CHAPTER 1: Introduction to Corporate Finance (exclude 1.

6)
1 A business created as a distinct entity Corporation
is called a:

2 A business form by two or more General partnership

individuals who each have unlimited
personal liability for all the firm’s debt
is called a:

3 A business owned by a single Sole proprietorship

individual is called a:

4 A conflict of interest between the Agency problem

stockholders and management of a
firm is referred to as the:

5 A firm’s capital structure refers to Proportions of financing from current and

the firm’s long term debt and equity

6 A general partner Can end the partnership by withdrawing

7 A proxy fight occurs when A group solicits voting rights to replace

the board of directors

8 Agency costs refer to The cost of any conflicts of interest

between stockholders and management

9 Corporate bylaws Establish the rules by which the firm regulate

its existence

10 Financial managers should Maximize the current value per share of

primarily strive to: existing stock

11 For a firm to create value it must: Create more cash flow than it uses

12 One advantage of a partnership is the: Relatively low formation cost

13 The articles of incorporation: Set forth the number of shares of stock than
can be issued

14 The decision made by financial Market value of the existing owner’s equity
managers should all be ones
which increases the:

15 The owner of a limited liability Being taxed personally on all business income
company generally prefer:

16 The primary goal of financial Maximize the current value per share of
management is to: the existing stock

17 The process of planning and Capital budgeting

managing a firm’s long-term assets
is called:
18 The Sarbanes-Oxley Act requires List any deficiencies in internal controls
public corporation to

19 The treasurer and the controller of Chief financial officer

a corporation generally report to
the

20 The ultimate control of a corporation Stockholders

lies in the hand of the corporate:

21 Which one of the following actions by Agreeing to expand the company company
a financial manager creates an at the expense of stockholder’ value
agency problem?

22 Which one of the following best Liability for firm debts is limited to the
describes the primary advantage capital invested
of being a limited partner rather
than a general partner?

23 Which one of the following Corporation

business types is best suited to
raising large amount of capital

24 Which one of the following is a Deciding whether or not a new

capital budgeting decision? production facility should be built

2 Which one of the following is least apt to

25 Pay raises based on length of service
help convince managers to work in the
best interest of the stockholders?

26 Which one of the following The life time of the firm is limited to the
statements concerning a sole lifespan of the owner
proprietorship is correct?

27 Which one of the following statements Sole proprietorships and partnership are
is correct? taxed in a similar fashion

28 Which one of these accounts is Inventory

included in net working capital?

29 Which one of these best fits The payment required for an outside audit of
the description of an agency the firm
cost?

30 Which one of these statements The value of an investment by a firm

is correct? depends on the size, the timing, and the risk
of the investment’ cash flows.

CHAPTER 2: Financial Statements and cash flow (exclude 2.7)

1 A firm has $820 in inventory, $3,200 in $1,500
fixed assets, $1,210 in account Net working capital = $360 + 1,210 +
receivable, $890 in accounts payable, 820 – 890 = $1,500
and $360 in cash. What is the amount of
the net working capital?

2 According to the Generally Matched with revenues

Accepted Accounting Principles,
costs are:

3 As seen on an income statement: Depreciation reduces both the

pretax income and the net income

4 Assuming the number of shares Addition to retained earnings

outstanding remains constant, an
increase in dividends per share will
reduce the:

5 At the beginning of the year, a firm has - $2,330

current assets of $16,200 and current Change in net working capital =
liabilities of $13,280. At the end of the ($14,800 – 14,210) – ($16,200 – 13,280)
year, the current assets are $14,800 and = - $2,330
the current liabilities are $14,210. What
is the change in net working capital?

6 At the beginning of the year, long-term - $360

debt of a firm is $2,400 and total debt is Cash flow to creditors = $40 –
$3,150. At the end of the year, long-term ($8,200 – 2,400) = - $360
debt is $2,800 and total debt is $4,370.
The interest paid is $40. What is the
amount of the cash flow to creditors?

7 Awnings incorporated has beginning $72,000

net fixed assets of $234,100 and Net capital spending = $234,600 – 243,100
ending net

fixed assets of $234,600. Assets valued + 62,500 = $72,000

ate $42,500 were sold during the year.
Depreciation was $62,500. What is the
amount of net capital spending?

8 Book value: Is based on historical cost

9 Cash flow to stockholders is defined as: Cash dividends paid plus repurchases
of equity minus new equity financing

10 Depreciation for a profitable firm: Decreases net income by less than $1

for every $1 of depreciation expense

11 Earnings per share will increase when: Depreciation decreases

12 Free cash flow is: Cash that the firm can distribute to
creditors and stockholders

13 Given the tax rates as shown, what is 31.34%

the average tax rate for a firm with Tax = 0.15($50,000) + 0.25($25,000) +
taxable income of $218,700? 0.34($25,000) + 0.39($218,700 – 100,000)
Taxable income Tax Rate (%) $0 = $68,543
– 50,000 15
50,001 – 75,000 25 Average tax rate = $68,543 / $218,700
75,001 – 100,000 34 = 0.3134 or 31.34%
100,001 – 335,000 39

14 Martha’s Enterprises spent $4,100 to $800

purchase equipment three years ago. Book vakye of shareholde’s equity = $400
This equipment is currently valued at + 2,700 – 2,300 = $800
$2,700 on today;s balance sheet but
could actually be sold for $3,200.
Assuming the equipment is the firm’s
only fixed asset, what is the book valye
of shareholder’s equity?

15 New Town Industries (15 – 16) $4,030

Net income = ($42,629 – 23,704 –
7,040 – 2,609 – 1,230) x (1 – 0.35) =
$5,230

Addition to retained earnings =

$5,230 – 1,200 = $4,030

hat is the addition to retained earnings for

2015?

16 What is the cash flow of the firm for 2015? $6,425

Pretax income = $42,629 – 23,704 –
2,609 – 1,230 = $8,046
 Tax = 0.35($8,046) = $2,816
Operating cash flow = ($42,629 –
23,704 – 7,040 – 2,609) + $2,609 –
2,816 = $9,069

Net capital spending = $41,260 – 42,110

+ 2,609 = $1,759

Change in net working capital = ($3,671

+ 4.601 + 3,968 – 2,325) – ($2,969 –
5,318 + 4,503 – 3,760) = $885

Cash flow of the firm = $9,069 – 1,759 –

885 = $6,425

17 Noncash items refer to: Expenses charged against revenes that

do not directly affect cash flow

18 Peggy Grey’s Cookies had net income of $2,933

$8,110. The firm paid out 30 percent of Cash flow to stockholders = (0.30 x
the net income to its shareholders as $8,110) – (- $500) = $2,933
dividends. During the year, the company
repurchased $500 worth of common
stock. What is the cash flow to
stockholders?

19 The income statement Includes noncash

expenses

20 The tax rates are as shown. Your firm $8,754

currently has taxable income of Additional tax = .34($100,000 - 83,200)
$83,200. How much additional + .39($83,200 + 24,600 -100,000) =
tax will you owe if you increase your $8,754
taxable income by $24,600?
Taxable Income Tax Rate (%) $0 -
50,000 15
50,001 -75,000 25
75,001 -100,000 34
100,001 -335,000 39

21 Thompson's Jet Skis has operating cash $5,858

flow of $11,618. Depreciation is $2,345 Cash flow of the firm = $11,618 - 6,180 -
and interest paid is $395. A net total of (- $420) = $5,858
$485 was paid on long-term debt. The
firm spent $6,180 on fixed assets and
decreased net working capital by $420.
What is the cash flow of the firm?

22 Under generally accepted Historical cost less accumulated

accounting principles (GAAP), a depreciation.
firm's assets are reported at:
23 When you are making a financial Marginal
decision, the most relevant tax rate is
the ….. rate.

24 Which one of these statements is correct? Earnings per share can be negative
but dividends per share cannot

25 Which term defines the tax rate that Marginal

applies to the nest dollar of taxable
income earned?

26 Woodlands Inc.(26 – 29) $337 million

Net capital spending = $2,290 – 2,264 +
311 = $337 (in millions)

hat is the net capital spending for

2015?

