Need help with a finance final.

51 questions

Correct answers are marked in yellow

1) Which statement is FALSE?

A. The Behavioral Principle can be applied to situations where it is less cost effective.
B. The Signaling Principle says that actions convey information.
C. The Behavioral Principle can be applied to capital structure choice.
D. The Behavioral Principle is a direct application of the Signaling Principle.

2) There are three primary areas of corporate finance. Which of the below is (are) included among these
three areas?

A. all options apply

B. investments
C. financial markets and intermediaries
D. corporate financial management

3) Corporate financial management is best described as focusing on ______.

A. none of the options apply

B. the asset side of the balance sheet
C. maximizing sales
D. how a corporation can create and maintain value

4) Which of the following statements is (are) TRUE about the statement of cash flows?

A. all of the options apply

B. It indicates how the cash position of the firm has changed during the period covered by the income
statement.
C. It breaks down the sources and uses of cash into cash flows from operating, investing, and financing
activities.
D. It complements the income statement and the balance sheet.
5) In regards to the cash flow statement, the direct and indirect methods __________.

A. show the firm’s capital structure

B. have identical formats
C. give different numerical results
D. give the same numerical result

6) Certain items in the income statement are called noncash items, wherein the cash flow for the
expense occurs outside of the reporting period. These include which of the following?

A. set-up costs
B. inventory
C. variable expenses
D. depreciation

7) __________ represent(s) the total claims of creditors and owners against the firm’s assets.

A. Stockholders’ equity
B. Working capital
C. Total Liabilities
D. Liabilities and stockholders’ equity

8) Book value (or Net book value) refers to:

A. the net amount shown in the accounting statements.

B. the statement of a firm's financial position at one point in time, including its assets and the claims on
those assets by creditors (liabilities) and owners (stockholders' equity).
C. the length of an asset’s life when it is issued.
D. the price for which something could be bought or sold in a reasonable length of time, where
“reasonable length of time” is defined in terms of the item’s liquidity.

9) The current market value of an asset can be very different from its book value. Four factors affect the
likelihood of a difference between market and book values. These include which of the following?

A. the yield curve

B. the time since the asset will be liquidated
C. the asset’s liquidity
D. the term structure of interest rates

10) The income statement is a financial statement that:

A. details the firm’s assets and liabilities over a period of time
B. shows the firm’s financial position at a particular point in time
C. summarizes a firm’s revenues and expenses at a particular point in time
D. summarizes a firm’s revenues and expenses over a period of time

11) Financial statement analysis can be useful in fundamental ways including:

A. it can help structure your thinking about business decisions AND provide some information that is
helpful in making business decisions.
B. it can help structure your thinking about business decisions.
C. it can provide foolproof information for picking stocks.
D. it can provide some information that is helpful in making business decisions.

12) Original maturity refers to:

A. the net amount (net book value) for something shown in quarterly accounting statements.
B. the length of an asset’s life when it is issued.
C. the price for which something could be bought or sold in a reasonable length of time, where
“reasonable length of time” is defined in terms of the item’s liquidity.
D. a technical accounting term that encompasses the conventions, rules, and procedures necessary to
define accepted accounting practice at a particular time.

13) Leverage ratios show the relative contribution of creditors and owners to the financing of the
company. An example of a leverage ratio is:

A. return on equity
B. equity multiplier
C. return on assets
D. cash ratio

14) Red Hot Chili’s had annual credit sales of $800,000 over the past year. During that time, average
receivables were $200,000. What was the days’ sales outstanding or average collection period (ACP)?
[HINT. ACP = (365 days)(average receivables) / (annual credit sales).]

A. 55 days
B. 91 days
C. 36 days
D. four days

15) A company has a net income (NI) of $200, interest expenses (INT) of $50, and depreciation (DEP) of
$50. The corporate tax rate (T) is 50%. What is the cash coverage ratio (CCR)? [HINT. CCR = (EBIT + DEP) +
INT where EBIT equals INT plus NI /(1 - T).]
A. 10.0
B. 3.0 times
C. 1.8 times
D. 1.2 times

16) Stony Products has an inventory conversion period (ICP) of about 60.83 days. The receivables
collection period (RCP) is 36.50 days. The payables deferral period (PDP) is about 30.42 days. What is
Stony's cash conversion cycle (CCC)?

A. about 69 days
B. about 68 days
C. about 67 days
D. about 66 days

17) __________ is the difference between the available or collected balance at the bank and the firm's
ledger balance.

A. Zero balance accounts

B. Float
C. Lockboxes
D. Controlled disbursing

18) Firms use several devices and procedures to manage float including __________.

A. all of the options apply

B. controlled disbursing
C. zero balance accounts
D. lockboxes

19) Which of the following statements about trade credit is FALSE?

