable growth rate:

assumes the debt-equity ratio is constant.

The retention ratio is:

the percentage of net income available to the firm to fund future growth.

The basic lesson of the M&M theory is that the value of a firm is dependent upon:

the total cash flow of the firm.

On a common-size balance sheet, all accounts are expressed as a percentage of:

total assets for the current year.

The evidence indicates that, on average, a company's stock price declines when it announces a new issue of equity.

true

When a company is in financial distress, its shareholders may have an incentive to undertake excessively risky investments.

true

According to GAAP, revenue should not be recognized until cash is received.

False

Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line method.

False

All else equal, a terminal value based on a no-growth perpetuity would be higher than a terminal value based on a perpetuity with 2 percent growth.

False

All else equal, an increase in a company's asset turnover will decrease its ROE.

False

All else equal, if two competing firms in industry X are valuing the same plant in industry Y for a potential acquisition, the firm with the more volatile stock should arrive at a lower valuation for the plant.

False

An acquirer should never consider a target that would reduce the acquirer's earnings per share.

False

An advantage of the percent-of-sales approach to financial forecasting is that effective forecasts can be prepared without consulting historical financial statements.

False

An annual financial forecast for 2013 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2013.

False

An increase in cash and cash equivalents should appear as a source of cash on the sources and uses statement.

False

As a noncash expense, depreciation is irrelevant in the determination of a project's cash flows.

False

Asset betas measure financial risk and business risk.

False

Failing to include real options in a project valuation could cause the NPV of the project to be overestimated.

False

If a company seeks to maximize firm value, it should never grow at a rate above its sustainable growth rate.

False

If a company seeks to maximize firm value, it should never grow at a rate above its sustainable growth rate.

False

One way to manage an actual growth rate above a sustainable growth rate is to decrease prices.

False

One way to manage an actual growth rate above the sustainable growth rate is to decrease prices.

False

Premature revenue recognition is acceptable under GAAP.

False

Share repurchases usually decrease earnings per share.

False

The adjusted present value (APV) method of valuation is superior to the standard WACC method of valuation because the WACC method makes no adjustment for interest tax shields

False

The cost of equity is usually reported on the income statement right below interest expense.

False

The notes to the financial statements are only important to the accountants; the financial analyst can skip over them to save time.

False

The only reason why the price would fall on a corporate bond is if market interest rates increase.

False

The only way a company can grow at a rate above its current sustainable growth rate is by increasing leverage.

False

The only way a company can grow at a rate above its current sustainable growth rate is by increasing leverage.

False

The percent-of-sales approach to financial forecasting works well for forecasting the income statement but is not useful for forecasting the balance sheet.

False

Valuing a call option requires an accurate estimate of the future value of the underlying asset.

False

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. Immediately prior to the Ginormous Oil bid, the shares of Slick Co. traded at $33 per share. What value did Ginormous Oil place on the control of Slick Co.?

$2.21 billion

You are estimating your company's external financing needs for the next year. At the end of the year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year?

$20 million

Your brother will borrow $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at an 8.6 percent annual interest rate, compounded monthly. What is the amount of each payment?

$366.05

What would be the carried interest (at 20%) on a private equity portfolio with an initial value of $500 million that was subsequently liquidated for $750 million?

$50 million

The change in revenue that occurs when one more unit of output is sold is referred to as: A. marginal revenue. B. average revenue. C. total revenue. D. erosion. E. scenario revenue.

A

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August?

$643

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, what will be the book value of equity if all else remains the same?

$750,000

Please refer to the income statement for VGA Associates below. Assuming that cost of goods sold are variable and operating expenses are fixed, what was VGA Associates' breakeven sales volume in 2017?

$80,000

You plan to buy a new Mercedes four years from now. Today, a comparable car costs $82,500. You expect the price of the car to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it?

$99,517.41

Giant Corp. is considering a project that requires a $1,500 initial cost for a new machine that will be depreciated straight line to a salvage value of 0 on a 5-year schedule. The project will require a one-time increase in the level of net working capital of $300. The project will generate an additional $1,600 in revenues and $700 in operating expenses each year. The project will end at the end of year 2, at which time the machinery is expected to be sold for $800. Giant's tax rate is 50%. In a discounted cash flow analysis of this project, what would be the projected Year 0 free cash flow?

-$1,800

Please refer to Oscar's financial statements above. Assume a constant profit margin and dividend payout ratio, and further assume all of Oscar's assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is Oscar's external financing need for next year?

-$260

Please refer to the selected financial information for Boss Stores above. What is the difference between Boss's sustainable growth rate and its actual growth rate for 2017?

-3.04%

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥122 at year-end. What holding period return, measured in yen, did you earn on the bond?

-7.38 You paid $1,000 for the bond (¥100,000/100). At the end of the year, you had interest income and a yen bond worth a total of $926.23 (¥113,000/122). Your dollar return was -7.38 percent ([$926.23 - $1,000]/$1,000). Another way to find the dollar return is to use the following equation,(1+$ return) - (1+ Y return)(1+ % appreciation in $)(1+.13)(1+((1/22) - (1/100))/ (1/100)) = )1+.13)(1-.18) - 1 = -.0738

The change in variable costs that occurs when production is increased by one unit is referred to as the: A. marginal cost. B. average cost. C. total cost. D. scenario cost. E. net cost.

A

[The following information applies to the questions displayed below.] Link, Inc.Selected financial data ($ thousands) 2016 2017Income statement and related items Sales$160,835 $274,219 Cost of goods sold 141,829 209,628 Net income (91,432) (257,981)Cash flow from operations (35,831) (12,538) Balance sheet items Cash$236,307 $164,952 Marketable securities 209,670 22,638 Accounts receivable 12,645 21,655 Inventory 3,971 40,556 Total current assets 462,593 249,801 Accounts payable 17,735 13,962 Accrued liabilities 27,184 76,596 Total current liabilities 44,919 90,558 Please refer to the financial data for Link, Inc. above. Link's profit margin for 2017 is

-94%

A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent. Its asset turnover ratio is 0.85 and its assets-to-equity ratio (using beginning-of-period equity) is 1.80. What is its profit margin?

0.062 = PRAT = profit margin × 0.40 × 0.85 × 1.80 profit margin = 0.062/(0.40 × 0.85 × 1.80) = 10.13%

Please refer to the selected financial information for Boss Stores above. What is the retention ratio for 2013?

1 - (0.58/19.70) = 0.97

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's times-burden-covered ratio for the next year assuming the firm raises $40 million of new debt at an interest rate of 7 percent and that annual sinking fund payments on the new debt will equal $8 million.

1.49 EBIT = 40/(1 - 0.36) + 15 = $77.5 Interest = $15 + 0.07(40) = $17.8 Burden of interest and sinking fund before tax = 17.8 + (14 + 8)/(1 - 0.36) = $52.175 Times burden covered = 77.5/52.175 = 1.49 times

At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the dividend yield in fiscal year 2012?

1.79% Dividend yield = 0.55/30.75 = 1.79%

Gujarat Corporation doubled its shareholders' equity during the year 2014. Gujarat did not issue any new equity, repurchase any equity, or pay out any dividends during the year. What is Gujarat's sustainable growth rate for 2014?

100%

At the end of 2016, Crane Industries, Inc.'s stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2017?

13.43%

At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2012?

13.43% Percentage change in share price = (34.88- 30.75)/30.75 = 4.13/30.75 = 13.43%.

At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What rate of return did the common stock owners earn in fiscal year 2012?

15.22 Rate of return = ((34.88 + 0.55) - 30.75)/30.75 = 15.22%

Sensitivity analysis is based on: A. varying a single variable and measuring the resulting change in the NPV of a project. B. applying differing discount rates to a project's cash flows and measuring the effect on the NPV. C. expanding and contracting the number of years for a project to determine the optimal project length. D. the best, worst, and most expected situations. E. various states of the economy and the probability of each state occurring.

A

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000, and dividends were $44,640. What is Westcomb's sustainable growth rate?

18.24 percent

Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish's times-burden-covered ratio if Squamish sells 2 million new shares at $20 a share.

2.10

The current ratio at the end of 2012 is:

2.76 Current Ratio = Total current assets/Total current liabilities = 249,801/90,558 = 2.76

Please refer to the financial data for Link, Inc. above. The current ratio for Link at the end of 2017 is

2.76 (current assets/current liabilities)

Please refer to the financial data for Link, Inc. above. Assume a 365-day year for your calculations. Link's days' sales in cash at the end of 2017 is:

249.7

Assume a 365-day year for your calculations. The collection period in days, based on sales, at the end of 2012 is:

28.8

In the above financial statements, Royal Corporation has prepared (incomplete) pro forma financial statements for 2014, based on actual financial statements for 2013. Royal Corp. used the percent-of-sales method assuming a sales growth rate of 10% for 2014. If capital expenditures are planned to be $1,615 in 2014, then what would be the appropriate projection for net fixed assets in 2014?

4,048 + 1,615 - 1,100 = $4,563

Please refer to the pro forma financial statements for Royal Corporation above. If Royal Corporation plans to issue $100 in new equity in 2014, what should be the projection for shareholders' equity for 2014?

4,942 + 307 + 100 = $5,349

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's times-interest-earned ratio for next year assuming the firm raises $40 million of new debt at an interest rate of 7 percent.

4.35 EBIT = 40/(1 - 0.36) + 15 = $77.5 Interest = 15 + 0.07(40) = $17.8 Times interest earned = 77.5/17.8 = 4.35 times

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2016?

9.97%

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Assume that no new equity will be issued in 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for shareholders' equity in cell G19?

=F19 + (1 - B4)*C16

Changes in the net working capital requirements: A. can affect the cash flows of a project every year of the project's life. B. only affect the initial cash flows of a project. C. only affect the cash flow at time zero and the final year of a project. D. are generally excluded from project analysis due to their irrelevance to the total project. E. reflect only the changes in the current asset accounts.

A

If you excel in analyzing the future outlook of firms, you would prefer the financial markets be ____ form efficient so that you can have an advantage in the marketplace. A. weak B. semiweak C. semistrong D. strong E. perfect

A

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return? A. risk premium B. geometric return C. arithmetic D. standard deviation E. variance

A

Standard deviation measures which type of risk? A. total B. nondiversifiable C. unsystematic D. systematic E. economic

A

The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock: A. is underpriced. B. is correctly priced. C. will plot below the security market line. D. will plot on the security market line. E. will plot to the right of the overall market on a security market line graph.

A

The return earned in an average year over a multi-year period is called the _____ average return. A. arithmetic B. standard C. variant D. geometric E. real

A

The top-down approach to computing the operating cash flow: A. ignores noncash expenses. B. applies only if a project increases sales. C. applies only to cost cutting projects. D. is equal to sales - costs - taxes + depreciation. E. is used solely to compute a bid price.

A

Unsystematic risk: A. can be effectively eliminated by portfolio diversification. B. is compensated for by the risk premium. C. is measured by beta. D. is measured by standard deviation. E. is related to the overall economy.

A

Which of the following characteristics relate to the cash break-even point for a given project? I. The project never pays back. II. The IRR equals the required rate of return. III. The NPV is negative and equal to the initial cash outlay. IV. The operating cash flow is equal to the depreciation expense. A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

A

Which of the following statements concerning risk are correct? I. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid. A. I and III only B. II and IV only C. I and II only D. III and IV only E. I, II, and III only

A

Which one of the following characteristics best describes a project that has a low degree of operating leverage? A. high variable costs relative to the fixed costs B. relatively high initial cash outlay C. an OCF that is highly sensitive to the sales quantity D. high level of forecasting risk E. a high depreciation expense

A

Which one of the following correctly describes the dividend yield? A. next year's annual dividend divided by today's stock price B. this year's annual dividend divided by today's stock price C. this year's annual dividend divided by next year's expected stock price D. next year's annual dividend divided by this year's annual dividend E. the increase in next year's dividend over this year's dividend divided by this year's dividend

A

Which one of the following is an example of systematic risk? A. investors panic causing security prices around the globe to fall precipitously B. a flood washes away a firm's warehouse C. a city imposes an additional one percent sales tax on all products D. a toymaker has to recall its top-selling toy E. corn prices increase due to increased demand for alternative fuels

A

Which one of the following is least apt to reduce the unsystematic risk of a portfolio? A. reducing the number of stocks held in the portfolio B. adding bonds to a stock portfolio C. adding international securities into a portfolio of U.S. stocks D. adding U.S. Treasury bills to a risky portfolio E. adding technology stocks to a portfolio of industrial stocks

A

Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk? A. capital asset pricing model B. time value of money equation C. unsystematic risk equation D. market performance equation E. expected risk formula

A

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset? A. beta B. reward-to-risk ratio C. risk ratio D. standard deviation E. price-earnings ratio

A

Which one of the following statements is correct? A. The greater the volatility of returns, the greater the risk premium. B. The lower the volatility of returns, the greater the risk premium. C. The lower the average return, the greater the risk premium. D. The risk premium is unrelated to the average rate of return. E. The risk premium is not affected by the volatility of returns.

A

Which of the following statements concerning a firm's cash flows and profits is false?

A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

To estimate Missed Places Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year?

A. $169,000

Which one of the following is represented by the slope of the security market line? A. reward-to-risk ratio B. market standard deviation C. beta coefficient D. risk-free interest rate E. market risk premium

E

Which one of the following statements is correct concerning the cash balance of a firm?

A cumulative cash deficit on a cash budget indicates the need to acquire additional funds.

In March, with the spot price of wheat at $5.75 per bushel, Hollywood Bakery longs 100 July wheat futures contracts (5,000 bushels each) on the CBOE at a futures price of $5.90 per bushel. In June, Hollywood Bakery closes out its futures contracts when the futures price is $5.80 per bushel. What is Hollywood Bakery's gain (or loss) on the futures contracts?

A loss of $50,000

Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings? A. $14,700 B. $17,500 C. $18,300 D. $20,600 E. $21,000 F. None of the above.

A. $14,700 Change in retained earnings = $437,500 × 0.048 × (1 - 0.30) = $14,700

Unsystematic risk: A. can be effectively eliminated by portfolio diversification. B. is compensated for by the risk premium. C. is measured by beta. D. is measured by standard deviation. E. is related to the overall economy. F. None of the above.

A. can be effectively eliminated by portfolio diversification.

To estimate Missed Places Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year? A. $169,000 B. $170,400 C. $181,400 D. $506,300 E. $518,700 F. None of the above.

A. $169,000 158,000 + 23,400 - 12,400 = $169,000

To estimate Missed Places Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year? A. $169,000 B. $170,400 C. $181,400 D. $506,300 E. $518,700 F. None of the above.