27 What is the operating cash flow for 2015? $783 million

Operating cash flow = $634 + 311 – 162
= $783 (in millions)

28 What is the cash flow of the firm for 2015 $295 million
Operating cash flow = $634 + 311 – 162
= $783 (in millions)

Net capital spending = $2,290 – 2,264 +

311 = $337 (in millions)

Change in net working capital = ($503 =

418 + 1,239 – 686) – ($227 + 522 + 1,187
– 613) = $151 ( in millions)

Cash flow of the firm = $783 – 337 – 151

= 295 ( in millions)

29 What is the cash flow to creditors for 2015? $220 million

Cash flow to creditors = $170 –
($1,300 – 1,350) = $220 ( in millions)
30 Your firm has total assets of $22,980, cost $7,510,20
of $14,715, and depreciation of $6,045. Earnings before interest and taxes
The tax rate is 34 percent. There are no = $22,980 – 14,715 – 6,045 =
interset expenses of other income. What $2,220
is the operating cash flow?
Tax = $2,220 x 0.34 = $754.80

Operating cash flow = $2,220 + 6,045

– 754.80 = $7,510.20

CHAPTER 3: Financial Statement Analysis and Financial Models (exclude 3.6)

1 A banker considering loaning money to a 0.40; 1.75
firm for ten years would most likely prefer
the firm have a debt ratio of _______ and
a

times interest earned ratio of _______.

2 A firm has a total debt ratio of 0.47. $0.53 in total equity.

This means the firm has 47 cents in
debt for every:

3 A firm has sales of $22,400, net income of 11.20%

$3,600, net fixed assets of $18,700, Common-size inventory = $2,800 /
inventory of $2,800, and total current ($6,300 + 18,700) = .1120, or 11.20%
assets of $6,300. What is the common-
size statement value of inventory?

4 A public !rm's market capitalization is price per share multiplied by number

equal to the: of shares outstanding

5 A supplier, who requires payment within cash

ten days, should be most concerned with
which one of the following ratios when
granting credit?

6 An increase in which one of the inventory

following accounts increases a firm's
current ratio without a"ecting its quick
ratio?

7 Assume BGL Enterprises increases its Return on equity will increase

operating efficiency by lowering its costs
while holding its sales constant. As a
result, given all else constant, the:
8 Deep Falls Timber (8 – 9) 3.22
Market-to-book ratio = $6.50 / [($220,000
+ 224,400) / ($220,000 / $1)] = 3.22

Dee

p Falls Timber stock sold for $6.50 a

share as of 2015. What was the market-
to book ratio at that time?

9 Deep Falls Timber stock sold for $6.50 28.15

a share as of 2015. What was the Price-earnings ratio = $6.50 /
price earnings ratio at that time? [$50,800 / ($220,000 / $1)] = 28.15

10 Enterprise value is based on the: market value of interest bearing debt

plus the market value of equity minus
cash.

11 If a firm decreases its operating costs, price-earnings ratio will decrease.

all else constant, then the:

12 If a firm produces a return on assets of has no debt of any kind.

15 percent and also a return on equity
of 15

percent, then the firm:

13 If stockholders want to know how much return on equity.

pro!t the firm is making on their entire
investment in that firm, the stockholders
should refer to the:

14 Joe's has old, fully depreciated equipment. Moe's and Joe's will have the same
Moe's just purchased all new equipment EV multiple.
which will be depreciated over eight years.
If Joe's and Moe's have the same sales,
costs, tax rate, and enterprise value, then:

15 Last year, Alfred's Automotive had a the investors' outlook for the !rm
price earnings ratio of 15 and earnings has improved.
 per share of $1.20. This year, the price
earnings ratio is 18 and the earnings per
share is $1.20. Based on this
information, it can be stated with
certainty that:

16 New Metals has depreciation of $28,300, $7.76

interest expense of $11,400, EBIT of Market price per share = 8.6 ×
$62,700, a price earnings ratio of 8.6, a {[($62,700 - 11,400)(1 −.34)] /
profit margin of 7.2 percent, a tax rate of 37,500} = $7.76
34 percent, and 37,500 shares of stock
outstanding. What is the market price per
share?

17 Northern Industries has accounts 56.77

receivable of $42,300, inventory of Days' sales in inventory = 365 /
$61,200, sales of $544,200, and cost of ($393,500 / $61,200) = 56.77
goods sold of $393,500. How many days,
on average, does it take the firm to sell its
inventory?

18 Preston Woods has 17,500 shares of stock $926,073

outstanding along with $408,000 of interest EV multiple = [11.8 × ($697,000 × .068)]
bearing debt. The market and book values + $408,000 - 41,200 = $926,073
of the debt are the same. The firm has
sales of $697,000 and a profit margin of
6.8 percent. The tax rate is 35 percent, the
debt-equity ratio is 40 percent, and the
price-earnings ratio is 11.8. The firm has
$130,000 of current assets of which
$41,200 is cash. What is the enterprise
value multiple?

19 Rosita's Resources paid $11,310 in 3.60

interest and $16,500 in dividends last EBIT = 2.9 ×$11,310 = $32,799
year. The times interest earned ratio is Cash coverage ratio = ($32,799 +
2.9, the depreciation expense is $7,900, 7,900) / $11,310 = 3.60
and the tax rate is 35 percent. What is
the value of the cash coverage ratio?

20 The DuPont identity can be computed as: Profit margin × (1 / Capital intensity) × (1
+ Debtequity ratio).

21 The higher the inventory turnover, the: less time inventory items remain on
the shelf.

22 The long-term debt ratio is probably of mortgage holder

most interest to a firm's:

23 The return on equity can be calculated as: ROA × Equity multiplier

24 Uptowne Restaurant has sales of 6.93%
$418,000, total equity of $224,400, a tax ROA = (.051 × $418,000) / [(1
rate of 34 percent, a debt equity ratio + .37) ($224,400)] = .0693, or
of .37, and a profit margin of 5.1 percent. 6.93%
What is the return on assets?

25 Vinnie's Motors has a market-to-book ratio increase the price earnings ratio.
of 3.4. The book value per share is $34
and earnings per share are $1.36. Holding
the market-to-book ratio and earnings per
share constant, a $1 increase in the book
value per share will:

26 Deep Falls Timber (26 – 28) $62.79 days

Days’ sales in inventory 2015 =
365 / ($409,800 / $70,500) =
62.79 days

What are the day’ sales in inventory

for 2015? (Use ending inventory)

27 What are the values of the three 7.91%; 0.9758; 1.4806

components of the DuPont identity for 2015? Profit margin = $50,800 / $642,100 =
0.0791 or 7.91%

Total asset turnover = $642,100 / $658,00

= 0.9758

Equity multiplier = $658,000 / ($220,000

+ 224,400) = 1.4806

28 What is the current ratio for 2015? 1.95

Current ratio 2015 = ($32,300 + 50,700
+ 70,500) / ($58,900 + 20,000) = 1.95

29 Which one of the following statements is The firm collects in its sales in an
correct if a firm has a receivables turnover average of 36.5 days
of 10?
30 Wybro’s Markets has sales of $684,000, 11.30%
costs of $437,000, interest paid of Net income = ($684,000 – 437,000 –
$13,800, total assets of $712,000, and 109,400 - 13,800) x (1-0.35) =
depreciation of $80.470

$109,400. The tax rate is 35 percent anf Equity = $712,000 / 1.6 = $445,000
the equity multiplier is 1.6. What is the
return on equity ROE = $80,470 / $445,000 = 0.1808
or 18.08%

CHAPTER 4 : Discounted Cash Flow Valuation (exclude 4.5 and 4.6)

1 A car dealer is willing to lease you a car $17,014.34
for $319 a month for 60 months. APV = {$319 × [(1 - {1 / [1 + (.049 / 12)]
Payments are due on the first day of 60 }) / (.049/ 12)] × [1 + (.049 / 12)] =
each month starting with the day you $17,014.34
sign the lease contract. If your cost of
money is 4.9 percent,
compounded monthly, what is the
current value of the lease?