A. Trade credit is also more flexible than other means of short-term financing.
B. The terms "2/10, net 30" mean the buyer can take a 2% cash discount if payment is made within 10
days (the discount period).
C. If no discount is offered, or if payment is made soon enough that the discount can be taken, there is
no cost to the firm for the use of the sup¬plier's trade credit.
D. Trade credit is the largest single source of short-term funds for businesses, representing approximately
two-third of the current liabilities of nonfinancial corporations.

20) Main sources of short-term funds include __________.

A. wire transfers
B. bonds and trade credit
C. futures and bank loans
D. trade credit and commercial paper

21) Which of the following statements is TRUE?

A. Bank term loans always represent short-term loans with less than one-year maturity.
B. A revolving credit agreement represents a legal commitment to lend up to a specified maximum
amount any time during a specified period.
C. A 3-year revolving credit convertible into a 5-year term loan at the end of the third year is uncommon.

D. Banks make a transaction loan for general purposes.

22) Internal sources of credit information for a firm include __________.

A. industry association credit files.

B. credit bureau reports.
C. a credit application AND credit bureau reports.
D. a credit application.

23) Suppose Office Supply Corporation sells personal copying machines at the rate of 900 units per year.
The cost of placing one order is $225, and it costs $50 per year to carry a copier in inventory. What is
Office Supply’s EOQ?

A. about 92 copiers.
B. about 90 copiers.
C. about 94 copiers.
D. about 88 copiers.

24) The Five C's of Credit __________.

A. include comfort and capital.

B. include character and coherence.
C. include conditions and cooperation.
D. are five general factors that credit analysts often consider when making a credit-granting decision.

25) The net initial outlay can be broken down into various categories. These include which of the
following?

A. cash flow from the depreciation of old equipment

B. changes in current liabilities
C. the tax impact of selling assets at book value
D. cash expenditures for the new capital assets

26) The net initial outlay can be broken down into various categories. These include which of the
following?

A. cash flow from the sale of old equipment

B. changes in net working capital
C. changes in net working capital AND cash flow from the sale of old equipment
D. cash expenditures for the old capital assets

27) A corporation has been trying to decide if it should continue with a project. An argument in favor of
continuing is that a lot of money has already been spent on the project. What is the major problem with
this argument?

A. It includes the opportunity cost of the money spent.

B. It includes sunk costs in the decision.
C. It excludes sunk costs in the decision.
D. It ignores the opportunity cost of the money spent.

28) You expect to renovate a building you will pay $760,000 for and will lease it out for 20 years, after
which time you estimate you can sell the building for $250,000. You expect the lease to pay you
$110,000 per year. Finally, the cost of capital in this case is 13%. What is the value of the building in
today’s dollars when you sell it?

A. $121,695.57
B. $221,695.57
C. $21,695.57
D. $250,000.00

29) There are five basic concepts to keep in mind when calculating a project’s cash flows. These include
which (if any) of the following?

A. Cash flows must not always be measured on an incremental, or marginal, basis.

B. Cash flow timing is critical because timing affects value, even beyond simple time-value-of-money
considerations.
C. all of the options apply
D. Costs and benefits are measured in terms of net income.

30) Compute the NPV for the following project. The initial cost is $10,000. The net cash flows are $3,800
for four years. The net salvage value is $2,000 when the project terminates. The cost of capital is 10%.
A. $3,411.52
B. $1,7065.76
C. $2,000.00
D. $13,411.52

31) The CAPM uses a firm’s __________ to tell us its required rate of return.

A. standard deviation
B. beta
C. correlation coefficient
D. all of the options apply

32) Merck's required return for equity (re) is 14%. Its required return for debt (rd) is 8%, its debt-to-total
value ratio (L) is 35%, and its marginal tax rate (T) is 40%. Calculate Merck's WACC.

A. 10.58%
B. 10.78%
C. 10.68%
D. 10.48%

33) The weighted average cost of capital (WACC) can be computed using the formula: WACC = (1 - L)re +
L(1 - T)rd. Which of the following statements is TRUE?

A. T is the personal tax rate.

B. rd is the required return on equity.
C. L is debt divided by firm value.
D. T iz fhs equity divided by firm value

34) Which of the following is (are) TRUE?

A. T*D / rd represents the present value of the stream of interest tax shields.
B. The value of a leveraged firm when considering only the tax effect can be presented in a simplified
formula as given by: VL = VU + T*D.
C. I¯(1 - T) / r represents the present value of the firm's operating cash flow stream, calculated as though
the firm had no debt
D. all of the options apply

35) Jonathan's Tidbits is an entertainment service. It has an unleveraged required return of r = 23%.
Jonathan's rebalances its leverage each year to a target of L = 0.52 and T* = 0.20. Jonathan can borrow
currently at a rate of rd = 16%. What is Jonathan's WACC?

A. about 21.54%
B. about 19.54%
C. about 21.24%
D. about 22.24%

36) There are five basic considerations involved in a firm's choice of capital structure. These include
__________.