A. $169,000 158,000 + 23,400 - 12,400 = $169,000

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. Immediately prior to the Ginormous Oil bid, the shares of Slick Co. traded at $33 per share. What value did Ginormous Oil place on the control of Slick Co.? A. $2.21 billion B. $2.71 billion C. $4.17 billion D. $6.38 billion E. None of the above.

A. $2.21 billion Ginormous paid $60 per share for a firm that minority shareholders valued at $33 per share, so they placed a value of 60 - 33 = $27 per share on control of Slick. $27 × 82 million = $2.21 billion

You are estimating your company's external financing needs for the next year. At the end of the year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year? A. $20 million B. $70 million C. $150 million D. $160 million E. $180 million F. None of the above.

A. $20 million

You are estimating your company's external financing needs for the next year. At the end of the year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year? A. $20 million B. $70 million C. $150 million D. $160 million E. $180 million F. None of the above.

A. $20 million

What is the difference in the value of a $5,000 annual perpetuity and an annuity of $5,000 for 100 years? Assume that the discount rate is 8% and that cash flows are received at the end of the year. A. $28 B. $656 C. $1,656 D. $5,000

A. $28 The present value of the perpetuity is 5,000/0.08 = $62,500. For the annuity: The difference = 62,500 - 62,472 = $28

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share? A. $3.50 B. $5 C. $10 D. $25 E. $50 F. None of the above.

A. $3.50

Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600. What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash? A. $400 B. $600 C. $1,800 D. $2,200 E. $2,600 F. None of the above.

A. $400 The NPV of the merger is the market value of the target firm, plus the value of the enhancements, minus the acquisition costs: NPV = 1,100 ($26) + $2,600 - 1,100($28) = $400

Please refer to the pro forma financial statements for Royal Corporation above. If Royal Corporation plans to issue $100 in new equity in 2014, what should be the projection for shareholders' equity for 2014? A. $5,349 B. $5,436 C. $5,451 D. $5,536

A. $5,349

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance? A. $560,000 B. $1,400,000 C. $8,000,000 D. $20,000,000

A. $560,000

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt, but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance? A. $560,000 B. $1,400,000 C. $8,000,000 D. $20,000,000

A. $560,000 Interest tax shield = interest rate × amount of debt × tax rate = 0.07 × 20,000,000 × 0.40= $560,000

Given the spreadsheet below, what value would Excel return if you entered the following formula? =NPV(B2,B5:D5)

A. $577.57 lowest

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, what will be the book value of equity if all else remains the same? A. $750,000 B. $1,250,000 C. $1,000,000 D. $1,400,000 E. $4,000,000 F. None of the above.

A. $750,000

EAC Nutrition offers a 9.5 percent coupon bond with annual payments, maturing 11 years from today. Your required return is 11.2 percent. What price are you willing to pay for this bond if the face (or par) value is $1,000?

A. $895.43

EAC Nutrition offers a 9.5 percent coupon bond with annual payments, maturing 11 years from today. Your required return is 11.2 percent. What price are you willing to pay for this bond if the face (or par) value is $1,000? A. $895.43 B. $896.67 C. $941.20 D. $946.18 E. $953.30 F. None of the above.

A. $895.43 Price = present value of coupons and face value Coupon payment = 0.095 × 1000 = $95 per year

Please refer to the information for FM Foods above. Estimate the appropriate weight of debt to be used when calculating FM's weighted-average cost of capital. A. 11.5% B. 19.3% C. 80.7% D. 88.5% E. 100.0% F. None of the above.

A. 11.5% Market value of equity = $40 × 240 million = $9,600 million. Weight of debt = 1,250/(9,600 + 1,250) = 0.1152 or 11.5%.

Honest Abe's is a chain of furniture retail stores. Integral Designs is a furniture maker and a supplier to Honest Abe's. Honest Abe's has a beta of 1.38 as compared to Integral Designs' beta of 1.12. Both firms carry no debt, i.e., are 100% equity-financed. The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent. What discount rate should Honest Abe's use if it considers a project that involves the manufacturing of furniture? A. 12.46% B. 12.92% C. 13.50% D. 14.08% E. 14.54% F. None of the above.

A. 12.46% KE = gov't borrowing rate + equity beta × market risk premium = 0.035 + 1.12(0.08) = 0.1246 or 12.46%

Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3.00 per share. It also has $2 million in face value of debt that trades at 90% of par. What is the appropriate debt ratio (D/(D+E)) to use for calculating Company X's weighted-average cost of capital? A. 23.1% B. 25.0% C. 31.0% D. 33.3%

A. 23.1% D = 0.9 × $2 million = $1.8 million E = $3 × 2 million = $6 million D/(D+E) = 1.8/(1.8 + 6) = 0.231

When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)? A. ABC's cash flows from operations are less volatile than XYZ's. B. ABC is a computer software firm, and XYZ is an electric utility. C. ABC operates in a more competitive industry than XYZ. D. ABC's assets have lower resale values than XYZ's assets.

A. ABC's cash flows from operations are less volatile than XYZ's.

Which of the following would increase a company's need for external finance, all else equal? A. An increase in the dividend payout ratio B. A decrease in sales growth C. An increase in profit margin D. A decrease in the collection period

A. An increase in the dividend payout ratio

Which of the following is NOT a major category on the cash flow statement? A. Cash flows from selling activities B. Cash flows from operating activities C. Cash flows from financing activities D. Cash flows from investing activities

A. Cash flows from selling activities

Which of the following is most likely to increase the final number for notes payable in the pro forma balance sheet? A. Decrease in accounts payable. B. Decrease in accounts receivable. C. Decrease in inventory. D. Decrease in inventory.

A. Decrease in accounts payable

Which item is a noncash item that would be added to net income to convert it to cash flow from operating activities? A. Depreciation. B. Inventory. C. Accounts receivable. D. Accounts payable.

A. Depreciation.

Which of the following is NOT a typical reason for differences between profits and cash flow? A. Goodwill B. Depreciation expense C. Changes in accounts receivable D. Accrual accounting practices

A. Goodwill

Which of the following statements are correct? I. Going-concern value of a firm is equal to the present value of expected future cash flows to owners and creditors. II. When an acquiring firm purchases a target firm's equity, the acquirer need not assume the target's liabilities. III. The market value of a public company reflects the worth of the business to minority investors. IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value. A. I and III only B. II and IV only C. II and III only D. I, II, and III only E. II, III, and IV only F. None of the above.

A. I and III only

Which of the following statements concerning risk are correct? I. Systematic risk is measured by beta. II. The risk premium increases as unsystematic risk increases. III. Systematic risk is the only part of total risk that should affect asset prices and returns. IV. Diversifiable risks are market risks you cannot avoid. A. I and III only B. II and IV only C. I and II only D. III and IV only E. I, II, and III only F. None of the above.

A. I and III only

Which of the following should be included in the cash flow projections for a new product? I. Money already spent for research and development of the new product II. Capital expenditures for equipment to produce the new product III. Increase in working capital needed to finance sales of the new product IV. Interest expense on the loan used to finance the new product launch A. II and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

A. II and III only

Which of the following accounts could be categorized as either a current or noncurrent liability depending on date the debt is due? A. Notes payable and deferred taxes. B. Accounts payable and current portion of long-term debt. C. Deferred taxes and mortgages due in 30 years. D. Long-term warranties and accounts payable.

A. Notes payable and deferred taxes.

Which of the following items could be found on a statement of shareholders' equity? A. Reasons for retained earnings increases or decreases. B. A reconciliation of beginning to ending cash. C. The market value of the firm's common stock. D. Assets = Liabilities + Stockholders' Equity.

A. Reasons for retained earnings increases or decreases.

Which one of the following is an example of systematic risk? A. The Federal Reserve unexpectedly announces an increase in target interest rates. B. A flood washes away a firm's warehouse. C. A city imposes an additional one percent sales tax on all products. D. A toymaker has to recall its top-selling toy. E. Corn prices increase due to increased demand for alternative fuels. F. None of the above.

A. The Federal Reserve unexpectedly announces an increase in target interest rates.

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

A. asset turnover and control

Which one of the following will increase the sustainable rate of growth a corporation can achieve? A. decrease in the dividend payout ratio B. decrease in sales given a positive profit margin C. reduction in the retention ratio D. None of the options are correct. E. avoidance of external equity financing F. increase in corporate tax rates

A. decrease in the dividend payout ratio

The pre-tax cost of debt: A. is based on the current yield to maturity of the firm's outstanding bonds. B. is equal to the coupon rate on the latest bonds issued by a firm. C. is equivalent to the average current yield on all of a firm's outstanding bonds. D. is based on the original yield to maturity on the latest bonds issued by a firm. E. has to be estimated as it cannot be directly observed in the market. F. None of the above.

A. is based on the current yield to maturity of the firm's outstanding bonds

Depreciation expense: A. reduces both taxes and net income. B. increases net fixed assets as shown on the balance sheet. C. is a noncash item that increases net income. D. decreases current assets, net income, and operating cash flows.

A. reduces both taxes and net income.

When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)?

ABC's cash flows from operations are less volatile than XYZ's.

You are preparing pro forma financial statements for 2014 using the percent-of-sales method. Sales were $100,000 in 2013 and are projected to be $120,000 in 2014. Net income was $5,000 in 2013 and is projected to be $6,000 in 2014. Equity was $45,000 at year-end 2012 and $50,000 at year-end 2013. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2014?

All of net income was added to equity in 2013, so all of net income will be added to equity in 2014. $50,000 + $6,000 = $56,000.

When conducting a discounted cash flow analysis of a project, it is important to always include a careful estimate of financing costs in the project's cash flows.

False

You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e., the company projected a financing surplus). Which of the following options, all else equal, would NOT correct the projected imbalance?

An increase in the retention ratio

Please refer to the selected financial information for Boss Stores above. What is the difference between Boss's sustainable growth rate and its actual growth rate for 2014? A. - 11.40% B. - 7.09% C. - 3.04% D. 5.47% E. 13.98% F. 21.40%

C. - 3.04%

3. Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? A. portfolio return B. portfolio weight C. degree of risk D. price-earnings ratio E. index value

B

A company that utilizes the MACRS system of depreciation: A. will have equal depreciation costs each year of an asset's life. B. will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life. C. can depreciate the cost of land, if it so desires. D. will expense less than the entire cost of an asset. E. cannot expense any of the cost of a new asset during the first year of the asset's life.

B

Efficient financial markets fluctuate continuously because: A. the markets are continually reacting to old information as that information is absorbed. B. the markets are continually reacting to new information. C. arbitrage trading is limited. D. current trading systems require human intervention. E. investments produce varying levels of net present values.

B

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio? A. 5 B. 10 C. 25 D. 50 E. 75

B

Individuals who continually monitor the financial markets seeking mispriced securities: A. earn excess profits over the long-term. B. make the markets increasingly more efficient. C. are never able to find a security that is temporarily mispriced. D. are overwhelmingly successful in earning abnormal profits. E. are always quite successful using only historical price information as their basis of evaluation.

B

Operating leverage is the degree of dependence a firm places on its: A. variable costs. B. fixed costs. C. sales. D. operating cash flows. E. net working capital.

B

Standard deviation is a measure of which one of the following? A. average rate of return B. volatility C. probability D. risk premium E. real returns

B

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments? A. index B. portfolio C. collection D. grouping E. risk-free

B

Ted is analyzing a project using simulation. His focus is limited to the short-term. To ease the simulation process, he is combining expenses into various categories. Which one of the following should he include in the fixed cost category? A. production department payroll taxes B. equipment insurance C. sales tax D. raw materials E. product shipping costs

B

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk. A. efficient markets hypothesis B. systematic risk principle C. open markets theorem D. law of one price E. principle of diversification

B

The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2010. A. 3 B. 5 C. 7 D. 9 E. 11

B

The bottom-up approach to computing the operating cash flow applies only when: A. both the depreciation expense and the interest expense are equal to zero. B. the interest expense is equal to zero. C. the project is a cost-cutting project. D. no fixed assets are required for a project. E. both taxes and the interest expense are equal to zero.

B

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? A. depreciation tax shield B. tax due on the salvage value of that asset C. current year's operating cash flow D. change in net working capital E. MACRS depreciation for the current year

B

Which one of the following statements is correct concerning bid prices? A. The bid price is the maximum price that a firm should bid. B. A firm can submit a bid that is higher than the computed bid price and still break even. C. A bid price ignores taxes. D. A bid price should be computed based solely on the operating cash flows of the project. E. A bid price should be computed based on a zero percent required rate of return.

B

Which one of the following statements is correct concerning unsystematic risk? A. An investor is rewarded for assuming unsystematic risk. B. Eliminating unsystematic risk is the responsibility of the individual investor. C. Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. D. Beta measures the level of unsystematic risk inherent in an individual security. E. Standard deviation is a measure of unsystematic risk.

B

Which one of the following statements is correct? A. Project analysis should only include the cash flows that affect the income statement. B. A project can create a positive operating cash flow without affecting sales. C. The depreciation tax shield creates a cash outflow for a project. D. Interest expense should always be included as a cash outflow when analyzing a project. E. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.

B

Which one of the following statements related to capital gains is correct? A. The capital gains yield includes only realized capital gains. B. An increase in an unrealized capital gain will increase the capital gains yield. C. The capital gains yield must be either positive or equal to zero. D. The capital gains yield is expressed as a percentage of the sales price. E. The capital gains yield represents the total return earned by an investor.

B

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? A. hiring temporary workers from an employment agency rather than hiring part-time production employees B. subcontracting portions of the project rather than purchasing new equipment to do all the work in-house C. leasing equipment on a long-term basis rather than buying equipment D. lowering the projected selling price per unit E. changing the proposed labor-intensive production method to a more capital intensive method

B

Please refer to Oscar's financial statements above. All of Oscar's costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year? A. $949 B. $1,034 C. $1,113 D. $1,730 E. $2,670

B. $1,034

Please refer to Oscar's financial statements above. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the projected addition to retained earnings for next year? A. $1,309.19 B. $1,421.40 C. $1,884.90 D. $2,667.78 E. $3,001.40 F. None of the above.

B. $1,421.40

Please refer to Oscar's financial statements above. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the projected addition to retained earnings for next year? A. $1,309.19 B. $1,421.40 C. $1,884.90 D. $2,667.78 E. $3,001.40 F. None of the above.