2 A credit card compounds interest monthly 11.99%

and has an effective annual rate of 12.67 APR = [(1 + .1267)1/12 - 1] ×12 = .1199,
percent. What is the annual percentage or 11.99%
rate?

3 A trust has been established to fund $27,272.73

scholarships in perpetuity. The next PV Growing perpetuity = $1,200 /
annual distribution will be $1,200 and (.074 − .03) = $27,272.73
future payments will increase by 3
percent per year. What is the value of
this trust at a discount rate of 7.4
percent?

4 An annuity stream of cash flow payments equal cash flows occurring each time
is a set of: period over a fixed length of time.

5 Annuities where the payments occur at the ordinary annuities; annuities due
end of each time period are called _____,
whereas _____ refer to annuity streams
with payments occurring at the beginning
of each time period.
6 Denise will receive annual payments of $8,069.28
$10,000 for the next 25 years. The APVADue = [$10,000 × ({1 - [1 / (1
discount rate is 6.8 percent. What is the +0 .068)25 ]} /0 .068)] × (1 + 0.068)
difference in the present value of these =
payments if they are paid at the beginning $126,735.21
of each year rather than at the end of
each year? APV = [$10,000 × ({1 - [1 / (1
+ .068)25 ]} / 0.068)] = $118,665.92

Difference = $126,735.21 - 118,665.92

= $8,069.29

Difference = 0.068 × $118,665.92

= $8,069.28

7 Donaldson's purchased some property for $9,351.66

$1.2 million, paid 25 percent down in Amount financed = $1,200,000 ×(1
cash, and financed the balance for 12 −.25) = $900,000 $900,000 = C ×
years at 7.2 percent, compounded [(1 - {1 / [1 + (.072 / 12)] 12 ×
monthly. What is the amount of each 12 }) / (.072 / 12)]; C = $9,351.66
monthly mortgage payment?

8 Lucas invested $4,500 at 6.2 percent, $11,405.29

compounded continuously. What will FV = $4,500 × e.062 × 15 = $11,405.29
his investment be worth after 15
years?

9 Luis has a management contract which $3,655,832.79

grants him a lump sum payment of $20 $20,000,000 = C ×{[(1 + .045)5 - 1]
million be paid upon the completion of his / .045}; C = $3,655,832.79
first five years of service. The company
wants to set aside an equal amount of
funds each year to cover this anticipated
cash outflow. The company can earn 4.5
percent on these funds. How much must
the company set aside each year for this
purpose?

10 Olivia is willing to pay $185 a month for $10,549.07

four years for a car payment. If the interest PV = $2,500 + {$185 × [(1 - {1 / [1 +
rate is 4.9 percent, compounded monthly, (.049 / 12)]4 ×12 }) / (.049 / 12)]} =
and she has a cash down payment of $10,549.07
$2,500, what price car can she afford to
purchase?

11 On the day you retire, you have $389,900 $2,216.29

in your retirement savings. You expect to $389,900 = C × [(1 - {1 / [1 + (.045 / 12)]
earn 4.5 percent, compounded monthly, 24 × 12 }) / (.045 / 12)]; C = $2,216.29
and live 24 more years. How much can
you withdraw
 from your savings each month during
your retirement if you plan to die on the
day you spend your last penny?

12 Shawn has $2,500 invested at a $3,093.16

guaranteed rate of 4.35 percent, FV5 = $2,500 × 1.04355 = $3,093.16
compounded annually. What will his
investment be worth after five years?

13 Ted purchased an annuity today that will Ted's annuity has a higher present
pay $1,000 a month for five years. He value than Allison's.
received his first monthly payment today.
Allison purchased an annuity today that
will pay $1,000 a month for five years. She
will receive her first payment one month
from today. Which one of the following
statements is correct concerning these
two annuities?

14 The annual percentage rate: equals the effective annual rate when
the interest on an account is
designated as simple interest.

15 The highest effective annual rate that can e.09 −1.

be derived from an annual percentage
rate of 9% is computed as:

16 The interest rate charged per period annual percentage

multiplied by the number of periods per
year is called the _____ rate.

17 Theo is depositing $1,300 today in an $15,699.54

account with an expected rate of return FV = $1,300 ×1.08110 + $3,200 ×1.0818
of 8.1 percent. If he deposits an + $4,000 ×1.0817 = $15,699.54
additional $3,200 two years from today,
and $4,000

three years from today, what will his

account balance be ten years from today?

18 Uptown Industries just decided to save $34,678.35

$3,000 a quarter for the next three APVADue = {$3,000 × [(1 - {1 / [1 +
years. The money will earn 2.75 (.0275 / 4)]3 × 4 }) / (.0275 / 4)]} × [1 +
percent, (.0275 / 4)] = $34,678.35
compounded quarterly, and the first
deposit will be made today. If the
company had wanted to deposit one
lump sum today, rather than make
quarterly deposits, how much would it
have had to deposit today to have the
 same amount saved at the end of the
three years?

19 What is the effective annual rate if your 11.22%

credit card charges you 10.64 percent EAR = [1 + (.1064 / 365)]365 - 1 = 11.22%
compounded daily? (Assume a 365-
day year.)

20 What is the effective annual rate of 10.79%

10.25% compounded continuously? EAR = e.1025 - 1 = .1079, or 10.79%

21 You are borrowing $5,200 at 7.8 percent, 42

compounded monthly. The monthly loan $5,200 = $141.88 ×[(1 - {1 / [1 +
payment is $141.88. How many loan (.078 / 12)]T }) / (.078 / 12)] ln1.3127
payments must you make before the loan = T × ln1.0065 T = 42
is paid in full?

22 You are the beneficiary of a life insurance You should accept the lump sum
policy. The insurance company offers two because the payments are only worth
options for receiving the proceeds: a lump $49,540.40 today.
sum of $50,000 today or payments of $550 APV = $550 × [(1 - {1 / [1 + (.06 / 12)]10
a × 12 }) / (.06 / 12)] = $49,540.40
month for ten years. If you can earn 6
percent, compounded monthly, which
option should you take and why?

23 You borrow $12,600 to buy a car. The $235.76

terms of the loan call for monthly $12,600 = C × [(1 - {1 / [1 + (.0465 / 12)] 5
payments for five years at an interest rate × 12 }) / (.0465 / 12)]; C = $235.76
of 4.65 percent, compounded monthly.
What is the amount of each payment?

24 You borrow $199,000 to buy a house. $207,764

The mortgage rate is 5.5 percent, $199,000 = C × [(1 - {1 / [1 + (.055 / 12)]
compounded monthly. The loan period is 30 × 12 }) / (.055 / 12)]; C = $1,129.90
30 years, and payments are made
monthly. If you pay for the house Total interest = (30 × 12 ×
according to the loan agreement, how $1,129.90) − $199,000 =
much total interest will you pay? $207,764

25 You have $2,500 to deposit into a savings Bank B: 3.69%, compounded

account. The five banks in your area offer monthly EAR Bank A = [1 + (.0375 /
the following rates. In which bank should 1)]1 - 1 = .03750, or 3.750%
you deposit your savings?
EAR Bank B = [1 + (.0369 / 12)]12 - 1
= .03753, or 3.753%

EAR Bank C = [1 + (.0370 / 2)]2 - 1

= .03734, or 3.734%
 EAR Bank D = e .0367 - 1 = .03738,
or 3.738%

EAR Bank E = [1 + (.0365 / 4)]4 - 1

= .03700, or 3.700%

⇨ Bank B offers the highest EAR.

26 You just paid $525,000 for a security that 4.76%

will pay you and your heirs $25,000 a year r = $25,000 / $525,000 = 0.0476, or 4.76%
forever. What rate of return will you earn?

27 You plan to invest $6,500 for three years at $7,280.00

4 percent simple interest. What will your Investment value Year 3 = $6,500 +
investment be worth at the end of the three ($6,500 × .04 × 3) = $7,280
years?