A. the protection against illiquidity afforded by assets.

B. the ability to service debt.
C. the ability to use interest tax shields fully.
D. all of the options apply

37) Lawrence Refinancing (LR) has a $100M (M = million) bond issue outstanding, which is scheduled to
mature in a single lump sum 18 years (N) from today. This issue has a 10% coupon rate (r = 5%
semiannual). LR can call bonds at a strike price (P) of $1,060 each. LR can issue $100M new 18-year
noncallable debt at par value if they carry an 8% coupon rate (r' = 4% semiannual). LR's marginal income
tax rate (T) is 40%. What is the after-tax interest savings per period?

A. $0.61M
B. $0.59M
C. $0.60M
D. $0.62M

38) The four main classes of long term corporate debt include __________.

A. tax exempt
B. secured
C. unsecured
D. all of the options apply

39) Updike Refinancing has a $200M (M = million) bond issue outstanding. This issue has a 10% coupon
rate (r = 5% semiannual). Updike can issue $200M new 20-year noncallable debt at par value if they carry
an 8.40% coupon rate (r' = 4.20% semiannual). LR's marginal income tax rate (T) is 30%. What is Updike’s
semiannual after-tax cost of the new debt?

A. 2.94%
B. 4.12%
C. 3.20%
D. 2.50%

40) For a conventional project, the NPV is -$2M (M = million). Leasing generates the following after-tax
cash flows: CF0 (or P0) = $126M, CFAT1-10 = $20M, and the salvage value (SAL) at t = 10 is $20M. If the
appropriate discount rate is 11% for CFAT1-10 and 14% for SAL, should we accept this project?

A. Reject the project because the total net present value is about -$1M.
B. Accept the project because the total net present value is over -$0.82M.
C. Reject the project because the NPV and NAL are both negative.
D. Accept the project because the NAL is greater than $2M.

41) For a conventional project, the NPV is -$1,907,113. Leasing generates the following after-tax cash
flows: CF0 (or P0) = $50M (M = million), CFAT1-7 = $10.3M, and the salvage value (SAL) at t = 7 is $2M. If
the appropriate discount rate is 12% for CFAT1-7 and 15% for SAL, should we accept this project?

A. Accept, the total net present value is $434,321.

B. Accept, the total net present value is $334,321.
C. Reject, the total net present value is -$334,321.
D. Reject, the total net present value is -$1,907,113.

42) Leasing offers a number of disadvantages. These include __________.

A. forfeiting tax deductions.

B. circumventing restrictive debt covenants.
C. reduced risk.
D. bankruptcy considerations.

43) Capital rationing limits the firm's __________.

A. human capital.
B. capital structure AND capital expenditures.
C. capital structure.
D. capital expenditures.

44) Which of the following statements is TRUE?

A. A post-audit is a set of procedures for evaluating a capital budgeting decision after the fact.
B. all of the options apply.
C. Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from
outside sources.
D. Hard capital rationing refers to the rationing imposed internally by the firm.

45) Suppose Captain John’s can raise the price of its specialty loaf from $0.70 to $0.75 without absorbing
any extra costs. At this price it would sell 3 million loaves which is the capacity of the current plant. If it
doesn’t raise its price, it could sell more loaves but would have to expand its production capacity.
Captain John’s tax rate is zero. Captain John decides to expand. Is this a good or bad decision?
A. It is a good decision if the NPV of expansion is greater than $150,000.
B. It is a bad decision because we will lose customers.
C. It is a bad decision because we lose $150,000 in revenue.
D. It is a good decision because we will not lose customers.

46) Due to asymmetric information, the market fears that a firm issuing securities will do so when the
stock is __________.

A. caught up in a bear market.

B. being sold by insiders.
C. undervalued.
D. overvalued.

47) __________ says to look to comparable acquisitions for guidance regarding a reasonable price to pay
for an acquisition.

A. The Behavioral Principle

B. The Principle of Incremental Benefits.
C. The Principle of Self-Interested Behavior
D. The Principle of Comparative Advantage

48) __________ says to forecast the firm’s cash flows, and analyze the incremental cash flows of
alternative decisions.

A. The Principle of Incremental Benefits

B. The Principle of Risk-Return Trade-off
C. The Signaling Principle
D. The Time Value of Money Principle

49) Over the planning horizon, the cash flow break-even point is the point below which the firm will
need to __________.

A. buy back common stock.

B. all of the options apply.
C. obtain additional financing.
D. liquidate some of its assets to meet its variable costs.

50) Benefits a firm hopes to realize from the planning process include.

A. preparing for contingencies.

B. subjectivity
C. past orientation.
D. nonstandardized assumptions.

51) In the cash budget for your company, you have a negative net cash flow equal to -$62,000 for
January. January’s beginning cash balance is $200,000. What is the available balance for the month?

A. $138,000
B. $150,000
C. $262,000.
D. $62,000