B. $1,421.40

If projected net cash flow for November is ($10,000); beginning cash balance is $4,000; minimum cash balance is $3,000; beginning loan balance is $8,000, what will be the cumulative loan balance at the end of November? A. $5,000 B. $17,000 C. $22,000 D. $14,000

B. $17,000

A project will produce after-tax operating cash inflows of $3,200 a year for 5 years. The after-tax salvage value of the project is expected to be $2,500 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent? A. -$311.02 B. $2,168.02 C. $4,650.11 D. $9,188.98 E. $21,168.02 F. None of the above.

B. $2,168.02 Solve for the PV of the cash inflows, and then subtract the initial investment: NPV = 11668.02 - 9,500 = $2,168.02

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Assume BSL is worth the book value of its assets at the end of 2015. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. What is the maximum acquisition price (in $ millions) Macklemore should pay to acquire BSL's equity? A. $1,702.80 B. $2,227.80 C. $2,342.94 D. $2,383.94 E. $2,603.80 F. $4,297.80 G. None of the above.

B. $2,227.80

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Assume that in the years after 2015 the company's free cash flow grows 4 percent per year in perpetuity. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. What is the maximum acquisition price (in $ millions) Macklemore should pay to acquire BSL's equity at the end of 2010? A. $1,976.49 B. $2,501.49 C. $2,877.49 D. $4,195.49 E. $4,571.49 F. None of the above.

B. $2,501.49

Suppose an acquiring firm pays $100 million for a target firm and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account? A. $0 million B. $20 million C. $30 million D. $70 million E. $80 million F. None of the above.

B. $20 million

Suppose an acquiring firm pays $100 million for a target firm, and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account? A. $0 million B. $20 million C. $30 million D. $70 million E. $80 million F. None of the options are correct.

B. $20 million

In the above financial statements, Royal Corporation has prepared (incomplete) pro forma financial statements for 2014, based on actual financial statements for 2013. Royal Corp. used the percent-of-sales method assuming a sales growth rate of 10% for 2014. If capital expenditures are planned to be $1,615 in 2014, then what would be the appropriate projection for net fixed assets in 2014? A. $4,453 B. $4,563 C. $4,663 D. $5,663

B. $4,563

When conducting a discounted cash flow analysis of a project, it is important to always include a careful estimate of financing costs in the project's cash flows.

False

In the above financial statements, Royal Corporation has prepared (incomplete) pro forma financial statements for 2014, based on actual financial statements for 2013. Royal Corp. used the percent-of-sales method assuming a sales growth rate of 10% for 2014. If capital expenditures are planned to be $1,615 in 2014, then what would be the appropriate projection for net fixed assets in 2014? A. $4,453 B. $4,563 C. $4,663 D. $5,663

B. $4,563

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Estimate BSL's value (in $ millions) at the end of 2010 assuming that in the years after 2015 the company's free cash flow grows 4 percent per year in perpetuity. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. A. $4,297.25 B. $4,571.49 C. $4,686.78 D. $6,181.49 E. $5,351.19 F. $7,423.16 G. None of the above.

B. $4,571.49

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Assume that at year-end 2015 the company's equity is worth 15 times earnings after tax and its debt is worth book value. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. What is the maximum acquisition price (in $ millions) Macklemore should pay to acquire BSL's equity at the end of 2010? A. $3,484.68 B. $4,723.81 C. $4,938.06 D. $5,554.68 E. $6,343.81 F. None of the above.

B. $4,723.81

You are to receive an annuity of $1,000 per year for 10 years. You will receive the first payment two years from today. At a discount rate of 10%, what is the present value of this annuity? A. $5,078.15 B. $5,585.97 C. $6,144.57 D. $6,759.03

B. $5,585.97 The PV = $6,144.57. But the first payment is received in two years, not one year, so discount the PV by one more year: 6,144.57/1.1 = $5,585.97

You are preparing pro forma financial statements for 2014 using the percent-of-sales method. Sales were $100,000 in 2013 and are projected to be $120,000 in 2014. Net income was $5,000 in 2013 and is projected to be $6,000 in 2014. Equity was $45,000 at year-end 2012 and $50,000 at year-end 2013. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2014? A. $55,000 B. $56,000 C. $60,000 D. Insufficient information is provided to project equity in 2014.

B. $56,000 All of net income was added to equity in 2013, so all of net income will be added to equity in 2014. $50,000 + $6,000 = $56,000.

You are preparing pro forma financial statements for 2014 using the percent-of-sales method. Sales were $100,000 in 2013 and are projected to be $120,000 in 2014. Net income was $5,000 in 2013 and is projected to be $6,000 in 2014. Equity was $45,000 at year-end 2012 and $50,000 at year-end 2013. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2014? A. $55,000 B. $56,000 C. $60,000 D. Insufficient information is provided to project equity in 2014.

B. $56,000 All of net income was added to equity in 2013, so all of net income will be added to equity in 2014. $50,000 + $6,000 = $56,000.

In a discounted cash flow analysis of Giant Corp.'s project described in the problem above, what would be the projected Year 1 free cash flow? A. $300 B. $600 C. $750 D. $900

B. $600

In a discounted cash flow analysis of Giant Corp.'s project described in the problem above, what would be the projected Year 1 free cash flow? A. $300 B. $600 C. $750 D. $900

B. $600

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Estimate the present value of BSL's free cash flow (in $ millions) for the years 2011 to 2015. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. A. -$1.29 B. $628.79 C. $720.58 D. $726.68 E. $743.94 F. None of the above.

B. $628.79

ZZZ Corporation's income statement shows a provision for income taxes of $65 million in 2014. At the end of 2013, ZZZ's balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million. At the end of 2014 their balance sheet shows income taxes payable of $15 million and deferred taxes of $17 million. What were ZZZ's taxes paid in 2014? A. $61 million B. $63 million C. $65 million D. $67 million E. $69 million

B. $63 million

Tutter Corporation is being valued using discounted cash flow methodology with terminal value calculated as a growing perpetuity. Not including the terminal value, the present value of projected free cash flows for years 1 through 5 is $200 million (total). In year 5, projections show free cash flow of $60 million. What is the estimated fair market value of Tutter Corporation? Assume a WACC of 10% and a growth rate of 2%. A. $666 million B. $675 million C. $950 million D. $965 million

B. $675 million FMV = PV{FCF, 1-5} + PV{Terminal value}. Terminal value = FCF(1 + g)/(KW - g) = $61.2/0.08 = $765 million. PV of Terminal value = $765 million/1.115 = $475 million. FMV = 200 million + 475 million = $675 million.

Please refer to Oscar's financial statements above. Assume a constant profit margin and dividend payout ratio, and further assume all of Oscar's assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is Oscar's external financing need for next year? A. -$410 B. -$260 C. $235 D. $1,320 E. $7,240 F. None of the above.

B. -$260

Please refer to Oscar's financial statements above. Assume a constant profit margin and dividend payout ratio, and further assume all of Oscar's assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is Oscar's external financing need for next year? A. -$410 B. -$260 C. $235 D. $1,320 E. $7,240 F. None of the above.

B. -$260

Gujarat Corporation doubled its shareholders' equity during the year 2014. Gujarat did not issue any new equity, repurchase any equity, or pay out any dividends during the year. What is Gujarat's sustainable growth rate for 2014? A. 50% B. 100% C. 150% D. 200%

B. 100% If equity doubled, then g* = change in equity/equitybop = 100%. For example, if equitybop was 25, the change in equity must also be 25 in order to double equity.

Gujarat Corporation doubled its shareholders' equity during the year 2014. Gujarat did not issue any new equity, repurchase any equity, or pay out any dividends during the year. What is Gujarat's sustainable growth rate for 2014? A. 50% B. 100% C. 150% D. 200%

B. 100% If equity doubled, then g* = change in equity/equitybop = 100%. For example, if equitybop was 25, the change in equity must also be 25 in order to double equity.

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Which of the following formulas would correctly give the forecast for sales in cell C8? A. =B8*B2 B. =B8 + B8*B2 C. =(1 + B8)*B2 D. =(1/B2)*B8 E. None of the above.

B. =B8 + B8*B2

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Which of the following formulas would correctly give the forecast for sales in cell C8? A. =B8*B2 B. =B8 + B8*B2 C. =(1 + B8)*B2 D. =(1/B2)*B8 E. None of the above.

B. =B8 + B8*B2

Which of the following statements concerning a firm's cash flows and profits is false? A. Managers must be at least as concerned with cash flows as with profits. B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production. C. The cash flows generated in a given time period can differ from the profits reported. D. Profits are no assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

Which of the following is NOT a likely financing policy for a rapidly growing business? A. Adopt a modest dividend payout policy that enables the company to finance most of its growth externally. B. Borrow funds rather than limit growth, thereby limiting growth only as a last resort. C. Maintain a conservative leverage ratio to ensure continuous access to financial markets. D. If external financing is necessary, use debt to the point it does not affect financial flexibility. E. None of the above.

B. Borrow funds rather than limit growth, thereby limiting growth only as a last resort.

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet? A. Equity rises $250,000; net plant and equipment falls $250,000. B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000. C. Cash rises $250,000; accounts receivable falls $100,000; goodwill rises $150,000. D. Cash rises $250,000; net plant and equipment falls $250,000.

B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.

Which of the following is NOT an important step in the financial evaluation of an investment opportunity? A. Calculate a figure of merit for the investment. B. Estimate the accounting rate of return for the investment. C. Estimate the relevant cash flows. D. Compare the figure of merit to an acceptance criterion. E. All of the above are important steps.

B. Estimate the accounting rate of return for the investment.

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling II. Distress costs III. Management incentives IV. Financial flexibility A. I and II only B. I and III only C. II and IV only D. I, II, and III only E. I, II, and IV only F. None of the above.

B. I and III only

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling II. Distress costs III. Tax benefits IV. Financial flexibility A. I and II only B. I and III only C. II and IV only D. I, II, and III only E. I, II, and IV only F. None of the above.

B. I and III only

Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR is the discount rate at which an investment's NPV equals zero. II. An investment should be undertaken if the discount rate exceeds the IRR. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. The IRR is the best tool available for deciding between mutually exclusive investments. A. I and II only B. I and III only C. II and III only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

B. I and III only

Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR is the discount rate at which an investment's NPV equals zero. II. An investment should be undertaken if the discount rate exceeds the IRR. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. The IRR is the best tool available for deciding between mutually exclusive investments.

B. I and III only

The after-tax cost of debt generally increases when: I. a firm's bond rating improves. II. the market-required rate of interest for the company's bonds increases. III. tax rates decrease. IV. bond prices rise. A. I and III only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

B. II and III only

The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations? I. Firms that have a 100-percent retention ratio II. Firms that pay an unchanging dividend III. Firms that pay a constantly increasing dividend IV. Firms that pay an erratically growing dividend A. None of the options are correct. B. II and III only C. I and II only D. I and IV only E. I, III, and IV only F. I, II, and III only

B. II and III only

Please refer to the selected financial information for Boss Stores above. What is the difference between Boss's sustainable growth rate and its actual growth rate for 2014? A. - 11.40% B. - 7.09% C. - 3.04% D. 5.47% E. 13.98% F. 21.40%

C. - 3.04%

Which of the following statements is/are correct? I. Going-concern value of a firm is equal to the present value of expected net income. II. When a buyer values a target firm, the appropriate discount rate is the buyer's weighted-average cost of capital. III. The liquidation value estimate of terminal value usually vastly understates a healthy company's terminal value. IV. The value of a firm's equity equals the discounted cash flow value of the firm minus all liabilities. A. II only B. III only C. I and II only D. II and III only E. II, III, and IV only F. None of the above.

B. III only

Which of the following statements is FALSE with regard to quality of financial reporting? A. Financial statements should reflect an accurate picture of a company's financial condition and performance. B. It is unlikely that management can manipulate the bottom line due to the regulations in place to enforce GAAP. C. Financial information should be useful both to assess the past and predict the future. D. The closer that the picture presented through the financial data is to reality, the higher the quality of financial reporting.

B. It is unlikely that management can manipulate the bottom line due to the regulations in place to enforce GAAP.

Which of the following statements regarding junk bonds is true? A. Junk bonds typically offer lower yields to maturity than investment-grade bonds. B. Junk bonds have higher priority in bankruptcy than preferred stock. C. Junk bonds offer no coupon payments to investors. D. Junk bonds are typically defined as bonds with default probabilities of 25% or higher

B. Junk bonds have higher priority in bankruptcy than preferred stock.

Which of the following items would be classified as an investing activity on the statement of cash flows: A. Payment to lenders. B. Sale of property. C. Sale of goods. D. Proceeds from borrowing.

B. Sale of property.

What does a low asset turnover compared to the industry imply? A. The investment in assets is too low. B. The investment in assets may be too high. C. Sales are higher than average. D. Net income is low relative to the investment in assets.

B. The investment in assets may be too high.

Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future? A. Inflation reduces the purchasing power of future dollars. B. The value of a dollar in the future will be compounded more than the value of a dollar today. C. There is more uncertainty of receiving dollars further into the future. D. A dollar today can be productively invested in the time before receiving a dollar in the future.

B. The value of a dollar in the future will be compounded more than the value of a dollar today.

Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future? A. Inflation reduces the purchasing power of future dollars. B. The value of a dollar in the future will be compounded more than the value of a dollar today. C. There is more uncertainty of receiving dollars further into the future. D. A dollar today can be productively invested in the time before receiving a dollar in the future.

B. The value of a dollar in the future will be compounded more than the value of a dollar today.

Which one of the following correctly defines the retention ratio? A. one plus the dividend payout ratio B. additions to retained earnings divided by net income C. additions to retained earnings divided by dividends paid D. net income minus additions to retained earnings E. net income minus cash dividends F. None of the above.

B. additions to retained earnings divided by net income

Which one of the following correctly defines the retention ratio? A. one plus the dividend payout ratio B. additions to retained earnings divided by net income C. additions to retained earnings divided by dividends paid D. net income minus additions to retained earnings E. net income minus cash dividends F. None of the above.

B. additions to retained earnings divided by net income

Pro forma financial statements are A. often required by prospective creditors. B. all of these. C. often required by prospective creditors. D. the most comprehensive means of financial forecasting.

B. all of these

The capital structure weights used in computing the weighted-average cost of capital: A. are based on the book values of total debt and total equity. B. are based on the market value of the firm's debt and equity securities. C. are computed using the book value of the long-term debt and the book value of equity. D. remain constant over time unless the firm issues new securities. E. are restricted to the firm's debt and common stock. F. None of the above.

B. are based on the market value of the firm's debt and equity securities.

The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value.