28 You want to save sufficient funds to $3,146.32

generate an annual cash flow of $55,000 a PV = $55,000 × ({1 - [1 / (1
year for 25 years as retirement income. + .075)25 ]} / .075) = $613,082.02
You currently have no retirement savings $613,082.02 = C × {[(1 + .075)38
but plan to save an equal amount each −1] / .075}; C = $3,146.32
year for the next 38 years until your
retirement. How much do you need to
save each year if you can earn 7.5 percent
on your savings?

29 Your employer contributes $50 a week to $32,861.08

your retirement plan. Assume you work APV = $50 × [(1 - {1 / [1 + (.05 / 52)]20 ×
for your employer for another twenty 52 }) / (.05 / 52)] = $32,861.08
years and the applicable discount rate is
5 percent, compounded weekly. Given
these
assumptions, what is this employee
benefit worth to you today?

30 Your parents plan to give you $200 a $8,516.06

month for four years while you are in APV = $200 × [(1 - {1 / [1 + (.06 / 12)]4 ×
college. At a discount rate of 6 percent, 12 }) / (.06 / 12)] = $8,516.06
compounded monthly, what are these
payments worth to you when you first
start college?

CHAPTER 5: Net Present Value and Other Investment Rules (exclude 5.3 and 5.7)
1 A financing project has an initial cash 15.26%; reject
inflow of $42,000 and cash flows of − 0 = $42,000 + [−$15,600 / (1 +
$15,600, −$22,200, and −$18,000 IRR)] + [−$22,200 / (1 + IRR)2 ] +
for Years 1 to 3, respectively. The [− $18,000 / (1 + IRR)3 ; IRR =
required rate of return is 13 percent. 15.26%
 What is the internal rate of return? Since this is a financing project, an
Should the project be accepted? IRR greater than the required rate
indicates rejection.

2 A financing project is acceptable if its IRR is: Less than the discount rate

3 A project will have more than one IRR if, cash flow pattern exhibits more than
any only if, the: one sign change.

4 A situation in which accepting one mutually exclusive investment decision.

investment prevents the acceptance of

another investment is called the:

5 An independent investment is acceptable greater than one

if the profitability index (PI) of the
investment is:

6 An investment is acceptable if the is less than some pre-specified period

payback period: of time.

7 Anne is considering two independent You should only accept project A since it
projects with 2-year lives. Both projects has the largest PI and the PI exceeds
have been assigned a discount rate of 13 one. PIA = ($19,400 / 1.13 + $28,700 /
percent. She has sufficient funds to finance 1.132 ) / $38,500 = 1.03
one or both projects. Project A costs
$38,500 and has cash flows of $19,400 PIB = ($25,000 / 1.13 + $22,000 /
and $28,700 for Years 1 and 2, 1.132) / $41,000 = .96
respectively. Project B costs $41,000, and
has cash flows of $25,000 and $22,000 for
Years 1 and 2, respectively. Which
project, or projects, if either, should you
accept based on the profitability index
method and what is the correct reason for
that decision?

8 Assume you use all available methods to ignore the IRR and rely on the
evaluate projects. If there is a conflict in decision indicated by the NPV
the indicated decision between two method.
mutually exclusive projects due to the
IRR-based indicator, you should:

9 Bernstein's proposed project has an 9.82%

initial cost of $128,600 and cash 0 = [−$128,600 + (−$15,500 /
flows of $64,500, $98,300, and − 1.103 )] + $64,500 / (1 + IRR) +
$15,500 for Years 1 to 3 $98,300 / (1 + IRR)2 ; IRR = 9.82%
respectively. If all negative cash
flows are moved to Time 0 at a
discount rate of 10 percent, what is
the modified internal rate of return?
10 For investment projects, the internal rate is the rate generated solely by the
of return (IRR): cash flows of the investment.

11 How should a profitability index of zero the project's cash flows subsequent to
be interpreted? the initial cash flow have a present
value of zero.

12 It will cost $3,000 to acquire a small ice 2.14 years

cream cart. Cart sales are expected to be Payback = 2 + ($3,000 −1,400 -
$1,400 a year for three years. After the 1,400) / $1,400 = 2.14 years
three years, the cart is expected to be
worthless as that is the expected
remaining life of the cooling system. What
is the payback period of the ice cream
cart?

13 Net present value: is more useful than the internal rate

of return when comparing different
sized projects.

14 Project A has an initial cost of $75,000 and 12.89%; B

annual cash flows of $33,000 for three 0 = (−$75,000 - (−$60,000) +
years. Project B costs $60,000 and has ($33,000 - 25,000) / (1 + IRR) +
cash flows of $25,000, $30,000, and ($33,000 - 30,000) / (1 + IRR)2 +
$25,000 for Years ($33,000 −25,000) / (1 + IRR)3 ;

1 to 3, respectively. Projects A and B are IRR = 12.89%

mutually exclusive. The incremental IRR
is _______ and if the required rate is Using a discount rate of 15 percent:
higher than the crossover rate then NPVA = −$75,000 + $33,000 × ({1 -
Project _______ should be accepted. [1 / (1 + .15)3 ]} / .15) = $346.43
NPVB = −$60,000 + $25,000 /
1.15 + $30,000 / 1.152 +
$25,000 / 1.153 = $861.35

15 Project A is opening a bakery at 10 net present value

Center Street. Project B is opening a
specialty coffee shop at the same
address. Both projects have
unconventional cash flows, that is, both
projects have positive and negative cash
flows that occur following the initial
investment. When trying to decide which
project to accept, given sufficient funding
to accept either, you should rely most
heavily on the _____ method of analysis.

16 Project X has an initial cost of $20,000 and X; Y; Y

a cash inflow of $25,000 in Year 3. Project 0X = −$20,000 + $25,000 / (1 +
Y costs $40,700 and has cash flows of IRR)3 ; IRR = 7.72%
 $12,000, $25,000, and $10,000 in Years 1
to 3, respectively. The discount rate is 6 NPVx = −$20,000 + $25,000 /
percent and the projects are mutually 1.063 = $990.48 0Y = −$40,700 +
exclusive. Based on the individual project's $12,000 / (1 + IRR) + $25,000 / (1
IRRs you should accept Project _____; + IRR)2 + $10,000 / (1 + IRR)3 ;
based on NPV you should accept Project IRR = 7.70%
____; the final decision should be to
accept Project ____. NPVY = −$40,700 + $12,000 /
1.06 + $25,000 / 1.062 +
$10,000 / 1.063 = $1,266.86

17 The internal rate of return is: computed using a project's cash flows
as the only source of inputs.

18 The modified internal rate of return: is computed by combining cash flows

until only one change in sign remains.

19 The possibility that more than one multiple rates of return.

discount rate will make the NPV of an
investment equal to zero presents the
problem referred to as:

20 The present value of an investment's profitability index.

future cash flows divided by the initial
cost of the investment is called the:

21 The profitability index: is useful as a decision tool when

investment funds are limited and all
available funds are allocated.

22 Two mutually exclusive projects have 3- reject both projects

year lives and a required rate of return of 0 = −$75,000 + $18,500 / (1 + IRR)
10.5 percent. Project A costs $75,000 and + $42,900 / (1 + IRR)2 + $28,600 /
has cash flows of $18,500, $42,900, and (1 + IRR)3 ; IRR = 9.12%
$28,600 for Years 1 to 3, respectively.
Project B costs

$72,000 and has cash flows of $22,000, 0 = −$72,000 + $22,000 / (1 + IRR)

$38,000, and $26,500 for Years 1 to 3, + $38,000 / (1 + IRR)2 + $26,500 /
respectively. Using the IRR, which project, (1 + IRR)3 ; IRR = 9.48%
or projects, if either, should be accepted?
Both projects should be rejected because
their IRR's are less than the required rate
of return. Thus, both projects also have
negative NPVs. There is no reason to do
incremental analysis as neither project is
acceptable.
23 Using the internal rate of return method, greater than the discount rate.
a conventional investment project
should be accepted if the internal rate
of return is:

24 What is the net present value of a project −$1,195.12

with an initial cost of $36,900 and cash NPV = −$36,900 + $13,400 /
inflows of $13,400, $21,600, and $10,000 1.13 + $21,600 / 1.132 +
for Years 1 to 3, respectively? The $10,000 / 1.133 = −
discount rate is 13 percent. $1,195.12

25 Which one of the following statements You must know the discount rate to
is true? compute the NPV but you can compute
the IRR without having a discount rate.

