1. What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).
a. $893
b. $3,106
c. $429
d. $833
2. The future value of $500 deposited into an account paying 8% annually for three years is:
a. $500.
b. $630.
c. $700.
d. $620.
3. Pacific Waste, Inc. has fixed costs of $225,000. PW’s trashbins sell for $45 and have a unit variable cost of $20. What is PW’s break-even point in units?
a. 8,500
b. 8,750
c. 9,000
d. 9,250
4. Which of the following statements is correct?
a. In general, a firm with low operating leverage has a small proportion of its total costs in the form of fixed costs.
b. An increase in the personal tax rate would not affect firms’ capital structure decisions.
c. A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else is equal.
d. All of the above are correct.
e. None of the above is correct.
5. If fixed interest expense is present in a firm’s cost structure, so is:
a. financial leverage.
b. capital leverage.
c. operating leverage.
d. net operating profit after tax.
6. Why are domestic cash management systems less complicated than international cash management systems?
a. Domestic systems do not have to allow for currency fluctuations.
b. International cash management systems are not affected by interest rate differences.
c. International cash management systems actually are less complicated because the rest of the world’s major countries are more attuned to the advantages of electronic funds transfer.
d. International cash management systems actually are less complicated because transactions are fewer but for larger sums of money.
7. Which of the following best describes a firm’s cost of capital?
a. The average yield to maturity on debt
b. The average cost of the firm’s assets
c. The rate of return that must be earned on its investments in order to satisfy the firm’s investors
d. The coupon rate on preferred stock
8. Given the following information for Kraft, determine the company’s weighted average cost of capital.
Value Cost of Capital
Restaurant Division $ 5 Billion 13%
Snack Foods Division 7 Billion 12%
Beverages Division 13 Billion 8%
a. 10.12%
b. 11.00%
c. 12.10%
d. 13.00%
9. A __________ is a business combination of two companies in which the new company maintains the identity of the acquiring company.
a. consolidation
b. holding company
c. conglomerate
d. merger
10. Which of the following is not a potential advantage of a merger in the United States?
a. A better financing structure
b. A better use of tax-loss carry-forwards
c. A more secure monopolization of an industry
d. A lower operating risk through diversification
11. If one security has a greater risk than another security, how will investors respond?
a. They will require a lower rate of return for the investment that has greater risk.
b. They would be indifferent regarding their expectation of rates of return for either investment.
c. They will require a higher rate of return for the investment that has greater risk.
d. None of the above.
12. If a company’s average collection period is higher than the industry average, then the
company might be:
a. enforcing credit conditions upon its customers which are too stringent.
b. allowing its customers too much time to pay their bills.
c. too tough in collecting its accounts.
d. too liquid.
13. What is the value today of an investment that pays $500 every year at year-end during the next 15 years if the annual interest rate is 9%?
a. $4,030.50
b. $7,500.00
c. $3,500.00
d. $7,000.00
14. With respect to working capital policy, firms most often employ:
a. a cautious approach which finances short-term assets with long-term financing.
b. the hedging principle.
c. an aggressive approach which finances long-term assets with short-term financing.
d. a mixture of all of the above.
15. Under a field warehouse financing agreement:
a. collateral inventories are physically separated from other inventories of the borrower.
b. collateral inventories are placed under the control of a third party.
c. a warehouse receipt is issued which might or might not be negotiable.
d. all of the above.
16. The Gooding Corp. plans to borrow $10,000 for a 60-day period. At maturity, Gooding will repay the $10,000 principal plus interest at an annual rate of 12%. What is the effective rate of interest on this loan?
a. 12.62%
b. 12.13%
c. 11.47%
d. 11.22%
17. All else equal, which of the following is the most likely to occur if actual sales are much less than forecasted sales?
a. The company will be in a better position to pay down most of its debt.
b. The firm’s actual investment in inventory will be unchanged from the amount forecasted.
c. Accounts receivable will rise significantly above the forecast.
d. The company might face a cash flow crunch.
18. Money market funds:
a. are one of the oldest forms of mutual funds.
b. typically invest in a diversified portfolio of short-term, high-grade debt instruments.
c. are generally very profitable but fail to provide liquidity to the small investor.
d. typically sell shares to the public in $5,000 denominations.
19. Which of the following has the least interest rate risk?
a. A six-month unsecured promissory note from International Harvester
b. An eight-year investment certificate from a federally insured bank
c. A 15-year U.S. Treasury bond
d. An AT&T bond maturing in 2010
20. Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal?
a. Training expense
b. Working capital investments
c. Installation costs of an asset
d. Before-tax selling price of old machine
21. ABC, Inc. is considering adding a product line that would utilize unused floor place of their manufacturing plant. The floor space would be considered a(n):
a. variable cost.
b. opportunity cost.
c. sunk cost.
d. irrelevant cash flow.
22. What is the capital budgeting term that is used to refer to more than one investment alternative that performs the same function?
a. Simulated
b. Capital rationed
c. Mutually exclusive
d. Opportunistic
23. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?
a. Cash flows have a greater present value than accounting profits.
b. Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
c. Cash flows are more stable than accounting profits.
d. Cash flows improve the tax position of a firm more than accounting profits.
e. None of the above.
24. The most expensive source of capital is:
a. preferred stock.
b. new common stock.
c. debt.
d. retained earnings.
25. A company has a capital structure that consists of 50% debt and 50% equity. Which of the following is true?
a. The weighted average cost of capital is less than the cost of equity financing.
b. The cost of equity financing is greater than the cost of debt financing.
c. The weighted average cost of capital is calculated on a before-tax basis.
d. Both a and b.
e. All of the above.
26. Typically, XYZ, Inc. maintains $1 million in cash and marketable securities. The firm currently is expecting an economic recession and projects that its net cash flows from operations during the period will be $2.5 million. XYZa expects annual interest and sinking fund payments will be $3 million during the period. If the recession occurs, XYZ’s cash balance at the end of the period will be:
a. $6.5 million.
b. $1 million.
c. $500,000.
d. $3.5 million.
27. Which of the following is not a component of a firm’s capital structure?
a. Preferred stock
b. Bonds
c. Common stock
d. Accounts payable
e. Retained earnings
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