B. based on historical cost.

In the construction of the cash payments schedule, the major cash payment is generally A. interest and dividends. B. costs associated with inventory manufactured. C. the general and administrative expense. D. payments for new plant and equipment.

B. costs associated with inventory manufactured.

Which one of the following is a use of cash? A. increase in notes payable B. increase in inventory C. increase in long-term debt D. decrease in accounts receivable E. increase in common stock

B. increase in inventory

Homemade leverage is:

the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.

A firm utilizing LIFO inventory accounting would, in calculating gross profits, assume that A. all sales were from current production. B. sales were from current production until current production was depleted, and then use sales from beginning inventory. C. all sales were for cash. D. all sales were from beginning inventory.

B. sales were from current production until current production was depleted, and then use sales from beginning inventory.

The retention ratio is: A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future growth. C. equal to one minus the asset turnover ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales. F. None of the above.

B. the percentage of net income available to the firm to fund future growth.

The retention ratio is: A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future growth. C. equal to one minus the asset turnover ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales. F. None of the above.

B. the percentage of net income available to the firm to fund future growth.

The basic lesson of the M&M theory is that the value of a firm is dependent upon: A. the firm's capital structure. B. the total cash flow of the firm. C. minimizing the marketed claims. D. the amount of marketed claims to that firm. E. the size of the stockholders' claims. F. None of the above.

B. the total cash flow of the firm.

According to the pecking order theory of capital structure, why do firms avoid issuing equity?

Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

Which of the following securities has a purely fixed claim against a firm's cash flows?

Bonds

A stock with an actual return that lies above the security market line has: A. more systematic risk than the overall market. B. more risk than that warranted by CAPM. C. a higher return than expected for the level of risk assumed. D. less systematic risk than the overall market. E. a return equivalent to the level of risk assumed.

C

According to theory, studying historical stock price movements to identify mispriced stocks: A. is effective as long as the market is only semistrong form efficient. B. is effective provided the market is only weak form efficient. C. is ineffective even when the market is only weak form efficient. D. becomes ineffective as soon as the market gains semistrong form efficiency. E. is ineffective only in strong form efficient markets.

C

As the degree of sensitivity of a project to a single variable rises, the: A. less important the variable to the final outcome of the project. B. less volatile the project's net present value to that variable. C. greater the importance of accurately predicting the value of that variable. D. greater the sensitivity of the project to the other variable inputs. E. less volatile the project's outcome.

C

At the accounting break-even point, the: A. payback period must equal the required payback period. B. NPV is zero. C. IRR is zero. D. contribution margin per unit equals the fixed costs per unit. E. contribution margin per unit is zero.

C

Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: A. was unaffected by the announcement. B. increased proportionately with the dividend decrease. C. decreased proportionately with the dividend decrease. D. decreased by $0.14 per share. E. increased by $0.14 per share.

C

Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision? A. internal rate of return B. operating cash flow C. equivalent annual cost D. depreciation tax shield E. bottom-up operating cash flow

C

Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary A. I and II only B. III and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

C

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct? A. As a project, the new machine has a net present value equal to minus one times the machine's purchase price. B. The new machine will have a zero rate of return. C. The new machine will generate positive operating cash flows, at least in the first few years of its life. D. The new machine will create a cash outflow when the firm disposes of it at the end of its life. E. The new machine creates erosion effects.

C

Forecasting risk is defined as the possibility that: A. some proposed projects will be rejected. B. some proposed projects will be temporarily delayed. C. incorrect decisions will be made due to erroneous cash flow projections. D. some projects will be mutually exclusive. E. tax rates could change over the life of a project.

C

Given the following, which feature identifies the most desirable level of output for a project? A. operating cash flow equal to the depreciation expense B. payback period equal to the project's life C. discounted payback period equal to the project's life D. zero IRR E. zero operating cash flow

C

If the variability of the returns on large-company stocks were to increase over the long-term, you would expect which of the following to occur as a result? I. decrease in the average rate of return II. increase in the risk premium III. increase in the 68 percent probability range of the frequency distribution of returns IV. decrease in the standard deviation A. I only B. IV only C. II and III only D. I and III only E. II and IV only

C

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? A. storing supplies in the same space currently used for materials storage B. utilizing the basket manager to oversee wreath production C. hiring additional employees to handle the increased workload should the firm accept the wreath project D. researching the market to determine if wreath sales might be profitable before deciding to proceed E. planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt

C

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? A. determining how fixed costs affect NPV B. estimating the residual value of fixed assets C. identifying the potential range of reasonable outcomes D. determining the minimal level of sales required to break-even on an accounting basis E. determining the minimal level of sales required to break-even on a financial basis

C

Which one of the following statements is correct based on the historical record for the period 1926-2010? A. The standard deviation of returns for small-company stocks was double that of large-company stocks. B. U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free. C. Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds. D. Inflation was less volatile than the returns on U.S. Treasury bills. E. Long-term government bonds underperformed intermediate-term government bonds.

C

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly? A. variance B. standard deviation C. reward-to-risk ratio D. beta E. risk premium

C

Which one of the following would make a project unacceptable? A. cash inflow for net working capital at time zero B. requiring fixed assets that would have no salvage value C. an equivalent annual cost that exceeds that of an alternative project D. lack of revenue generation E. a depreciation tax shield that exceeds the value of the interest expense

C

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient. A. weak B. semiweak C. semistrong D. strong E. perfect

C

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? A. arithmetic return B. historical return C. expected return D. geometric return E. required return

C

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share? A. $3.50 B. $5 C. $10 D. $25 E. $50 F. None of the above.

C. $10

Please refer to Oscar's financial statements above. Assume a constant debt-equity ratio, net profit margin and dividend payout ratio, and further assume all of Oscar's expenses, assets and current liabilities vary directly with sales. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent? A. $10,857.50 B. $10,931.38 C. $11,663.75 D. $15,587.50 E. $18,987.50 F. None of the above.

C. $11,663.75

Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated present value of the enhancements from the merger have to be? A. $0 B. $75 million C. $150 million D. $710 million E. $860 million F. None of the above.

C. $150 million Minimum economic value in PV terms = $860 million - $710 million = $150 million

Your grandmother invested a lump sum 26 years ago at 4.25-percent interest. Today, she gave you the proceeds of that investment which totaled $51,480.79. How much did she originally invest? A. $15,929.47 B. $16,500.00 C. $17,444.86 D. $17,500.00 E. $17,999.45 F. None of the options are correct.

C. $17,444.86

Your grandmother invested a lump sum 26 years ago at 4.25 percent interest. Today, she gave you the proceeds of that investment which totaled $51,480.79. How much did she originally invest? A. $15,929.47 B. $16,500.00 C. $17,444.86 D. $17,500.00 E. $17,999.45 F. None of the above.

C. $17,444.86 Present value = $51,480.79/(1 + 0.0425)26 = $17,444.86

On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya's sales for April were $430 and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya's accounts receivable period is 30 days. What is the firm's beginning cash balance on June 1? A. $145 B. $155 C. $205 D. $215 E. $265

C. $205 Cash balance = $175 - $110 - $290 + $430 = $205

On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya's sales for April were $430 and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya's accounts receivable period is 30 days. What is the firm's beginning cash balance on June 1? A. $145 B. $155 C. $205 D. $215 E. $265

C. $205 Cash balance = $175 - $110 - $290 + $430 = $205

What is an appropriate estimate of Havasham's terminal value as of the end of 2017 using a warranted multiple of free cash flow as your estimate? A. $155 million B. $2,898.5 million C. $3,007.0 million D. $4,365.0 million E. $7,042.2 million F. None of the options are correct.

C. $3,007.0 million

What is an appropriate estimate of Havasham's terminal value as of the end of 2014, using a warranted multiple of free cash flow as your estimate? A. $155 million B. $2,898.5 million C. $3,007.0 million D. $4,365.0 million E. $7,042.2 million F. None of the above.

C. $3,007.0 million Terminal value2014 = 19.4 × $155 million = $3,007.0 million

What is an appropriate estimate of Havasham's terminal value as of the end of 2017 using a warranted price-to-earnings multiple as your estimate? A. $225 million B. $3,833.0 million C. $4,207.5 million D. $4,365.0 million E. $6,788.1 million F. None of the options are correct.

C. $4,207.5 million

What is an appropriate estimate of Havasham's terminal value as of the end of 2014, using a warranted price-to-earnings multiple as your estimate? A. $225 million B. $3,833.0 million C. $4,207.5 million D. $4,365.0 million E. $6,788.1 million F. None of the above.

C. $4,207.5 million Terminal value2014 = 18.7 × $225 million = $4,207.5 million.

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Estimate BSL's value (in $ millions) at the end of 2010 assuming it is worth the book value of its assets at the end of 2015. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. A. $628.24 B. $3,669.01 C. $4,297.80 D. $4,412.94 E. $4,984.28 F. $6,951.24 G. None of the above.

C. $4,297.80

Giant Corp. is considering a project that requires a $1,500 initial cost for a new machine that will be depreciated straight line to a salvage value of 0 on a 5-year schedule. The project will require a one-time increase in the level of net working capital of $300. The project will generate an additional $1,600 in revenues and $700 in operating expenses each year. The project will end at the end of year 2, at which time the machinery is expected to be sold for $800. Giant's tax rate is 50%. In a discounted cash flow analysis of this project, what would be the projected Year 0 free cash flow? A. -$1,200 B. -$1,500 C. -$1,800 D. -$2,100

C. -$1,800

Use BSL's actual financial data for 2010 and its projections for 2011 as shown above. What is BSL's projected free cash flow (in $ millions) for 2011? A. -$938 B. -$792 C. -$7 D. $122 E. $1,091 F. None of the above.

C. -$7

Please refer to the selected financial information for Boss Stores above. What is the retention ratio for 2013? A. 0.32 B. 0.68 C. 0.97 D. 1.00 E. None of the above.

C. 0.97

Please refer to the selected financial information for Boss Stores above. What is the retention ratio for 2013? A. 0.32 B. 0.68 C. 0.97 D. 1.00 E. None of the above.

C. 0.97

What is the benefit-cost ratio for an investment with the following cash flows at a 14.5 percent required return? YEAR CASH FLOW 0 $(46,500) 1 $12,200 2 $38,400 3 $11,300 A. 0.94 B. 0.98 C. 1.02 D. 1.06 E. 1.11 F. None of the above.

C. 1.02 PVinflows = (12,200/1.145) + (38,400/1.1452) + (11,300/1.1453) = $47,472.78 BCR = $47,472.78/$46,500 = 1.02

Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is 1.6 and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is Komatsu's sustainable rate of growth? A. 1.91% B. 6.12% C. 10.83% D. 11.26% E. 12.74% F. None of the above.

C. 10.83% Sustainable growth = PRAT = 0.045 × (1 - 0.15) × 1.6 × 1.77 = 10.83%

Florida Corp. is calculating the appropriate rate for discounting cash flows on a project valued using the APV method. Florida's target debt ratio (D/(D+E)) in market value terms is 50%, and the yield-to-maturity on its outstanding debt is 6%. A comparable firm has an equity beta of 1.4 and a debt ratio (D/(D+E)) of 40%. Assume a risk-free rate of 5% and a market risk premium of 8%. Florida's tax rate is 40%. What discount rate should Florida use? A. 7.66% B. 11.02% C. 11.72% D. 18.44%

C. 11.72% βA = (E/V)βE = (0.6)1.4 = 0.84 KE = 5% + 0.84(8%) = 11.72%

JKL Corporation, a company devoted primarily to paper products, is estimating the cost of equity appropriate for a vegetable processing plant it is planning to build. JKL Corp. has an equity beta of 1.0 and a debt ratio (D/(D+E)) of 0.3. A comparable (vegetable processing) firm has an equity beta of 0.8 and a debt ratio of 0.2. Assume a risk-free rate of 5% and a market risk premium of 8%. What cost of equity should JKL use in this situation? A. 7.7% B. 11.4% C. 12.3% D. 13.0%

C. 12.3% Unlever the comparable firm's beta: βA = (E/V)βE = (0.8)0.8 = 0.64 Then relever at JKL's debt ratio: βE = βA/(E/V) = 0.64/(0.7) = 0.91 Cost of Equity: KE = 5% + 0.91(8%) = 12.3%

Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish's earnings per share if Squamish sells 2 million new shares at $20 a share. A. 1.28 B. 1.39 C. 2.00 D. 2.22 E. 4.00 F. None of the above.

C. 2.00

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's earnings per share next year assuming Squamish raises $40 million of new debt at an interest rate of 7 percent. A. 1.28 B. 2.00 C. 2.12 D. 2.22 E. .06

C. 2.12

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's earnings per share next year assuming Squamish raises $40 million of new debt at an interest rate of 7 percent. A. 1.28 B. 2.00 C. 2.12 D. 2.22 E. 3.06 F. None of the above.

C. 2.12

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's earnings per share next year assuming Squamish raises $40 million of new debt at an interest rate of 7 percent.

C. 2.12 EBIT = 40/(1 - 0.36) + 15 = $77.5 Interest = $15 + 0.07(40) = $17.8 EPS = (77.5 - 17.8)(1 - 0.36)/18 = $2.12

You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per year forever. What annual rate of return will you realize? A. 0.48% B. 2.40% C. 4.80% D. 5.10% E. 20.83% F. None of the above.

C. 4.80% r = A/P = $2.40/$50 = 4.80%

You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per year forever. What annual rate of return will you realize?

C. 4.80% r = A/P = $2.40/$50 = 4.80%

The Limited collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect: A. 60 percent of February sales. B. 15 percent of April sales. C. 60 percent of March sales. D. 15 percent of March sales. E. 25 percent of February sales.

C. 60 percent of March sales

The Limited collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect: A. 60 percent of February sales. B. 15 percent of April sales. C. 60 percent of March sales. D. 15 percent of March sales. E. 25 percent of February sales.

C. 60 percent of March sales.

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2013? A. - 17.6% B. - 7.9% C. 9.97% D. 10.27% E. 12.23% F. 21.40%

C. 9.97%

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2013? A. - 17.6% B. - 7.9% C. 9.97% D. 10.27% E. 12.23% F. 21.40%

C. 9.97%

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Assume that no new equity will be issued in 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for shareholders' equity in cell G19? A. =F19*B2 B. =F19*(1 + B2) C. =F19 + (1 - B4)*C16 D. =F19 + B4*C16 E. None of the above.