CHAPTER 15: Long-Term Financing: An Introduction (exclude 15.7)

1 A bank line of credit Generally involves a fee charged to
the borrower on the unused portion
of the revolver.

2 A classified board is one which has: terms that expire at different times.

3 A grant of authority allowing someone else a proxy

to vote shares of stock that you own is
called:

4 Bonds that grant the issuer the right callable bond

to extinguish the debt prior to
maturity are referred to as which
type of bond?

5 Different classes of stock usually are allow a certain group to maintain

issued to: ownership control while reducing that
group's equity position.

6 Financial economists prefer to use a better reflection of current information.

market values rather than book values
when measuring debt ratios because
market values are:

7 If a debt is subordinated, it: must give preference to the

secured creditors in the event of
default.

8 If a group other than current management proxy fight

solicits the authority to vote shares as part
of their effort replace the current
management team, a _____ is said to
occur.
9 If an issuer retires a debt issue before call price
maturity, the specific amount paid to do so
is

called the:

10 Not paying dividends on a voting rights being granted to

cumulative preferred issue may preferred shareholders.1
result in:

11 Preferred stock dividends: can be deferred indefinitely.

12 The written agreement between a indenture

corporation and its bondholders is called the:

13 The written agreement between a restrictive covenant

corporation and its bondholders might
contain a prohibition against paying
dividends in excess of current earnings.
This prohibition is an example of a(n):

14 There are 3 directors' seats up for election. cumulative voting

If you own 1,000 shares of stock and have
been granted a total of 3,000 votes, then
the firm uses the voting procedure
referred to as:

15 There are 3 directors' seats up for election. straight voting

If you own 1,000 shares of stock and you
can vote 1,000 votes in each of the three
elections, then the firm uses the voting
procedures referred to as:

16 There are seven seats on the board of 123,251

directors of Furniture Unlimited up for Shares needed = (.5 × 246,500) + 1
election. The firm has 246,500 shares of = 123,251
stock outstanding and uses straight
voting. Each share is granted one vote.
How many shares must you control if
you want to guarantee your election to
the board assuming no one else votes
for you?

17 Unsecured corporate debt is called a(n): debenture

18 Which one of the following statements Preferred stock usually has a

about preferred stock is true? stated liquidating value of $100
per share.

19 Which one of the following statements Debt increases the possibility of

 is true? financial distress

20 Which one of these applies to floating- Coupon payments are variable while the
rate bonds? par value is fixed.

21 Which one of these is a positive covenant? The firm must maintain a current ratio of
1.2 or better.

22 Which type of bond only pays coupon income bond

payments if it can do so from the
income earned by the firm?

CHAPTER 16: Capital Structure: Basic Concepts, and static trade-off theory
1 A firm has a debt-equity ratio of .64, a 15.22%
pretax cost of debt of 8.5 percent, and a RS = .126 + .64(.126 - .085) = .1522,
required return on assets of 12.6 percent. or 15.22%
What is the cost of equity if you ignore
taxes?

2 A firm has zero debt in its capital 13%

structure and has an overall cost of Rs = .10 + .60 / .40(.10 - .08) = .13, or 13%
capital of 10

percent. The firm is considering a new

capital structure with 60 percent debt at
an interest rate of 8 percent. Assuming
there are no taxes or other
imperfections, what would be the cost of
equity with the new capital structure?

3 A key underlying assumption of individuals and corporations borrow at

MM Proposition I without taxes is the same rate.
that:

4 A levered firm is a company that has: some debt in its capital structure.

5 An unlevered firm has a cost of capital of $846,505.88

13.6 percent and earnings before interest VL = {[$138,000 × (1 - .34)] / .136} + (.34
and taxes of $138,000. A levered firm × $520,000) = $846,505.88
with the same operations and assets has
both a book value and a face value of
debt of $520,000 with an annual coupon
of 7 percent. The applicable tax rate is
34 percent. What is the value of the
levered firm?

6 Aspen's Distributors has a levered cost of 8.60%

equity of 13.84 percent and an unlevered VE = $14,600 - 5,000 = $9,600 RS = .1384
 cost of capital of 12.5 percent. The = .125 + ($5,000 / $9,600) × (1 - .34) ×
company has $5,000 in debt that is selling (.125 - RB) ; RB = .0860, or 8.60%
at par. The levered value of the firm is
$14,600 and the tax rate is 34 percent.
What is the pretax cost of debt?

7 Bigelow has a levered cost of equity of .87

14.29 percent and a pretax cost of debt of RS = .1429 = .11 + B/S(.11 - .0723); B/S
7.23 percent. The required return on the = .87
assets is 11 percent. What is the firm's
debt-equity ratio based on MM Proposition
II with no taxes?

8 In the absence of taxes, the capital homage leverage

structure chosen by a firm doesn't really
matter because of:

9 Juanita's Steak House has $12,000 of $4,080

debt outstanding that is selling at par PV Tax shield = .34 × $12,000 = $4,080
and has a coupon rate of 8 percent. The
tax rate is 34
percent. What is the present value of the
tax shield?

10 MM Proposition I with taxes states that: increasing the debt-equity ratio

increases firm value.

11 MM Proposition I without taxes : leverage does not affect the value of

proposes that: the firm.

12 Rosita's has a cost of equity of 13.76 12.27%

percent and a pretax cost of debt of 8.5 RS = .1376 = RU + .60 × (1 - .34) ×
percent. The debt-equity ratio is .60 and (RU - .085); RU = .1227, or 12.27%
the tax rate is 34 percent. What is Rosita's
unlevered cost of capital?

13 Salmon Inc. has debt with both a face and 14.27%

a market value of $227,000. This debt VL = {[$87,200 × (1 - .35)] / .12} + (.35 ×
has a

coupon rate of 7 percent and pays interest $227,000) = $551,783.33

annually. The expected earnings before
interest and taxes is $87,200, the tax rate VS = $551,783.33 - 227,000 = $324,783.33
is 35 percent, and the unlevered cost of
capital is 12 percent. What is the firm's Rs = .12 + [($227,000 / $324,783.33) ×
cost of equity? (1 - .35) × (.12 - .07)] = .1427, or 14.27%

14 The Backwoods Lumber Co. has a debt 6.05%

equity ratio of .68. The firm's required RS = .1554 = .117 + .68(.117 - RB); RB
return on assets is 11.7 percent and its = .0605, or 6.05%
 levered cost of equity is 15.54 percent.
What is the pretax cost of debt based on
MM Proposition II with no taxes?

15 The Dance Studio is currently an all- $447,750

equity firm that has 22,000 shares of
stock outstanding with a market price of VL = (22,000 × $27) + (.35 × $225,000)
$27 a share. The current cost of equity is = $672,750
12 percent and the tax rate is 35 percent. VE = $672,750 - 225,000 = $447,750
The firm is considering adding $225,000
of debt with a coupon rate of 6.25
percent to its capital structure. The debt
will sell at par. What will be the levered
value of the equity?

16 The effects of financial leverage depend Leverage only provides value above
on the operating earnings of the the break-even point.
company. Based on this relationship,
assume you graph the EPS and EBI for
a firm, while ignoring taxes. Which one
of these
statements correctly states a
relationship illustrated by the graph?

17 The interest tax shield has no value for a the firm is unlevered.
firm when:

18 The Montana Hills Co. has expected $99,516.13

earnings before interest and taxes of VU = [$17,100 × (1 - .34) ] / .124
$17,100, an unlevered cost of capital of = $91,016.13
12.4 percent, and debt with both a book
and face value of $25,000. The debt has VL = $91,016.13 + (.34 × $25,000)
an annual 6.2 percent coupon. If the tax = $99,516.13
rate is 34 percent, what is the value of the
firm?

