FIN 420: Exam #1 Review

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, how long after a company firm files for bankruptcy protection do creditors have to wait before submitting their own reorganization plan to the court?

18 months

It is common for venture capitalists to receive at least ___ percent of a start-up company's equity in exchange for the venture capital.

40

Theresa is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that she is considering is most apt to cause that project to produce a positive NPV instead? Consider each change independently.

Decrease the labor hours per unit produced

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

Degree of operating leverage

may or may not have a pre-emptive right to newly issued shares

Existing shareholders

Which one of the following statements concerning venture capitalists is correct?

Exit strategy is a key consideration when selecting a venture capitalist

Which one of these actions generally occurs first in a bankruptcy reorganization?

Filing proofs of claim

Financial planning includes the: I. determination of asset requirements. II. development of contingency plans. III. establishment of priorities. IV. analysis of funding options.

I, II, III, and IV

Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output?

IRR and net income

Assume both the discount and tax rates are positive values. At the financial break-even point, the:

IRR equals the required return

The maximum rate of growth a corporation can achieve can be increased by:

Increasing the retention ratio

By definition, which one of the following must equal zero at the cash break-even point?

Operating cash flow

Franklin Minerals recently had a rights offering of 12,000 shares at an offer price of $17 a share. Isabelle is a shareholder who exercised her rights option by buying all of the rights to which she was entitled based on the number of shares she owns. Currently, there are six shareholders who have opted not to participate in the rights offering. Isabelle would like to purchase these unsubscribed shares. Which one of the following will allow her to do so?

Oversubscription privilege

Which one of the following is a direct cost of bankruptcy?

Paying an outside accountant to prepare bankruptcy reports

Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding?

Payment of employees' wages

degree to which the net present value reacts to changes in a single variable is determined by

Sensitivity analysis

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?

Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

Which one of the following is correct in relation to pro forma statements?

The addition to retained earnings is equal to net income less cash dividends

Which one of the following will be used in the computation of the best-case analysis of a proposed project?

The lowest variable cost per unit that can reasonably be expected

Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function?

The slope of the function measures the sensitivity of the net present value to a change in sales quantity

Which one of the following statements related to Chapter 7 bankruptcy is correct?

Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated

When selecting a venture capitalist, which one of the following characteristics is probably the least important?

Underwriting experience

Business Aid is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?

Venture capital

Which one of the following statements concerning venture capital financing is correct?

Venture capitalists should have key contacts and financial strength

Atlas Industries combines the investment proposals from each operational unit into one single project for planning purposes. This process is referred to as:

aggregation.

a legal proceeding

bankruptcy

A firm's external financing need is met by:

debt or equity

All else constant, a(n) ______ will increase the internal rate of growth.

decrease in total assets

Roy owns 200 shares of RTF Inc. He has opted not to participate in the current rights offering by this company. As a result, Roy will most likely be subject to:

dilution

The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs.

direct bankruptcy

When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance?

dividend policy

Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock?

ex-rights date

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:

facing hard rationing

Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points?

financial

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?

financial break-even

considers multiple options and scenarios.

financial planning

often contain alternative options based on economic developments

financial plans

Worthington Industries is currently operating at full-capacity sales. Thus, sales are currently being limited by the firm's:

fixed assets

As the degree of sensitivity of a project to a single variable rises, the:

greater is the importance of accurately predicting the value of that variable

As the degree of sensitivity of a project to a single variable rises, the:

greater is the importance of accurately predicting the value of that variable.

The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs.

indirect bankruptcy

Buster's Market earns a profit and has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its long-term debt at this time. Which one of the following defines the maximum rate at which this firm can currently grow?

internal growth rate

A company is technically insolvent when:

it is unable to meet its financial obligations

The change in variable costs that occurs when production is increased by one unit is referred to as the:

marginal cost

The change in revenue that occurs when one more unit of output is sold is referred to as:

marginal revenue

The value of a right depends upon the number of rights required for each new share as well as the:

market and subscription prices

The financial planning process tends to place the least emphasis on a firm's:

market value

The financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and income statement account values is referred to as the _______method.

percentage of sales

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:

permits key employee retention plans only if the affected employee(s) has another job offer

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

plowback ratio

Equity financing of new, non-public companies is broadly referred to as:

private equity.

Which one of the following are you most apt to estimate first as you begin the process of preparing pro forma statements?

projected sales

Which one of the following has the least effect on a firm's sustainable rate of growth?

quick ratio

Edwards Farm Products was unable to meet its financial obligations and was forced into using legal proceedings to restructure itself so that it could continue as a viable business. The process this company underwent is known as a:

reorganization

Financial plans generally tend to ignore

risks associated with cash flows

Which one of the following types of analysis is the most complex to conduct?

simulation

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:

soft rationing

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. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of:

soft rationing

A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a(n) _____ underwriting.

standby

BK & Co. offered 15,000 shares in a rights offer. T.L. Moore & Co. was the underwriter that by prior agreement purchased the 639 unsold shares. For its participation in this rights offer, T.L. Moore & Co. is most likely entitled to:

standby fee

To purchase a share in a rights offering, an existing shareholder generally just needs to:

submit the required number of rights along with the subscription price

A project that has a payback period exactly equal to the project's life is operating at:

the accounting break-even point

When constructing a pro forma statement, net working capital generally:

varies proportionally with sales

The absolute priority rule determines

which parties receive payment first in a bankruptcy proceeding

Simulation analysis is based on assigning a _____ and analyzing the results.

wide range of values to multiple variables simultaneously