C. =F19 + (1 - B4)*C16

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Assume that no new equity will be issued in 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for shareholders' equity in cell G19? A. =F19*B2 B. =F19*(1 + B2) C. =F19 + (1 - B4)*C16 D. =F19 + B4*C16 E. None of the above.

C. =F19 + (1 - B4)*C16

How is the cash conversion cycle calculated? A. Average collection period + days inventory held + Days payable outstanding. B. Average collection period - days inventory held - Days payable outstanding. C. Average collection period + days inventory held - Days payable outstanding. D. Average collection period - days inventory held + Days payable outstanding.

C. Average collection period + days inventory held - Days payable outstanding.

Which of the following would NOT be considered a use of cash? A. Dividends paid B. A decrease in accounts payable C. Depreciation D. An increase in the cash and marketable securities account

C. Depreciation

Which of the following statements are correct concerning diversifiable, or unsystematic, risks? I. Diversifiable risks can be largely eliminated by investing in 50 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk. A. I and IV only B. I, II, III, and IV C. I, II, and III only D. I and III only E. II and IV only F. None of the options are correct.

C. I, II, and III only

Which of the following statements are true? I. Underwriters help private companies access public stock markets through IPOs. II. Shelf registrations and private placements are examples of seasoned security issues. III. Issue costs for debt are typically greater than issue costs for equity. IV. Bearer bonds make it easier for investors to avoid paying taxes on interest income. A. I and II only B. I and III only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV

C. I, II, and IV only

The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations? I. Firms that have a 100 percent retention ratio II. Firms that pay an unchanging dividend III. Firms that pay a constantly increasing dividend IV. Firms that pay an erratically growing dividend A. I and II only B. I and IV only C. II and III only D. I, II, and III only E. I, III, and IV only F. None of the above.

C. II and III only

When making a capital budgeting decision, which of the following is/are NOT relevant? I. The size of a cash flow. II. The risk of a cash flow. III. The accounting earnings from a cash flow. IV. The timing of a cash flow. A. I only B. II only C. III only D. II and III only E. III and IV only F. They are all relevant.

C. III only

Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts?

C. In today's dollars, Ian's money is worth more than Sunny's.

Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts? A. The present values of Ian and Sunny's monies are equal. B. In future dollars, Sunny's money is worth more than Ian's money. C. In today's dollars, Ian's money is worth more than Sunny's. D. Twenty years from now, the value of Ian's money will be equal to the value of Sunny's money. E. Sunny's money is worth more than Ian's money given the 7 percent discount rate. F. None of the above.

C. In today's dollars, Ian's money is worth more than Sunny's.

Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7-percent discount rate to these amounts? A. The present values of Ian and Sunny's monies are equal. B. In future dollars, Sunny's money is worth more than Ian's money. C. In today's dollars, Ian's money is worth more than Sunny's. D. Twenty years from now, the value of Ian's money will be equal to the value of Sunny's money. E. Sunny's money is worth more than Ian's money given the 7-percent discount rate. F. None of the options are correct.

C. In today's dollars, Ian's money is worth more than Sunny's.

Milano Corporation has experienced growth of 20% for each of the last 5 years. Over this 5-year period, Milano's return on equity has never exceeded 15%, its profit margin has held steady at 5%, and its total asset turnover has not changed. Over the 5-year period, Milano paid no dividends and issued no new equity. Based on this information, which of the following can you most likely infer about Milano's performance over the past 5 years? A. Milano's leverage has decreased. B. Milano's leverage has remained constant. C. Milano's leverage has increased. D. None of the above.

C. Milano's leverage has increased. Note first that g > g because g = 20% and g<15%.With g > g* one of PRAT must increase. P has held steady at 5%, R has remained at 100%, A has not changed. Thus T (leverage) must have increased.

Milano Corporation has experienced growth of 20% for each of the last 5 years. Over this 5-year period, Milano's return on equity has never exceeded 15%, its profit margin has held steady at 5%, and its total asset turnover has not changed. Over the 5-year period, Milano paid no dividends and issued no new equity. Based on this information, which of the following can you most likely infer about Milano's performance over the past 5 years? A. Milano's leverage has decreased. B. Milano's leverage has remained constant. C. Milano's leverage has increased. D. None of the above.

C. Milano's leverage has increased. Note first that g > g* because g = 20% and g*<15%. With g > g* one of PRAT must increase. P has held steady at 5%, R has remained at 100%, A has not changed. Thus T (leverage) must have increased.

Which of the following is NOT an implication of the pecking order theory of capital structure? A. On average, a firm's stock price drops when it announces an equity issue. B. Firms may want to maintain a reserve of cash or unused borrowing capacity. C. More-profitable firms (all else equal) should have higher debt ratios. D. Firms may fail to undertake positive-NPV projects if they would have to be financed with a new issue of equity.

C. More-profitable firms (all else equal) should have higher debt ratios.

Which of the following is NOT an implication of the pecking order theory of capital structure? A. On average, a firm's stock price drops when it announces an equity issue. B. Firms may want to maintain a reserve of cash or unused borrowing capacity. C. More-profitable firms (all else equal) should have higher debt ratios. D. Firms may fail to undertake positive-NPV projects if they would have to be financed with a new issue of equity.

C. More-profitable firms (all else equal) should have higher debt ratios.

Which of the following statements is correct if a firm's pro forma financial statements project net income of $12,000 and external financing required of $5,000? A. Total assets cannot grow by more than $10,000. B. Dividends cannot exceed $10,000. C. Retained earnings cannot grow by more than $12,000. D. Long-term debt cannot grow by more than $5,000.

C. Retained earnings cannot grow by more than $12,000.

Which of the following statements is correct if a firm's pro forma financial statements project net income of $12,000 and external financing required of $5,000? A. Total assets cannot grow by more than $10,000. B. Dividends cannot exceed $10,000. C. Retained earnings cannot grow by more than $12,000. D. Long-term debt cannot grow by more than $5,000.

C. Retained earnings cannot grow by more than $12,000.

Which equation represents an income statement? A. Assets = liabilities + stockholders' equity. B. Cash in - cash out = net income. C. Revenues - expenses = net income. D. Beginning retained earnings + revenues - expenses = ending retained earnings.

C. Revenues - expenses = net income

What is amortization? C. The process used to allocate the cost of natural resources. B. The process used to allocate the cost of tangible fixed assets. C. The process used to allocate the cost of capital leases, leasehold improvements and intangible assets. D. The process used to allocate the cost of oil, gas, minerals and standing timber.

C. The process used to allocate the cost of capital leases, leasehold improvements and intangible assets.

Which of the following is not a condition that must be met for an item to be recorded as revenue? A. Revenues must be earned. B. The amount of the revenue must be measurable. C. The revenue must be received in cash. D. The costs of generating the revenue can be determined.

C. The revenue must be received in cash.

The sustainable growth rate: A. assumes there is no external financing of any kind. B. assumes no additional long-term debt is available. C. assumes the debt-equity ratio is constant. D. assumes the debt-equity ratio is 1.0. E. assumes all income is retained by the firm. F. None of the above.

C. assumes the debt-equity ratio is constant.

A balance sheet reports the value of a firm's assets, liabilities, and equity A. over an annual period. B. over any period of time. C. at any point in time. D. at the end of the year.

C. at any point in time.

A balance sheet reports the value of a firm's assets, liabilities, and equity: A. over an annual period. B. over any period of time. C. at any point in time. D. at the end of the year.

C. at any point in time.

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets? A. income statement B. creditor's statement C. balance sheet D. cash flow statement E. sources and uses statement

C. balance sheet

The cost of equity for a firm: A. tends to remain static for firms with increasing levels of risk. B. increases as the unsystematic risk of the firm increases. C. can be estimated from the capital asset pricing model or the dividend growth model. D. equals the risk-free rate plus the market risk premium. E. equals the firm's pre-tax weighted-average cost of capital. F. None of the above.

C. can be estimated from the capital asset pricing model or the dividend growth model.

The sustainable growth rate: A. is the highest growth rate attainable for a firm that pays no dividends. B. is the highest growth rate attainable for a firm without issuing new stock. C. can never be greater than the return on equity. D. can be increased by decreasing leverage

C. can never be greater than the return on equity.

The sustainable growth rate: A. is the highest growth rate attainable for a firm that pays no dividends. B. is the highest growth rate attainable for a firm without issuing new stock. C. can never be greater than the return on equity. D. can be increased by decreasing leverage.

C. can never be greater than the return on equity.

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a: A. pro forma income statement. B. sales projection. C. cash budget. D. receivables analysis. E. credit analysis. F. None of the above.

C. cash budget.

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time? A. income statement B. balance sheet C. cash flow statement D. shareholders' equity statement E. market value statement

C. cash flow statement

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? A. net working capital policy B. capital structure policy C. dividend policy D. capital budgeting policy E. capacity utilization policy F. None of the above.

C. dividend policy

Homemade leverage is: A. the incurrence of debt by a corporation in order to pay dividends to shareholders. B. the exclusive use of debt to fund a corporate expansion project. C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage. D. best defined as an increase in a firm's debt-equity ratio. E. the term used to describe the capital structure of a levered firm. F. None of the above.

C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.

CHAPTER 4

CHAPTER 4

CHAPTER 5

CHAPTER 5

On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya's sales for April were $430 and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya's accounts receivable period is 30 days. What is the firm's beginning cash balance on June 1?

Cash balance = $175 - $110 - $290 + $430 = $205

The sources and uses of cash over a stated period of time are reflected in the...

Cash flow statement

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time?

Cash flow statement

Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings?

Change in retained earnings = $437,500 × 0.048 × (1 - 0.30) = $14,700 A. $14,700

Which of the following securities has a purely RESIDUAL claim against a firm's cash flows?

Common Stock

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1900-2010 period)?

Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills

The depreciation tax shield is best defined as the: A. amount of tax that is saved when an asset is purchased. B. tax that is avoided when an asset is sold as salvage. C. amount of tax that is due when an asset is sold. D. amount of tax that is saved because of the depreciation expense. E. amount by which the aftertax depreciation expense lowers net income.

D

The expected return on a portfolio: I. can never exceed the expected return of the best performing security in the portfolio. II. must be equal to or greater than the expected return of the worst performing security in the portfolio. III. is independent of the unsystematic risks of the individual securities held in the portfolio. IV. is independent of the allocation of the portfolio amongst individual securities. A. I and III only B. II and IV only C. I and II only D. I, II, and III only E. I, II, III, and IV

D

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent? A. portfolio B. nondiversifiable C. market D. unsystematic E. total

D

A project has a payback period that exactly equals the project's life. The project is operating at: A. its maximum capacity. B. the financial break-even point. C. the cash break-even point. D. the accounting break-even point. E. a zero level of output.

D

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis. A. forecasting B. combined C. complex D. simulation E. break-even

D

An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used. I. annual salary for the firm's president II. contribution margin per unit III. cost of equipment required by a project IV. variable cost per unit A. I and III only B. I and IV only C. II and III only D. I, III, and IV only E. I, II, and IV only

D

By definition, which one of the following must equal zero at the accounting break-even point? A. net present value B. internal rate of return C. contribution margin D. net income E. operating cash flow

D

Decreasing which one of the following will increase the acceptability of a project? A. sunk costs B. salvage value C. depreciation tax shield D. equivalent annual cost E. accounts payable requirement

D

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: A. method of analysis used to make the decision. B. initial cash outflow. C. ability to recoup any investment in net working capital. D. accuracy of the projected cash flows. E. length of the project.

D

Inside information has the least value when financial markets are: A. weak form efficient. B. semiweak form efficient. C. semistrong form efficient. D. strong form efficient. E. inefficient.

D

Net working capital: A. can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C. is rarely affected when a new product is introduced. D. can create either a cash inflow or a cash outflow at time zero of a project. E. is the only expenditure where at least a partial recovery can be made at the end of a project.

D

Simulation analysis is based on assigning a _____ and analyzing the results. A. narrow range of values to a single variable B. narrow range of values to multiple variables simultaneously C. wide range of values to a single variable D. wide range of values to multiple variables simultaneously E. single value to each of the variables

D

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $0.75 in dividends. Which one of the following statements is correct in relation to this investment? A. The dividend yield is expressed as a percentage of the selling price. B. The capital gain would have been less had Stacy not received the dividends. C. The total dollar return per share is $3. D. The capital gains yield is positive. E. The dividend yield is greater than the capital gains yield.

D

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient. A. weak B. semiweak C. semistrong D. strong E. perfect

D

The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly. A. real return B. actual return C. nominal return D. risk premium E. expected return

D

The average compound return earned per year over a multi-year period is called the _____ average return. A. arithmetic B. standard C. variant D. geometric E. real

D

Which of the following figures of merit might not use all possible cash flows in its calculations? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Benefit-cost ratio

D. I only

The expected return on a stock computed using economic probabilities is: A. guaranteed to equal the actual average return on the stock for the next five years. B. guaranteed to be the minimal rate of return on the stock over the next two years. C. guaranteed to equal the actual return for the immediate twelve month period. D. a mathematical expectation based on a weighted average and not an actual anticipated outcome. E. the actual return you should anticipate as long as the economic forecast remains constant.

D

The expected return on a stock given various states of the economy is equal to the: A. highest expected return given any economic state. B. arithmetic average of the returns for each economic state. C. summation of the individual expected rates of return. D. weighted average of the returns for each economic state. E. return for the economic state with the highest probability of occurrence.

D

The historical record for the period 1926-2010 supports which one of the following statements? A. A higher-risk security will provide a higher rate of return next year than will a lower-risk security. B. If you need a stated amount of money next year, your best investment option today for those funds would be long-term government bonds. C. Increased long-run potential returns are obtained by lowering risks. D. It is possible for small-company stocks to more than double in value in any one given year. E. Inflation was positive each year throughout the period of 1926-2010.

D

The market risk premium is computed by: A. adding the risk-free rate of return to the inflation rate. B. adding the risk-free rate of return to the market rate of return. C. subtracting the risk-free rate of return from the inflation rate. D. subtracting the risk-free rate of return from the market rate of return. E. multiplying the risk-free rate of return by a beta of 1.0.

D

The operating cash flow for a project should exclude which one of the following? A. taxes B. variable costs C. fixed costs D. interest expense E. depreciation tax shield

D

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following? A. salvage value B. wasted value C. sunk cost D. opportunity cost E. erosion

D

The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B. Stock A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that: A. stock A is riskier than stock B and both stocks are fairly priced. B. stock A is less risky than stock B and both stocks are fairly priced. C. either stock A is underpriced or stock B is overpriced or both. D. either stock A is overpriced or stock B is underpriced or both. E. both stock A and stock B are correctly priced since stock A is riskier than stock B.