19 The proposition that the cost of equity is a MM Proposition II (no taxes).

positive linear function of capital structure
is called:

20 The proposition that the value of a levered MM Proposition I with no tax.

firm is equal to the value of an unlevered
firm is known as:

21 The proposition that the value of the firm MM Proposition I (no taxes).
is independent of its capital structure is
called:

22 The reason that MM Proposition I does levered firms pay less taxes compared
not hold in the presence of corporate with identical unlevered firms
taxation is because:

23 The tax savings of the firm derived from interest tax shield.
 the deductibility of interest expense is
called the:

24 The unlevered cost of capital is: the cost of capital for a firm with no debt
in its capital structure.

25 The use of personal borrowing to change homemade leverage.

the overall amount of financial leverage to
which an individual is exposed is called:

26 The Winter Wear Company has expected $16,948.96

earnings before interest and taxes of VU = [$3,800 ×(1 - .35)] / .154 =
$3,800, an unlevered cost of capital of $16,038.96
15.4 percent and a tax rate of 35 percent.
The company also has $2,600 of debt with VL = $16,038.96 + (.35 × $2,600)
a coupon rate of 5.7 percent. The debt is = $16,948.96
selling at par value. What is the value of
this firm?

27 Thompson amp; Thomson is an all-equity $8,960,000

firm that has 280,000 shares of stock Firm value = ($2,400,000 / 75,000)
outstanding. The company is in the × 280,000 = $8,960,000
process of borrowing $2.4 million at 5.5
percent interest to repurchase 75,000
shares of the outstanding stock. What is
the value of this firm if you ignore taxes?

28 When comparing levered versus stay fixed, leaving more income to

unlevered capital structures, leverage be distributed over fewer shares.
works to increase EPS for high levels of
EBIT because interest payments on the
debt:

29 You own 25 percent of Unique Vacations, $6.0 million

Inc. You have decided to retire and want to Firm value = $1.5 million / .25 = $6.0 million
sell your shares in this closely held, all-
equity firm. The other shareholders have
agreed to have the firm borrow $1.5 million
to purchase your 1,000 shares of stock.
What is the total value of this firm today if
you ignore taxes?

30 Your firm has a $250,000 bond issue $6,125

outstanding. These bonds have a coupon Annual interest tax shield = $250,000
rate of 7 percent, pay interest ×.07 ×.35 = $6,125
semiannually, and have a current market
price equal to 103 percent of face value.
What is the amount of the annual interest
tax shield given a tax rate of 35 percent?
CHAPTER 19: Dividends and Other Payouts

1 A _____ is an alternative method to cash share repurchase

dividends which is used to pay out a firm's
earnings to shareholders.

2 A cash payment made by a firm to its owners regular cash dividend.

in the normal course of business is called a:

3 A cash payment made by a firm to its owners liquidating dividend.

when some of the firm's assets are sold off is
called a:

4 A firm can repurchase its shares in all of the a reverse stock split.
following ways except through:

5 A payment made by a firm to its owners in the stock

form of new shares of stock is called a _____
dividend.

6 All else equal, a stock dividend will _____ the increase; decrease
number of shares outstanding and _____ the
value per share.

7 Allison's has a market value equal to its book $4.70

value. Currently, the firm has excess cash of
$1,100 and other assets of $12,400. Equity is Price per share = $13,500 / 2,500 = $5.40
worth $13,500. The firm has 2,500 shares of
stock outstanding and net income of $10,800. Number of shares repurchased = $1,100 /
What will be the new earnings per share if the $5.40 = 203.70 shares
firm uses its excess cash to complete a stock
repurchase? New EPS = $10,800 / (2,500 - 203.70) =
$4.70

8 Alpha Co. is paying a $.72 per share dividend retained earnings will decrease by $99,360.
today. There are 138,000 shares outstanding Đúng
with a par value of $1 per share. As a result of Decrease in retained earnings = $.72
this dividend, the: ×138,000 = $99,360

9 Assume a firm has a market value equal to its 1,138 shares

book value, excess cash of $900, other assets Đúng
of $16,500, and equity valued at $17,400. The Price per share = $17,400 / 1,200 = $14.50
firm has 1,200 shares of stock outstanding and
net income of $15,400. If the firm spends all of Number of shares repurchased = $900 /
its excess cash on share repurchases, how $14.50 = 62.07
many shares will be outstanding after the
repurchases are completed? (Round your New number of shares outstanding = 1,200
answer up to the nearest whole share) - 62.07 = 1,137.93, or 1,138

10 Downtown Deli has 2,000 shares of stock $14.86

outstanding with a par value of $1 per share Đúng
 and a market value of $26 per share. The Market value per share = (2,000 shares
balance sheet shows $2,000 in the common ×$26) / [2,000 ×(1 + .75)] = $14.86
stock account, $9,500 in the capital in excess
of par account, and $14,500 in the retained The answer can also be found as: $26 / (1 +
earnings account. The firm just announced a .75) = $14.86
stock dividend of 75 percent. What is the
market value per share after the dividend? e.
$12.00

11 Financial managers: are reluctant to cut dividends.

12 From a tax-paying investor's point of view, a is more desirable than a cash dividend.
stock repurchase:

13 Ignoring taxes and all else held constant, the ex-dividend date.
market value of a stock should decrease by
the amount of the dividend on the:

14 Jensen's has a market value equal to its book

value, excess cash of $500, other assets of $38
$9,500, and equity worth $10,000. The firm
has 250 shares of stock outstanding and net
income of $1,400. What will the stock price per
share be if the firm pays out its excess cash as
a cash dividend?

15 Leslie purchased 100 shares of GT stock on Leslie is entitled to the dividend but Marti is
th not.
Wednesday, June 7 . Marti purchased 100
th
shares of GT stock on Thursday, July 8 . GT
th
declared a dividend on June 20 to
th
shareholders of record on July 12 that is
st
payable on August 1 . Which one of the
following statements concerning the dividend
st
paid on August 1 is correct given this
information?

16 Murphy's has shares of stock outstanding with $39,180

a par value of $1 per share and a market value Đúng
of $24.60 per share. The balance sheet shows Retained earnings = [($12,000 / $1) ×.10
$32,500 in the capital in excess of par ×$24.60 ×( -1)] + $68,700 = $39,180
account, $12,000 in the common stock
account, and $68,700 in the retained earnings
account. The firm just announced a 10 percent
stock dividend. What will the balance be in the
retained earnings account after the dividend?

17 Nu Tech, Inc. is a technology firm with good a stock dividend.

growth prospects. The firm wishes to do
something to acknowledge the loyalty of its
shareholders but needs all of its available cash
 to fund its rapid growth. The market price of its
stock is currently trading in the upper end of its
preferred trading range. The firm could
consider:

18 Of the following factors, which one is maintaining a consistent dividend policy

considered to be the primary factor affecting a
firm's dividend decision?

19 Priscilla owns 500 shares of Deltona stock. It $3.59

is January 1, 2016, and the company recently
issued a statement that it will pay a $1 per
share dividend on December 31, 2016, a
$2.50 per share dividend on December 31,
2017, and then cease all future dividends.
Priscilla does not want any dividend income
this year but does want as much dividend
income as possible next year. Priscilla can
earn 8.5 percent on her investments. Ignoring
taxes, what will Priscilla's homemade dividend
per share be in 2017?

20 Robinson's has 15,000 shares of stock 22,500 shares

outstanding with a par value of $1 per share
and a market price of $36 a share. How many
shares of stock will be outstanding of the firm
does a 3-for-2 stock split?

21 Samuel's has shares of stock outstanding with $7,500

a par value of $1 per share and a market-to-
book ratio of 2.1. The balance sheet shows
$5,000 in the common stock account, $58,000
in the capital in excess of par account, and
$32,500 in the retained earnings account. The
firm just announced a 50 percent stock
dividend. What is the value of the common
stock account after the dividend?

22 The ability of shareholders to undo the homemade dividends.

dividend policy of the firm and create an
alternative dividend payment policy via
reinvesting dividends or selling shares of stock
is referred to as:

23 The information content of a dividend increase management believes the future earnings of
generally signals that: the firm will be strong.

24 The market's reaction to the announcement of information content effect.

a change in the firm's dividend payout is
referred to as the:

25 The observed empirical fact that stocks attract clientele effect.

particular investors based on the firm's
 dividend policy and the resulting tax impact on
investors is called the:

26 The Rent It Company declared a dividend of $60.00

th Dividend received = $.60 ×100 = $60.00
$.60 a share on October 20 to holders of
st
record on Monday, November 1 . The
st
dividend is payable on December 1 . You
purchased 100 shares of this stock on
th
Wednesday, October 27 . How much dividend
st
income will you receive on December 1 from
the Rent It Company?

27 Which one of the following is an argument in

favor of a low dividend policy? The tax on capital gains is deferred until the
gain is realized.

28 Which one of the following is cited as an agency costs related to excess cash
argument for a high dividend payout? reserves

29 Which one of these statements is true? Firms should never give up a positive NPV
project to increase a dividend.

30 You own 300 shares of Abco stock. The firms $29.64

plans on issuing a dividend of $2.10 a share
one year from today and then issuing a final
liquidating dividend of $36.45 a share two
years from today. Your required rate of return
is 14.5 percent. Ignoring taxes, what is the
value of one share of this stock to you today?

CHAPTER 26: Short-Term Finance and Planning

1 A cumulative cash deficit indicates a firm: has at least a short-term need for
external funding.

2 A manufacturing firm has a 90-day the second quarter.

collection period. The firm produces
seasonal merchandise and thus has the
least sales during the first quarter of a
year and the highest level of sales during
the third quarter of a year. The firm
maintains a relatively steady level of
production which means that

its cash disbursements are fairly equal in

all quarters. The firm is most apt to face a
cash out situation in:
3 A prearranged, short-term bank loan line of credit.
made on a formal or informal basis, and
typically reviewed for renewal annually,
is called a:

4 A restrictive short-term financial policy reduce future sales more so than a

tends to: flexible policy.

5 A use of cash is associated with: both an increase in an asset and

an increase in retained earnings.

6 ABC Manufacturing historically produced decrease the cash cycle.

products that were held in inventory until
they could be sold to a customer. The firm
is now changing its policy and only
producing a product when it receives an
actual order from a customer. All else
equal, this change will:

7 Baxter's collects 30 percent of its sales in 30 percent of May

the month of sale, 55 percent in the month
following the month of sale, and 13 percent
in the second month following the month of
sale. Given this, the company will collect
_____ sales during the month of May.

8 Bilt Rite has sales of $610,000 and cost of 35.89 days

goods sold equal to 68 percent of sales. Receivables turnover = $610,000 /
The beginning accounts receivable [($58,900 + 61,050) / 2]
balance is $58,900 and the ending
accounts receivable balance is $61,050. Receivables turnover = 10.17
How long on average does it take the firm
to collect its Receivables period = 365 / 10.17
receivables?
Receivables period = 35.89 days

9 Brook Side reported sales of $738,000 and 30.31 days

cost of goods sold of $584,000 for the Inventory turnover = $584,000 / [($51,000
year. The firm had a beginning inventory + 46,000) / 2]
of $51,000 and an ending inventory of
$46,000. What is the length of the Inventory turnover = 12.04
inventory period?
Inventory period = 365 / 12.04

Inventory period = 30.31 days

10 Cash decreases when: current assets other than cash increase

11 Cash increases when: accounts payable increases.

12 Flexible short-term financial policies tend maintain large cash balances.

to:
13 Given a flexible financing policy, a both current and long-term assets.
growing firm generally has a permanent
requirement for:

14 Heritage Farms has sales of $1.62 million 13.19 days

with costs of goods sold equal to 78 Inventory period = 365 / [(.78 ×
percent of sales. The average inventory is $1,620,000) / $369,000]
$369,000,

accounts payable average $438,000, and Inventory period = 106.59 days

receivables average $147,000. How long
is the cash cycle? Accounts receivable period =
365 / ($1,620,000 / $147,000)

Accounts receivable period = 33.12 days

Accounts payable period = 365 / [(.78

× $1,620,000) / $438,000

Accounts payable period = 126.52

days Cash cycle = 106.59 + 33.12 -

126.52 Cash cycle = 13.19 days

15 If your accounts receivable period is 30 March, April and May

days, you will collect payment for your
_____ sales during the second quarter of
a calendar year.

16 Last year, Wilson's had credit sales of 104.42 days

$927,000 and cost of goods sold of Inventory turnover = $762,000 /
$762,000. The beginning of the year [($138,000 + 154,300) / 2]
inventory was $138,000 and the end of the
year inventory was $154,300. If the Inventory turnover = 5.21 times
accounts receivables average $87,400, Inventory period = 365 / 5.21
what is the operating cycle?
Inventory period = 70.01 days

Accounts receivable turnover =

$927,000 / $87,400

Accounts receivable turnover = 10.61

Accounts receivable period = 365 /

10.61 Accounts receivable period =

 34.41 Operating cycle = 70.01 +

34.410

Operating cycle = 104.42 days

17 Miller's Hardware has a flexible short- invest in marketable securities.

term financing policy. Over the course
of one year, the firm should expect to
have some months that allow it to:

18 Modern Sound has sales of $811,000 54.63 days

and average accounts payable of Payables turnover = (.72 ×
$87,400. The cost of goods sold is $811,000) / $87,400
equivalent to 72 percent of sales. How
long does it take the firm to pay its Payables turnover = 6.68
suppliers?

Payables period = 365 / 6.68

Payables period = 54.63 days

19 Net working capital is defined as the: difference between current assets

and current liabilities.

20 The cash cycle is defined as the cash disbursements and cash collection
time between: for an item.

21 The cash cycle will decrease as a result inventory turnover rate.

of increasing the:

22 The forecast of cash receipts and cash budget

disbursements for the next planning period
is called a:

23 The length of time between the acquisition operating cycle

of inventory and the collection of cash
from receivables is called the:

24 The length of time between the acquisition accounts payable period

of inventory by a firm and the payment by
the firm for that inventory is called the:

25 The length of time between the payment cash cycle

for inventory and the collection of cash
from receivables is called the:

26 The length of time between the sale of accounts receivable period

inventory and the collection of cash
 from receivables is called the:

27 The most common means of financing short-term unsecured bank loan

a temporary cash deficit is a:

28 The operating cycle can be decreased by: collecting accounts receivable faster.

29 Which one of the following is a source an increase in accounts payable

of cash?

30 Which one of the following is a use of cash? submitting taxes to the government

31 Which one of the following will decrease paying a payment on a long-term debt
the net working capital of a firm? Assume
the current ratio is greater than 1.0.

32 Which one of these statements A negative cash cycle is actually

concerning the cash cycle is correct? preferable to a positive cash cycle.

33 Which one of these statements is The longer the cash cycle, the more
correct concerning the cash cycle? likely a firm will need external financing.

34 Wilco's currently has a 43-day cash cycle. 39 days

Assume the firm changes its operations Cash cycle = 43 - 2 + 1 - 3 = 39 days
such that it decreases its receivables
period by 2 days, increases its inventory
period by 1 day, and increases its
payables period by 3 days. What will the
length of the cash cycle be after these
changes?

35 You can decrease the cash cycle by: improving the cash discount offered
to customers who pay their accounts
early.

CHAPTER 27: Cash management

1 An appropriate cash balance is value of cash liquidity equals
reached when the: interest foregone on an equivalent
amount of Treasury bills

2 Determining the appropriate cash the benefits and costs of liquidity.

balance involves assessing the trade-
off between:

3 Examples of cash disbursements include sales of assets.

all of the following except:

4 Firms hold cash to satisfy the meet disbursements for normal

transaction motive. This means that operations and to balance the flow
cash is held to: between cash inflows and outflows.
5 Firms hold cash, in part, to satisfy commercial banks to pay implicitly for
compensating balance requirements. bank services.
Compensating balances are cash
balances held at:

6 Firms would need to hold zero cash perfectly synchronized with cash inflows.
for transaction purposes if all outgoing
cash transactions could be:

7 If a firm has seasonal sales, then is borrow short term for part of the year
highly likely the firm will: and invest in marketable securities the
rest of the year.