D

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? A. sunk B. total C. variable D. incremental E. fixed

D

Total risk is measured by _____ and systematic risk is measured by _____. A. beta; alpha B. beta; standard deviation C. alpha; beta D. standard deviation; beta E. standard deviation; variance

D

Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million, respectively. For the firm as a whole, the management of Uptown Promotions has limited spending to $10 million for new projects next year. This is an example of: A. scenario analysis. B. sensitivity analysis. C. determining operating leverage. D. soft rationing. E. hard rationing.

D

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? A. 1.0 percent B. 2.5 percent C. 5.0 percent D. 16 percent E. 32 percent

D

What was the average rate of inflation over the period of 1926-2010? A. less than 2.0 percent B. between 2.0 and 2.5 percent C. between 2.5 and 3.0 percent D. between 3.0 and 3.5 percent E. greater than 3.5 percent

D

What was the highest annual rate of inflation during the period 1926-2010? A. between 0 and 3 percent B. between 3 and 5 percent C. between 5 and 10 percent D. between 10 and 15 percent E. between 15 and 20 percent

D

When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as: A. best case sensitivity analysis. B. worst case sensitivity analysis. C. best case scenario analysis. D. worst case scenario analysis. E. base case scenario analysis.

D

Which of the following are examples of diversifiable risk? I. earthquake damages an entire town II. federal government imposes a $100 fee on all business entities III. employment taxes increase nationally IV. toymakers are required to improve their safety standards A. I and III only B. II and IV only C. II and III only D. I and IV only E. I, III, and IV only

D

Which of the following are inversely related to variable costs per unit? I. contribution margin per unit II. number of units sold III. operating cash flow per unit IV. net profit per unit A. I and II only B. III and IV only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV

D

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? A. capital break-even B. cash break-even C. accounting break-even D. financial break-even E. internal break-even

D

Which one of the following statements best defines the efficient market hypothesis? A. Efficient markets limit competition. B. Security prices in efficient markets remain steady as new information becomes available. C. Mispriced securities are common in efficient markets. D. All securities in an efficient market are zero net present value investments. E. Profits are removed as a market incentive when markets become efficient.

D

Which one of the following statements concerning scenario analysis is correct? A. The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project. B. Scenario analysis defines the entire range of results that could be realized from a proposed investment project. C. Scenario analysis determines which variable has the greatest impact on a project's final outcome. D. Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions. E. Management is guaranteed a positive outcome for a project when the worst case scenario produces a positive NPV.

D

Which one of the following statements is correct concerning market efficiency? A. Real asset markets are more efficient than financial markets. B. If a market is efficient, arbitrage opportunities should be common. C. In an efficient market, some market participants will have an advantage over others. D. A firm will generally receive a fair price when it issues new shares of stock. E. New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.

D

Which one of the following was the least volatile over the period of 1926-2010? A. large-company stocks B. inflation C. long-term corporate bonds D. U.S. Treasury bills E. intermediate-term government bonds

D

Please refer to the pro forma financial statements for Royal Corporation above. Assume that net fixed assets are projected to be 5,000 for 2014 and that shareholders' equity is projected to be 5,500 for 2014. If long-term debt is the plug figure, what should be the projection for long-term debt for Royal Corporation in 2014? A. $2,206 B. $2,363 C. $2,455 D. $2,847

D. $2,847

Please refer to the pro forma financial statements for Royal Corporation above. Assume that net fixed assets are projected to be 5,000 for 2014 and that shareholders' equity is projected to be 5,500 for 2014. If long-term debt is the plug figure, what should be the projection for long-term debt for Royal Corporation in 2014? A. $2,206 B. $2,363 C. $2,455 D. $2,847

D. $2,847

STU Corporation has $3 million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5, and earnings per share of comparable firm 2 is $2. Comparable firm 1's stock is trading for $50, and comparable firm 2's stock is trading for $28. What is the estimated stock price of STU using the method of comparables? (Use average multiples of the comparable firms when doing the calculations.) A. $33.43 B. $36.00 C. $39.00 D. $40.00

D. $40.00 Comp. 1 P/E = 10, Comp. 2 P/E = 14, Avg. P/E = 12 STU = 12 × $3.00 (EPS) = $36.00

Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Estimate BSL's value (in $ millions) at the end of 2010 assuming that at year-end 2015 the company's equity is worth 15 times earnings after tax and its debt is worth book value. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSL's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. A. $628.24 B. $3,669.01 C. $7,429.74 D. $6,343.81 E. $6,755.83 F. $7,008.06 G. None of the above.

D. $6,343.81

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil? A. $1.46 billion B. $3.46 billion C. $4.92 billion D. $6.38 billion E. $8.38 billion F. None of the above.

D. $6.38 billion The value of the bid to Ginormous's shareholders is the value of the assets acquired in the merger. This would include the value of the equity acquired and the liabilities that accompany the equity. Therefore, the cost of the acquisition was ($60 × 82 million shares) + $1.46 billion = 6.38 billion.

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's times-burden-covered ratio for the next year assuming the firm raises $40 million of new debt at an interest rate of 7 percent and that annual sinking fund payments on the new debt will equal $8 million. A. 1.01 B. 1.08 C. 1.38 D. 1.49 E. 1.95 F. None of the above.

D. 1.49

A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent. Its asset turnover ratio is 0.85 and its assets-to-equity ratio (using beginning-of-period equity) is 1.80. What is its profit margin? A. 3.79% B. 5.69% C. 6.75% D. 10.13% E. 18.24%

D. 10.13% 0.062 = PRAT = profit margin × 0.40 × 0.85 × 1.80profit margin = 0.062/(0.40 × 0.85 × 1.80) = 10.13%

A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent. Its asset turnover ratio is 0.85 and its assets-to-equity ratio (using beginning-of-period equity) is 1.80. What is its profit margin? A. 3.79% B. 5.69% C. 6.75% D. 10.13% E. 18.24%

D. 10.13% 0.062 = PRAT = profit margin × 0.40 × 0.85 × 1.80 profit margin = 0.062/(0.40 × 0.85 × 1.80) = 10.13%

Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is 1.6, and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is Komatsu's sustainable rate of growth? A. 11.26% B. 6.12% C. 1.91% D. 10.83% E. 12.74% F. None of the options are correc

D. 10.83%

Please refer to the information for FM Foods above. Estimate FM's after-tax cost of equity capital. A. 4.50% B. 6.92% C. 7.93% D. 12.20% E. 17.48% F. None of the above.

D. 12.20% KE = gov't borrowing rate + equity beta × market risk premium = 0.044 + 1.2 × 0.065 = 0.122

Please refer to the selected financial information for Boss Stores above. What is the actual sales growth rate for 2013? A. - 17.6% B. - 7.9% C. 8.51% D. 21.4% E. None of the above.

D. 21.4%

Please refer to the financial information for Foodtek, Inc. above. During 2014, how much cash (in $ millions) did Foodtek collect from sales? A. 364 B. 277 C. 404 D. 324 E. 451 F. None of the above.

D. 324

Which one of the following indicates a portfolio is being effectively diversified? A. an increase in the portfolio beta B. a decrease in the portfolio beta C. an increase in the portfolio rate of return D. an increase in the portfolio standard deviation E. a decrease in the portfolio standard deviation

E

Which one of the following statements is false?

Financial instruments are greatly constrained by law and regulation.

Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7.5%. In addition to the underwriter's fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital? A. 4.3 million B. 4.5 million C. 4.6 million D. 4.9 million

D. 4.9 million

Hayesville Corporation had net income of $5 million this year on net sales of $125 million per year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held $75 million in total liabilities. It paid out $2 million in dividends for the year. What is Hayesville Corporation's sustainable growth rate? A. 3% B. 4% C. 5% D. 6%

D. 6% ROEbop × Retention ratio = (5/50) × 0.6 = 6%

Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times. B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C. Most firms attempt to maximize the cash balance at all times. D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds. E. The ending cash balance must equal the minimum desired cash balance

D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds.

Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times. B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C. Most firms attempt to maximize the cash balance at all times. D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds. E. The ending cash balance must equal the minimum desired cash balance.

D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds.

What is an unqualified audit report? A. A report stating that the auditors are not qualified to report on a firm. B. A report that states the financial statements are in violation of GAAP. C. A report that states that departures from GAAP exist in the firm's financial statements. D. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

D. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e., the company projected a financing surplus). Which of the following options, all else equal, would NOT correct the projected imbalance?

D. An increase in the retention ratio

You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e., the company projected a financing surplus). Which of the following options, all else equal, would NOT correct the projected imbalance? A. A stock repurchase B. A decrease in accounts payable C. An increase in cash and marketable securities D. An increase in the retention ratio

D. An increase in the retention ratio

According to the pecking order theory of capital structure, why do firms avoid issuing equity? A. Because fees associated with issuing new equity are so high B. Because they want to avoid dilution of earnings per share C. Because they don't want to commit to paying dividends on the new equity D. Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

D. Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

Which item may be of concern when analyzing cash flow from financing activities? A. Payments of dividends. B. Repayment of debt. C. Increasing inventories. D. Borrowing each year to repay debt from prior years.

D. Borrowing each year to repay debt from prior years.

Which of the following would increase cash from operating activities? A. Increasing accounts receivable. B. Decreasing accounts payable. C. Increasing inventories. D. Decreasing accounts receivable.

D. Decreasing accounts receivable.

Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal? A. Ellsbury starts paying off all outstanding invoices to suppliers twice a month instead of once a month. B. Ellsbury changes the credit terms it offers to customers, allowing them to pay in 45 days instead of 30 days. C. Ellsbury increases its cash/assets ratio from 12% to 15%. D. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products

D. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products

Which one of the following statements is true? A. Equity securities offer fixed claims on future cash payouts. B. Unlike bondholders, for their returns, shareholders rely entirely on price appreciation. C. In theory, common shareholders exercise very little control over company decisions. D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds. E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation

D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.

Which of the following statements are correct? I. Using the same risk-adjusted discount rate to discount all future cash flows adjusts for the fact that the more distant cash flows are often more risky than cash flows occurring sooner. II. If you can borrow all of the money you need for a project at 5%, the cost of capital for this project is 5%. III. The best way to obtain the cost of debt capital for a firm is to use the coupon rates on its bonds. IV. A firm's weighted-average cost of capital is NOT the correct discount rate to use for all projects undertaken by the firm. A. I and III only B. II and IV only C. I and II only D. I and IV only E. I, II, and III only F. None of the above

D. I and IV only

Which of the following figures of merit might not use all possible cash flows in its calculations? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Benefit-cost ratio A. III only B. I & III only C. II & III only D. I only E. III & IV only F. I, II, III, and IV

D. I only

Which of the following statements are correct concerning diversifiable, or unsystematic, risks? I. Diversifiable risks can be largely eliminated by investing in 50 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk. A. I and III only B. II and IV only C. I and IV only D. I, II, and III only E. I, II, III, and IV F. None of the above.

D. I, II, and III only

According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources such as retained profits and excess cash. II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms prefer to issue new equity rather than source external debt. IV. A firm's capital structure is dictated by its need for external financing. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

D. I, II, and IV only

Which of the following actions would help a firm's growth problem if its actual sales growth exceeds its sustainable rate of growth? I. Increase prices II. Decrease financial leverage III. Decrease dividends IV. Prune away less-profitable products

D. I, III, and IV only

Which of the following actions would help a firm's growth problem if its actual sales growth exceeds its sustainable rate of growth? I. Increase prices II. Decrease financial leverage III. Decrease dividends IV. Prune away less-profitable products A. I and II only B. I and III only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the above.

D. I, III, and IV only

Financial leverage: I. increases expected ROE but does not affect its variability. II. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved. III. is a fundamental financial variable affecting sustainable growth. IV. increases expected return and risk to owners. A. I and II only B. I and III only C. II and IV only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

D. II, III, and IV only

Which of the following is NOT a reason for why U.S. corporations haven't issued more equity in recent years? A. Managers try to avoid dilution of earnings per share. B. Equity is relatively expensive to issue. C. Companies in the aggregate had sufficient funds through profits and new debt. D. Managers usually believe that their stock is overvalued. E. Managers perceive the stock market to be an unreliable funding source.

D. Managers usually believe that their stock is overvalued.

A company purchases a new $10 million building, financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet? A. Net plant and equipment rises $10 million; cash falls $10 million; bank debt rises $5 million. B. Net plant and equipment rises $5 million; cash falls $10 million; bank debt rises $5 million. C. Net plant and equipment rises $5 million; cash falls $5 million; bank debt rises $5 million. D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

Unitron Corp. is considering project Z, which costs $50 million and offers an annual after-tax cash flow of $7.5 million in perpetuity. The project is in an industry that has greater market risk than Unitron's typical projects. Unitron's company weighted-average cost of capital, based on its typical projects, is 15%. Should Unitron Corp. accept project Z? A. Yes, because a zero-NPV project is marginally acceptable. B. Yes, because the NPV of the project is positive. C. No, because a zero-NPV project is a waste of resources. D. No, because the NPV of the project is negative.

D. No, because the NPV of the project is negative

Which of the following statements regarding preferred stock is true? A. Holders of preferred stock have the same voting rights as common stockholders. B. Preferred stock dividend payments are a deductible expense for corporate tax purposes C. Almost all public corporations are at least partly financed with preferred stock. D. None of the above.

D. None of the above.

Which of the following statements regarding interest tax shields is correct? A. Taxes are reduced by the amount of a firm's interest-bearing debt. B. Taxable income is reduced by the amount of a firm's interest-bearing debt. C. Taxes are reduced by the amount of the interest on a firm's debt. D. Taxable income is reduced by the amount of the interest on a firm's debt.

D. Taxable income is reduced by the amount of the interest on a firm's debt.

Which of the following statements concerning the cash flow-production cycle is true? A. The profits reported in a given time period equal the cash flows generated. B. A company's operations and finances are independent of each other. C. Financial statements have nothing to do with reality. D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle. E. A profitable company will always have sufficient cash to meet its obligations.

D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle.

Which of the following is a reason why a company's market value of equity differs from its book value of equity? A. Shareholders are keenly aware of book values, but have little interest in market values. B. Accountants' charges for the cost of equity are often higher than they should be. C. Fair value accounting is becoming more widely used. D. Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

D. Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

The sources and uses of cash over a stated period of time are reflected on the: A. income statement. B. balance sheet. C. shareholders' equity statement. D. cash flow statement. E. statement of operating position.