8 Money market securities are best defined with maturities of one year or less
as securities:

9 Most large firms hold a larger cash banks are compensated by

balance than most models imply account balances for payment of
because: services.

10 Probably the most sensible cash sufficient cash on hand to meet all
management policy would be to maintain: ordinary business needs plus some
excess cash to invest in marketable
securities as a precautionary measure.

11 Short-term marketable securities a high level of liquidity.

generally have:

12 The cost of holding cash: is the opportunity cost of the lost

investment income.

13 U.S. Treasury bills: are sold at weekly auctions

14 Which one of the following is a money commercial paper

market security that has no active
secondary market?

15 Which one of these money market repurchase agreements

securities generally has the shortest life?

16 On an average day, DDL Enterprises $7,500

writes checks totaling $1,500. These
checks take an average of 5 days to clear.
On an average day, DDL receives checks
totaling $1,700 which take 4 days to clear.
The cost of debt is 7.5 percent. What is
the firm's disbursement float?

17 On an average day, Wilson's Meats -$1,800

receives 20 checks from customers
that average $1,200 each. It takes half
a day to process these payments and
another day for the funds to become
 available. Wilson's also receives
$48,000 of daily payments from
customers who are billed and pay
electronically. The electronic payments
are available immediately. What is the
firm's collection float?
18 UpTown Beverages has a checkbook $15,456; disbursement float
balance of $132,462. However, when
the financial manager looks up the
firm's account on the bank's website,
the balance that appears is $147,918.
What is the net float? Is the net float a
collection float or a disbursement float?
19 Top Notch Tools has average daily $53.04
receipts of $132,600. These receipts
are available after 2 days on average.
The interest rate that could be earned
is .02 percent per day. What is the
daily cost of the collection float?

20 KN Florals receives 72 checks per $341.05

month. Of these, 48 are for $82.60, 15
are for $71.50, and the remainder are
for $40.70. The delay for the $82.60
checks is 1.8 days, for the $71.50
checks 2.1 days, and the $40.70
checks 2.3 days. Calculate the
average daily float. Assume a 30-day
month.
21 Metal Manufacturers receives three 1.46 days; $18,333; $26,700
checks per month. The first check is for
$194,000 and takes two days to clear.
The second check is for $318,000 and
clears in one day. The third check is for
$38,000 and clears in 2.5 days. What
is the weighted average delay, the
average daily receipts, and the
average daily float? Assume a 30-day
month.
22 Rubber Tires receives three checks a $72,100
month. The first check averages
$842,000 and clears in 1.2 days. The
second check averages $318,000 and
clears in .7 days. The third check
 averages $465,000 and clears in 2
days. What is the average daily float?
Assume a 30-day month.
23 Baker's Confectionery has a bank $1,198
balance of $16,218 and a book
balance of $16,309. The firm just
received a check from a customer for
$1,289 that it has recorded in its
checkbook but has not yet deposited
into the bank. All of the firm's other
deposits have cleared and those funds
are currently available. What is the
amount of the disbursement float?
24 During the month Leslie's receive 4 $62.08
checks in the amounts of $100, $325,
$200, and $500. They are delayed for
1.6 days, 2.1 days, 2.6, and 1 day,
respectively. What is the average daily
collection float? Assume a 30-day
month.

CHAPTER 28: Credit and Inventory Management

1 A commercial draft typically: specifies the payment amount and
payment date.

2 All of the following can provide a. the customer's current payment

credit information about a history with the seller.
customer except: b. banks.
c. the amount of goods the customer

desires to purchase.
d. the customer's financial
statements. e. credit reports.
3 Baked Potatoes has total annual sales of $6,758
846,000 units, a carrying cost per unit of Q* = [(2T × F) / CC].5
$1.64 per year, and restocking costs of Q* = [(2 × 846,000 × $31) /
$31 per order. Each inventory item has an $1.64].5 Q* = 5,655 units
average cost of $2.39. What is the average
dollar value of the firm's inventory if it Average inventory value = Q* / 2 × Cost
always orders the most economical per unit
quantity?
Average inventory value = 5,655 / 2
× $2.39

Average inventory value = $6,758

4 Cash discounts: speed up the collection of receivables.

5 Credit terms of 1/5, net 15 should a one percent discount for

be interpreted as granting: payments received within five
days.

6 Determining the optimal credit policy is lost sales from refusing credit.
based on a trade-off between the
carrying costs of granting credit and
the:

7 Fried Onions has total annual sales of 3,968 units

438,000 units, a carrying cost per unit of Q* = [(2T × F) / CC].5
$2.67 per year, and restocking costs of Q* = [(2 × 438,000 × $48) /
$48 per order. What is the EOQ? $2.67].5 Q* = 3,968 units

8 Jensen's Boat Works total costs of $91.30

holding inventory is $8,400 when its At the optimal order size, carrying costs
order sizes are optimized. If the firm equal restocking costs. Thus, restocking
places 46 orders a year, what is the fixed costs equal 50 percent of the total costs
cost per order? of holding inventory.

Total restocking cost = .50(Total costs)

= Fixed cost per order ×Number of
orders

Fixed cost per order = .50($8,400) /

46 Fixed cost per order = $91.30

9 Lengthening the credit period decreases; increase

effectively _____ the price paid by
the customer. Generally, this acts to
_____ sales.

10 On September 1, a firm grants credit receives a discount of 2 percent

with terms of 2/10 net 30. The creditor: when payment is made within 10
days.
11 One characteristic of a conditional seller retains legal ownership of the
sales contract is that the: goods until they are completely paid for

12 Selling goods and services on credit is: an investment in a customer.

13 Since the credit decision usually includes determining the probability that customers
riskier customers, the decision should will not pay and reducing the expected
adjust for this by: cash flow.

14 Sisler's sells 382,000 units a year and $951.18

orders 10,000 units at a time. The cost of Total restocking cost = Fixed cost per order
placing an

order is $24.90. What is the firm's × Number of orders

annual total restocking cost? Total restocking cost = $24.90 ×
(382,000 / 10,000)

Total restocking cost = $951.18

15 The average collection period measures time necessary to collect a credit sale.
the average:

16 The credit period begins on the: invoice date.

17 The decision to grant credit should fixed costs incurred during the credit period.
consider all of the following except the:

18 The three components of credit policy are collection policy, credit analysis, and
terms of the sale.

19 When analyzing the decision to change highest NPV

the cash discount policy, the firm should
select the policy that has the:

20 When analyzing the NPV of a decision to firm's fixed costs

switch from a cash only sales policy to a
credit policy with an early payment
discount, the firm is least apt to consider
the:

21 When credit is granted to another firm accounts receivable and is called

this gives rise to a(n): trade credit.

22 Which one of the following statements is Small accounts, associated with firms that
false as it relates to considerations firms find it difficult to acquire a line of credit,
use when establishing a credit policy? tend to receive longer credit periods.
23 Which one of the follwing statements a. When a banker's acceptance is
is false? discounted in the secondary market
it becomes a commercial note.
b. A commercial draft becomes a
trade acceptance once the buyer
accepts the draft and promises to
pay.
c. Banker's acceptances arise when a
bank guarantees payment on a
commercial draft. d. Sight drafts require
immediate payment.
e. Commercial drafts represent a way to
obtain a credit commitment from a
customer before the goods are delivered.

24 Which one of these statements is Promissory notes usually involve no

true regarding promissory notes? cash discount.

25 Yesterday, Smiley Company sold $22,500 44.86%

of merchandise on credit. The invoice was Rate for 30 days = (.03 × $22,500) /
sent today with the terms, 3/10 net 40. [(1 - .03) × $22,500] = .030928
This customer normally pays on the net
date. What is the effective rate of interest EAR = 1.030928(365/30) - 1
the customer is paying by not taking the
discount? Assume a 365-day year. EAR = .4486, or 44.86%