D. cash flow statement.

Which one of the following will increase the sustainable rate of growth a corporation can achieve? A. avoidance of external equity financing B. increase in corporate tax rates C. reduction in the retention ratio D. decrease in the dividend payout ratio E. decrease in sales given a positive profit margin F. None of the above.

D. decrease in the dividend payout ratio

The sustainable growth rate of a firm is best described as the: A. minimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing. F. None of the above.

D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.

The most common approach to developing pro forma financial statements is called the: A. cash budget method. B. financial planning method. C. seasonality approach. D. percent-of-sales method. E. market-oriented approach. F. None of the above.

D. percent-of-sales method.

A firm is considering an average-risk project with an IRR of 6%. The firm's cost of debt (KD) is 5%, its cost of equity (KE) is 12%, and its tax rate (t) is 20%. The target debt ratio (D/(D+E)) for the project, in market values, is 0.5. The firm should: A. accept the project only if it can be completely financed with equity B. accept the project only if it can be completely financed with debt C. accept the project regardless of the financing method D. reject the project regardless of the financing method

D. reject the project regardless of the financing method The project should be rejected because the IRR of 6% does not meet the hurdle of 8%.

In general, the capital structures used by non-financial U.S. firms: A. typically result in debt-to-asset ratios between 60 and 80 percent. B. tend to converge to the same proportions of debt and equity. C. tend to be those that maximize the use of the firm's available tax shelters. D. vary significantly across industries. E. None of the above.

D. vary significantly across industries

When the cost of raw materials is increasing, FIFO accounting A. All of these. B. yields higher cost of goods sold than LIFO. C. produces higher unit sales than using LIFO. D. yields higher ending inventory values than LIFO. E. None of these

D. yields higher ending inventory values than LIFO.

Which of the following statements is true?

Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

18. Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is Steve using? A. simulation testing B. sensitivity analysis C. break-even analysis D. rationing analysis E. scenario analysis

E

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market? A. riskless market B. evenly distributed market C. zero volatility market D. Blume's market E. efficient capital market

E

Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function? A. The steepness of the function relates to the project's degree of operating leverage. B. The steeper the function, the less sensitive the project is to changes in the sales quantity. C. The resulting function will be a hyperbole. D. The resulting function will include only positive values. E. The slope of the function measures the sensitivity of the net present value to a change in sales quantity.

E

Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as: A. financial rejection. B. project rejection. C. soft rationing. D. marginal rationing. E. capital rationing.

E

Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions. All requests represent positive net present value projects. All projects are independent. Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests. Management is following a practice known as: A. scenario analysis. B. sensitivity analysis. C. leveraging. D. hard rationing. E. soft rationing.

E

By definition, which one of the following must equal zero at the cash break-even point? A. net present value B. internal rate of return C. contribution margin D. net income E. operating cash flow

E

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? A. opportunity B. fixed C. incremental D. erosion E. sunk

E

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow? A. erosion effects B. taxes C. fixed expenses D. salaries E. depreciation expense

E

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing: A. financial deferral. B. financial allocation. C. capital allocation. D. marginal rationing. E. hard rationing.

E

Pro forma statements for a proposed project should: I. be compiled on a stand-alone basis. II. include all the incremental cash flows related to the project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals. A. I and II only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

E

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale? A. average variable cost B. average total cost C. average total revenue D. marginal revenue E. marginal cost

E

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following? A. yearly incremental costs B. sunk costs C. opportunity costs D. erosion cost E. equivalent annual cost

E

The base case values used in scenario analysis are the ones considered the most: A. optimistic. B. desired by management. C. pessimistic. D. conducive to creating a positive net present value. E. likely to occur.

E

The bid price is: A. an aftertax price. B. the aftertax contribution margin. C. the highest price you should charge if you want the project. D. the only price you can bid if the project is to be profitable. E. the minimum price you should charge if you want to earn a target return on investment.

E

The equivalent annual cost considers which of the following? I. required rate of return II. operating costs III. need for replacement IV. economic life A. I and II only B. II and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV

E

The equivalent annual cost method is useful in determining: A. which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. B. the tax shield benefits of depreciation given the purchase of new assets for a project. C. the operating cash flows of a cost-cutting project. D. which one of two investments to accept when the investments have different required rates of return. E. which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

E

The expected return on a portfolio considers which of the following factors? I. percentage of the portfolio invested in each individual security II. projected states of the economy III. the performance of each security given various economic states IV. probability of occurrence for each state of the economy A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

E

The net book value of equipment will: A. remain constant over the life of the equipment. B. vary in response to changes in the market value. C. decrease at a constant rate when MACRS depreciation is used. D. increase over the taxable life of an asset. E. decrease slower under straight-line depreciation than under MACRS.

E

The operating cash flow of a cost cutting project: A. is equal to the depreciation tax shield. B. is equal to zero because there is no incremental sales. C. can only be analyzed by projecting the sales and costs for a firm's entire operations. D. includes any changes that occur in the current accounts. E. can be positive even though there are no sales.

E

Which one of the following is an example of unsystematic risk? A. income taxes are increased across the board B. a national sales tax is adopted C. inflation decreases at the national level D. an increased feeling of prosperity is felt around the globe E. consumer spending on entertainment decreased nationally

E

The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms: 1. The prices will apply only to units purchased in excess of the quantity normally purchased by a customer. 2. The units purchased must be paid for in cash at the time of sale. 3. The total quantity sold under these terms cannot exceed the excess capacity of the firm. 4. The net profit of the firm should not be affected. 5. The prices will be in effect for one week only. Given these conditions, the special sale price should be set equal to the: A. average variable cost of materials only. B. average cost of all variable inputs. C. sensitivity value of the variable costs. D. marginal cost of materials only. E. marginal cost of all variable inputs.

E

The primary purpose of Blume's formula is to: A. compute an accurate historical rate of return. B. determine a stock's true current value. C. consider compounding when estimating a rate of return. D. determine the actual real rate of return. E. project future rates of return.

E

The principle of diversification tells us that: A. concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. B. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. C. spreading an investment across five diverse companies will not lower the total risk. D. spreading an investment across many diverse assets will eliminate all of the systematic risk. E. spreading an investment across many diverse assets will eliminate some of the total risk.

E

The standard deviation of a portfolio: A. is a measure of that portfolio's systematic risk. B. is a weighed average of the standard deviations of the individual securities held in that portfolio. C. measures the amount of diversifiable risk inherent in the portfolio. D. serves as the basis for computing the appropriate risk premium for that portfolio. E. can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

E

The standard deviation of a portfolio: A. is a weighted average of the standard deviations of the individual securities held in the portfolio. B. can never be less than the standard deviation of the most risky security in the portfolio. C. must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. D. is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. E. can be less than the standard deviation of the least risky security in the portfolio.

E

Theresa is analyzing a project that currently has a projected NPV of zero. Which of the following changes that she is considering will help that project produce a positive NPV instead? Consider each change independently. I. increase the quantity sold II. decrease the fixed leasing cost for equipment III. decrease the labor hours needed to produce one unit IV. increase the sales price A. I and II only B. I and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV

E

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the: A. average arithmetic return. B. expected return. C. market rate of return. D. internal rate of return. E. cost of capital.

E

Valerie just completed analyzing a project. Her analysis indicates that the project will have a 6-year life and require an initial cash outlay of $320,000. Annual sales are estimated at $589,000 and the tax rate is 34 percent. The net present value is a negative $320,000. Based on this analysis, the project is expected to operate at the: A. maximum possible level of production. B. minimum possible level of production. C. financial break-even point. D. accounting break-even point. E. cash break-even point.

E

When the operating cash flow of a project is equal to zero, the project is operating at the: A. maximum possible level of production. B. minimum possible level of production. C. financial break-even point. D. accounting break-even point. E. cash break-even point.

E

Which of the following correspond to a wide frequency distribution? I. relatively low risk II. relatively low rate of return III. relatively high standard deviation IV. relatively large risk premium A. II only B. III only C. I and II only D. II and III only E. III and IV only

E

Which of the following statements are identified with financial break-even point? I. The present value of the cash inflows exactly offsets the initial cash outflow. II. The payback period is equal to the life of the project. III. The NPV is zero. IV. The discounted payback period equals the life of the project. A. I and II only B. I and III only C. II and IV only D. I, II, and III only E. I, III, and IV only

E

Which of the following statements related to market efficiency tend to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for investors to earn abnormal returns. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely weak form efficient. A. I and III only B. II and IV only C. I and IV only D. I, III, and IV only E. I, II, and III only

E

Which one of the following best defines the variance of an investment's annual returns over a number of years? A. The average squared difference between the arithmetic and the geometric average annual returns. B. The squared summation of the differences between the actual returns and the average geometric return. C. The average difference between the annual returns and the average return for the period. D. The difference between the arithmetic average and the geometric average return for the period. E. The average squared difference between the actual returns and the arithmetic average return.

E

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010? A. long-term government bonds B. small company stocks C. large company stocks D. long-term corporate bonds E. U.S. Treasury bills

E

Which one of the following categories of securities has had the most volatile returns over the period 1926-2010? A. long-term corporate bonds B. large-company stocks C. intermediate-term government bonds D. U.S. Treasury bills E. small-company stocks

E

Which one of the following is defined as the sales level that corresponds to a zero NPV? A. accounting break-even B. leveraged break-even C. marginal break-even D. cash break-even E. financial break-even

E

Which one of the following statements concerning variable costs is correct? A. Variable costs minus fixed costs equal marginal costs. B. Variable costs are equal to fixed costs when production is equal to zero. C. An increase in variable costs increases the operating cash flow. D. Variable costs are inversely related to fixed costs. E. Variable costs per unit are inversely related to the contribution margin per unit.

E

Which one of the following statements correctly applies to the period 1926-2010? A. Large-company stocks earned a higher average risk premium than did small-company stocks. B. Intermediate-term government bonds had a higher average return than long-term corporate bonds. C. Large-company stocks had an average annual return of 14.7 percent. D. Inflation averaged 2.6 percent for the period. E. U.S. Treasury bills had a positive average real rate of return.

E

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights? A. Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. B. The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. C. Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. D. The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. E. Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

E

Which one of the following statements is correct? A. The unexpected return is always negative. B. The expected return minus the unexpected return is equal to the total return. C. Over time, the average return is equal to the unexpected return. D. The expected return includes the surprise portion of news announcements. E. Over time, the average unexpected return will be zero.

E

Which one of the following statements related to unexpected returns is correct? A. All announcements by a firm affect that firm's unexpected returns. B. Unexpected returns over time have a negative effect on the total return of a firm. C. Unexpected returns are relatively predictable in the short-term. D. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. E. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

E

Which one of the following will increase a bid price? A. a decrease in the fixed costs B. a reduction in the net working capital requirement C. a reduction in the firm's tax rate D. an increase in the salvage value E. an increase in the required rate of return

E

Which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released? I. insiders knew the information prior to the announcement II. investors need time to digest the information prior to reacting III. the information has no bearing on the value of the firm IV. the information was anticipated A. I and II only B. I and III only C. II and III only D. II and IV only E. III and IV only

E

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine which has the: A. longest life. B. highest annual operating cost. C. lowest annual operating cost. D. highest equivalent annual cost. E. lowest equivalent annual cost.

E

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the: A. contribution margin per unit and set that margin equal to the fixed costs per unit. B. contribution margin per unit. C. accounting break-even point. D. cash break-even point. E. financial break-even point.

E

Sol's Sporting Goods is expanding and, as a result, expects additional operating cash flows of $26,000 a year for 4 years. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an additional $3,000 of net working capital throughout the life of the project; Sol expects to recover this amount at the end of the project. What is the net present value of this expansion project at a 16-percent required rate of return? A. $18,477.29 B. $21,033.33 C. $28,288.70 D. $29,416.08 E. $32,409.57 F. None of the options are correct.

E. $32,409.57

Sol's Sporting Goods is expanding, and as a result expects additional operating cash flows of $26,000 a year for 4 years. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an additional $3,000 of net working capital throughout the life of the project; Sol expects to recover this amount at the end of the project. What is the net present value of this expansion project at a 16 percent required rate of return?

E. $32,409.57

Sol's Sporting Goods is expanding, and as a result expects additional operating cash flows of $26,000 a year for 4 years. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an additional $3,000 of net working capital throughout the life of the project; Sol expects to recover this amount at the end of the project. What is the net present value of this expansion project at a 16 percent required rate of return? A. $18,477.29 B. $21,033.33 C. $28,288.70 D. $29,416.08 E. $32,409.57 F. None of the above.

E. $32,409.57 The initial investment consists of the fixed assets and incremental working capital: $39,000 + $3000 = $42,000. The working capital amount is recovered at the end of year 4. Solve for the PV of the cash inflows, and then subtract the initial investment: NPV = 74,409.57 - 42,000 = $32,409.57

Your brother will borrow $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at an 8.6-percent annual interest rate, compounded monthly. What is the amount of each payment? A. $287.71 B. $296.67 C. $301.12 D. $342.76 E. $366.05 F. None of the options are correct.

E. $366.05

Your brother will borrow $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at an 8.6 percent annual interest rate, compounded monthly. What is the amount of each payment? A. $287.71 B. $296.67 C. $301.12 D. $342.76 E. $366.05 F. None of the above.

E. $366.05 The number of monthly periods = 5 × 12 = 60 The monthly interest rate = 8.6%/12 = 0.71667%

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August? A. $621 B. $628 C. $633 D. $639 E. $643

E. $643 August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August? A. $621 B. $628 C. $633 D. $639 E. $643

E. $643 August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643

Please refer to the financial information for Foodtek, Inc. above. Assuming the company neither sold nor salvaged any assets during the year, what were Foodtek's capital expenditures (in $ millions) during 2014? A. 415 B. 105 C. 310 D. 40 E. 170 F. None of the above.

E. 170

Which of the following statements is true? A. Rapid growth spurs increases in market share and profits and thus, is always a blessing. B. Firms that grow rapidly only very rarely encounter financial problems. C. The cash flows generated in a given time period are equal to the profits reported. D. Profits provide assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke". F. None of the above.

E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

Which of the following statements is true? A. Rapid growth spurs increases in market share and profits and thus, is always a blessing. B. Firms that grow rapidly only very rarely encounter financial problems. C. The cash flows generated in a given time period are equal to the profits reported. D. Profits provide assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke". F. None of the above.

E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below? A. October, November, and December B. November, December, and January C. December, January, and February D. January, February, and March E. February, March, and April

E. February, March, and April

Which of the following figures of merit does not directly take into consideration the time value of money? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Accounting rate of return A. IV only B. I & III only C. II & III only D. I & II only E. I & IV only F. I, II, III, and IV

E. I & IV only

The term "financial distress costs" includes which of the following? I. Direct bankruptcy costs II. Indirect bankruptcy costs III. Direct costs related to being financially distressed, but not bankrupt IV. Indirect costs related to being financially distressed, but not bankrupt A. I only B. III only C. I and II only D. III and IV only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

Which of the following can affect a firm's sustainable rate of growth? I. Asset turnover ratio II. Profit margin III. Dividend policy IV. Financial leverage A. III only B. I and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

Which of the following can affect a firm's sustainable rate of growth?I. Asset turnover ratio II. Profit margin III. Dividend policy IV. Financial leverage A. III only B. I and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process? I. Should the firm merge with a competitor? II. Should additional equity be sold? III. Should a particular division be sold? IV. Should a new product be introduced? A. I, II, and III only B. I, II, and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process? I. Should the firm merge with a competitor? II. Should additional equity be sold? III. Should a particular division be sold? IV. Should a new product be introduced? A. I, II, and III only B. I, II, and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

Which of these ratios are the determinants of a firm's sustainable growth rate? I. Assets-to-equity ratio II. Profit margin III. Retention ratio IV. Asset turnover ratio A. I and III only B. II and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

Which of the following actions would help a firm's growth problem if its actual sales growth exceeds its sustainable rate of growth? I. Increase prices II. Decrease financial leverage III. Decrease dividends IV. Prune away less-profitable products A. I, II, III, and IV B. I, II, and IV only C. I and II only D. I and III only E. I, III, and IV only F. None of the options are correct

E. I, III, and IV only

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis

E. I, III, and IV only

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis A. II and IV only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

E. I, III, and IV only

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis A. II and IV only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

E. I, III, and IV only

Please refer to the information for FM Foods above. FM is contemplating an average-risk investment costing $100 million and promising an annual after-tax cash flow of $15 million in perpetuity. Which of the following statements is/are correct? I. FM should reject the project because the IRR is greater than the firm's WACC. II. FM should accept the project because the IRR is greater than the firm's WACC. III. FM should accept the project because the NPV is greater than zero. IV. FM should reject the project because the NPV is less than zero. A. I only B. II only C. IV only D. I and IV only E. II and III only F. None of the above

E. II and III only The IRR of the investment is 15/100 = 15%. FM's WACC of 11.27% is shown in the calculations below. The NPV of the investment at the WACC = -100 + 15/0.1127 = $33.1 million.

Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test A. I, III, and IV only B. I and III only C. I, II, and III only D. III and IV only E. II and IV only

E. II and IV only

Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? I. Insiders knew the information prior to the announcement II. Investors need time to digest the information prior to reacting III. The information has no bearing on the value of the firm IV. The information was anticipated A. I and II only B. I and III only C. II and III only D. II and IV only E. III and IV only F. None of the above.

E. III and IV only

A divisional manager submitted a project proposal to the chief financial officer, complete with a calculated NPV for the project. The chief financial officer studied the proposal and pointed out that the divisional manager had failed to account for a one-time increase in net working capital of $60,000 that will be required over the life of the seven-year project. Assuming the full value of net working capital will be recovered at the end of the project, how will the project's NPV change after making the chief financial officer's adjustment? Assume a discount rate of 9%.

E. None of the above.

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for cost of goods sold in cell C9? A. =B9*B3 B. =B9 + B9*B3 C. =B8*B3 D. =B9*B2 E. None of the above.

E. None of the above.

Which one of the following statements is true? A. Debt instruments offer residual claims to future cash payouts. B. Bonds with call provisions will have lower coupon rates than otherwise identical bonds. C. Bondholders enjoy a direct voice in company decisions. D. Bonds are low-risk investments that do well in inflationary periods. E. None of the above.

E. None of the above.

A divisional manager submitted a project proposal to the chief financial officer, complete with a calculated NPV for the project. The chief financial officer studied the proposal and pointed out that the divisional manager had failed to account for a one-time increase in net working capital of $60,000 that will be required over the life of the seven-year project. Assuming the full value of net working capital will be recovered at the end of the project, how will the project's NPV change after making the chief financial officer's adjustment? Assume a discount rate of 9%. A. The NPV will decrease by $16,411. B. The NPV will decrease by $32,822. C. The NPV will decrease by $60,000. D. The NPV will not be affected. E. None of the above.

E. None of the above. In Year 0 there is a $60,000 outflow. In Year 5 there is a $60,000 inflow, which has a present value of 60,000/1.097 = $32,822. The decrease in NPV is 60,000 - 32,822 = $27,178.

Which one of the following is an example of systematic risk? A. A flood washes away a firm's warehouse. B. Corn prices increase due to increased demand for alternative fuels. C. A city imposes an additional one-percent sales tax on all products. D. None of the options are correct. E. The Federal Reserve unexpectedly announces an increase in target interest rates. F. A toymaker has to recall its top-selling toy.

E. The Federal Reserve unexpectedly announces an increase in target interest rates.

Ptarmigan Travelers had sales of $420,000 in 2016 and $480,000 in 2017. The firm's current asset accounts remained constant. Given this information, which one of the following statements must be true? A. The days' sales in receivables increased. B. The total asset turnover rate increased. C. The fixed asset turnover decreased. D. The inventory turnover rate increased. E. The collection period decreased.

E. The collection period decreased.

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn a 6 percent annual rate on your money, compounded monthly. Which option should you take and why? A. You should accept the monthly payments because they are worth $209,414 to you. B. You should accept the $200,000 lump sum because the monthly payments are only worth $16,057 to you today. C. You should accept the monthly payments because they are worth $336,000 to you. D. You should accept the $200,000 lump sum because the monthly payments are only worth $189,311 to you today. E. You should accept the $200,000 lump sum because the monthly payments are only worth $195,413 to you today. F. None of the above.

E. You should accept the $200,000 lump sum because the monthly payments are only worth $195,413 to you today. The number of monthly periods = 20 × 12 = 240 The monthly interest rate = 6%/12 = 0.5%

Unsystematic risk A. None of the options are correct. B. is compensated for by the risk premium. C. is measured by beta. D. is measured by standard deviation. E. can be effectively eliminated by portfolio diversification. F. is related to the overall economy.

E. can be effectively eliminated by portfolio diversification

When investment returns are less than perfectly positively correlated, the resulting diversification effect means that: A. making an investment in two or three large stocks will eliminate all of the unsystematic risk. B. making an investment in three companies all within the same industry will greatly reduce the systematic risk. C. spreading an investment across five diverse companies will not lower the total risk. D. spreading an investment across many diverse assets will eliminate all of the systematic risk. E. spreading an investment across many diverse assets will eliminate some of the total risk. F. None of the above.

E. spreading an investment across many diverse assets will eliminate some of the total risk.

The discount rate assigned to an individual project should be based on A. the actual sources of funding used for the project. B. the current risk level of the overall firm. C. None of the options are correct. D. an average of the firm's overall cost of capital for the past five years. E. the risks associated with the use of the funds required by the project. F. the firm's weighted-average cost of capital.

E. the risks associated with the use of the funds required by the project.

The discount rate assigned to an individual project should be based on: A. the firm's weighted-average cost of capital. B. the actual sources of funding used for the project. C. an average of the firm's overall cost of capital for the past five years. D. the current risk level of the overall firm. E. the risks associated with the use of the funds required by the project. F. None of the above.

E. the risks associated with the use of the funds required by the project.

A times-interest-earned ratio of 3.5 indicates that the firm

Has EBIT equal to 3.5 times its interest expense.

Which of the following figures of merit does not directly take into consideration the time value of money? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Accounting rate of return

I & IV only

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling II. Distress costs III. Management incentives IV. Financial flexibility

I and III only

The term "financial distress costs" includes which of the following? I. Direct bankruptcy costs II. Indirect bankruptcy costs III. Direct costs related to being financially distressed, but not bankrupt IV. Indirect costs related to being financially distressed, but not bankrupt

I, II, III, and IV

Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process? I. Should the firm merge with a competitor? II. Should additional equity be sold? III. Should a particular division be sold? IV. Should a new product be introduced?

I, II, III, and IV

According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources such as retained profits and excess cash. II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms prefer to issue new equity rather than source external debt. IV. A firm's capital structure is dictated by its need for external financing.

I, II, and IV only

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover

I, II, and IV only

The interest tax shield has no value when a firm has: I. no taxable income. II. debt-equity ratio of 1. III. zero debt. IV. no leverage.

I, III, and IV only

Pro forma free cash flows for a proposed project should: I. exclude the cost of employing existing assets that could be sold anyway. II. exclude interest expense. III. include the depreciation tax shield related to the project. IV. exclude any required increase in operating current assets.

II and III only

Which of the following should be included in the cash flow projections for a new product? I. Money already spent for research and development of the new product II. Capital expenditures for equipment to produce the new product III. Increase in working capital needed to finance sales of the new product IV. Interest expense on the loan used to finance the new product launch

II and III only

Financial leverage: I. increases expected ROE but does not affect its variability. II. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved. III. is a fundamental financial variable affecting sustainable growth. IV. increases expected return and risk to owners.

II, III, and IV only

Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? I. Insiders knew the information prior to the announcement II. Investors need time to digest the information prior to reacting III. The information has no bearing on the value of the firm IV. The information was anticipated

III and IV only

When making a capital budgeting decision, which of the following is/are NOT relevant? I. The size of a cash flow. II. The risk of a cash flow. III. The accounting earnings from a cash flow. IV. The timing of a cash flow.

III only

Which of the following would allow a corporation to issue a bond at a lower coupon rate, all else equal?

None are correct

In some instances, additional debt financing can encourage managers to act more in the interests of owners.

True

Please refer to Oscar's financial statements above. Assume a constant debt-equity ratio, net profit margin and dividend payout ratio, and further assume all of Oscar's expenses, assets and current liabilities vary directly with sales. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent?

Pro forma net fixed assets = $10,850 × (1 + 0.075) = $11,663.75

Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is 1.6 and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is Komatsu's sustainable rate of growth?

Sustainable growth = PRAT = 0.045 × (1 - 0.15) × 1.6 × 1.77 = 10.83%

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2013?

Sustainable growth = g* = Change in Equity/Equitybop = (211.03 - 191.90)/191.90 = 9.97%

Debt financing results in lower after-tax earnings relative to equity financing.

TRUE

The evidence indicates that, on average, a company's stock price declines when it announces a new issue of equity.

TRUE

When evaluating investments under capital rationing that are independent and can be acquired fractionally, ranking by the BCR is the appropriate technique.

TRUE

Which of the following statements regarding interest tax shields is correct?

Taxable income is reduced by the amount of the interest on a firm's debt.

Which one of the following statements is correct?

The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio.

In venture capital valuation, the post-money valuation is equal to the pre-money valuation plus the amount of the venture capitalist's investment.

True

Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products.

The collection period decreased.

Ptarmigan Travelers had sales of $420,000 in 2010 and $480,000 in 2011. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?

The collection period decreased.

Investment-grade bonds are usually defined as bonds with ratings of BBB- or higher.

True

Issue costs of equity are high relative to those of debt.

True

When evaluating investments under capital rationing that are independent and can be acquired fractionally, ranking by the BCR is the appropriate technique.

True

Which of the following variables does NOT affect the value of a stock option?

The predicted future price of the underlying stock

Which of the following factors, when increased, will tend to cause the value of a put to decrease (all else equal)?

The price of the underlying stock

Please refer to the pro forma financial statements for Royal Corporation above. Assume that net fixed assets are projected to be 5,000 for 2014 and that shareholders' equity is projected to be 5,500 for 2014. If long-term debt is the plug figure, what should be the projection for long-term debt for Royal Corporation in 2014?

Total assets would be 1,046 + 6,233 + 4,660 + 5,000 = $16,939 Total liabilities and equity, without long-term debt, would be 431 + 8,161 + 5,500 = $14,092 Long-term debt must make up the difference = 16,939 - 14,092 = $2,847

Across companies, ROA and financial leverage tend to be inversely related.

True

After issue, the market price of a fixed-rate bond can differ substantially from its par value.

True

All else equal, a firm would prefer to have a higher gross margin.

True

All else equal, increasing the assumed collection period in a financial forecast will decrease external funding required.

True

All else equal, increasing the assumed payables period in a financial forecast will decrease external funding required.

True

An acquirer should be willing to pay a higher control premium for a poorly managed company than for a well-managed company.

True

An average-risk project that has an NPV of zero when its cash flows are discounted at the weighted-average cost of capital will provide sufficient returns to satisfy both stockholders and bondholders.

True

Bond investors should be more concerned with real returns than with nominal returns.

True

Cash budgets are less informative than pro forma financial statements.

True

Cash flow forecasts are less informative than pro forma financial statements.

True

Current liabilities are defined as liabilities with a maturity of less than one year.

True

Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding.

True

Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding.

True

If the maturity of a company's liabilities is less than that of its assets, the company incurs a refinancing risk.

True

In a strong-form efficient market, insider trading is not profitable.

True

Which of the following is a reason why a company's market value of equity differs from its book value of equity?

Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn a 6 percent annual rate on your money, compounded monthly. Which option should you take and why?

You should accept the $200,000 lump sum because the monthly payments are only worth $195,413 to you today.

Which one of the following will increase the sustainable rate of growth a corporation can achieve?

decrease in the dividend payout ratio

Which one of the following will increase the sustainable rate of growth a corporation can achieve?

decrease in the dividend payout ratio

If a company seeks to maximize firm value, it should never grow at a rate above its sustainable growth rate.

false

Scenario analysis involves changing one input to a financial forecast, whereas sensitivity analysis involves changing multiple inputs.

false

Share repurchases usually decrease earnings per share.

false

The M&M irrelevance proposition assures financial managers that their choice between equity or debt financing will ultimately have no impact on firm value.

false

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

income statement

Under the simplifying assumptions of Modigliani and Miller, an increase in a firm's financial leverage will:

increase the variability in earnings per share.

Individuals who continually monitor the financial markets seeking mispriced securities:

make the markets increasingly more efficient.

The best financing choice is the one that:

maximizes expected cash flows.

The sustainable growth rate of a firm is best described as the:

maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.

The sustainable growth rate of a firm is best described as the:

maximum growth rate achievable, excluding any external equity financing while maintaining a constant debt-equity ratio.

The most common approach to developing pro forma financial statements is called the:

percent-of-sales method.

The most common approach to developing pro forma financial statements is called the

percent-of-sales-method