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True or False Questions in Finance

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True or False

26.) All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any non-cash charges deducted as expense on the firm's income statement back to net profits after taxes.

27.) The weight average cost of capital (WACC) reflects the expected average future cost of funds over the long-run.

28.) Firms are able to raise funds through the sale of commercial paper more cheaply than by borrowing from a commercial bank.

31.) Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.

32.) The firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments

33.) If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC.

34.) Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.

35.) In the valuation process, the higher the risk, the greater the required return.

Short Answer- Please show calculations

36.) If I collect my accounts receivables every 38 days, pay my accounts payable every 35 days, and my inventory turns over 8.4 times per year, what is my cash conversion cycle?

40.) Determine the IRR on the following projects:

a. Initial outlay of $35,000 with an after-tax cash flow at the end of the year of $5,836 for seven years

b. Initial outlay of $350,000 with an after-tax cash flow at the end of the year of $70,000 for seven years

c. Initial outlay of $3,500 with an after-tax cash flow at the end of the year of $1,500 for three years

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True or False

26.) All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any non-cash charges deducted as expense on the firm's income statement back to net profits after taxes.

TRUE
For capital budgeting, after tax cash flows are taken. Adding back non cash expenses like depreciation to profit after taxes gives after tax cash flows.

27.) The weight average cost of capital (WACC) reflects the expected average future cost of funds over the long-run.

TRUE

28.) Firms are able to raise funds through the sale of commercial paper more cheaply than by borrowing from a commercial bank.

TRUE
Well estblished and reputable firms raise money using commercial paper because people subscribe to such paper. This saves intermediation costs which the commercial banks charge.

31.) Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.

TRUE

Only those cash flows are relevant for decision making which differ between alternatives.

32.) The firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments

TRUE

Free Cash Flow is cash that the firm is free to distribute to investors (stockholders and bondholders) because it is not needed for working capital or fixed assets investment.

33.) If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC.

TRUE

After tax cost of debt = Before tax cost of debt x (1-Tax rate); Higher the tax rate, lower is the after tax cost of debt.

34.) Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.

TRUE

NPV is the better of the two methods..

35.) In the valuation process, the higher the risk, the greater the required return.

TRUE

Investors are assumed to be risk averse. They have to be compensated in the form of higher risk ...

Solution Summary

Answers True or False Questions and short answer questions.

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25 Finance questions: TVM, ratio analysis, budgeting, WACC, contribution margin

True/False: Write "T' if the statement is true and "F" is the statement is false.

1. The focus of DuPont analysis is to provide management information as to how the firm is using its resources to maximize returns on owners' investments.

2. The financial manager should examine available risk-return trade-offs and make his decision based upon the greatest expected return.

3. When fixed expenses increase relative to sales, it indicates that there is not enough productive capacity to absorb an increase in sales.

4. We can use the present value of an annuity formula to calculate constant annual loan payments.

5. Working capital for a project includes investment in fixed assets.

6. Capital structure represents the mix of long-term sources of funds used by a firm.

7. Corporate profits play a part in the choice firms make between using internal versus external capital.

8. Business risk refers to the relative dispersion of the firm's earnings available to common stockholders.

9. The hedging principle involves matching the cash flow from an asset with the cash flow requirements of the financing used.

10. Accounts receivable are an asset that reflects sales made on credit.

Multiple Choice: Choose the one alternative that best completes the statement or answers the question)

11. If you were given the components of current assets and of current liabilities, what ratio (s) could you compute?
a. Quick ratio
b. Average collection period
c. Current ratio
d. Both a and c
e. All of the above

12. Purchases of plant and equipment can be determined from the:
a. current cash budget
b. previous period's balance sheet
c. pro forma income statement
d. use of ratio analysis

13. An increase in _________ would increase the weighted average cost of capital.
a. flotation costs
b. projected dividends
c. the tax rate
d. both a and c
e. all of the above
14. Financial intermediaries:
a. offer indirect securities
b. include insurance companies
c. usually are underwriting syndicates
d. both a and b
e. all of the above

15. Which of the following is considered a source of spontaneous financing?
a. Trade credit
b. Inventories
c. Accounts payable
d. Both a and c

Multiple Choice: Choose the one alternative that best completes the statement or answers the question.
16. Your firm is trying to determine its cash disbursements for the next two months (June and July). In any month, the firm makes purchases of 60% of that month's sales, which are paid the following month. In addition, the firm incurs the following costs every month and pays for them in the month the expenses are incurred: wages and salaries of $10,000, rent of $4,000, and miscellaneous cash expenses of $1,000. Depreciation amortized on a monthly basis is $2,000. June's sales are expected to be $100,000, and July's sales are expected to be $150,000. Cash disbursements for the month of July are expected to be:
a. $105,000
b. $107,000
c. $77,000
d. $75,000

17. Regal Enterprises is considering the purchase of a new embroidering machine. It is expected to generate additional sales of $400,000 per year. The machine will cost $295,000, plus $3,000 to install it. The embroider will save $12,000 in labor expenses each year. Regal is in the 34% income tax bracket. The machine will be depreciated on a straight-line basis over five years (it has no salvage value). The embroiderer will require annual operating expenses of $136,000. What is the annual operating cash flow that the machine will generate?
a. $316,954
b. $124,000
c. $202,424
d. $165,816

18. Based on the information in Table 1, which is the contribution margin?
Table 1
Average selling price per unit $16.00
Variable cost per unit $12.00
Units Sold 200,000
Fixed costs $800,000
Interest expense $50,000

a. $5.00
b. $4.00
c. $3.00
d. $2.00

19. Smart and Smiley Incorporated has an average collection period of 74 days. What is the accounts receivable turnover ratio for Smart and Smiley? You may use a 360-day year.
a. 4.86
b. 2.47
c. 2.66
d. 1.68

20. Use the following information to answer the questions. As of December 31, Budget, Inc. had a cash balance of $50,000. December sales were $150,000 and are expected to be $100,000 in January. 20% of sales in any month are cash sales, and 80% of sales are collected during the following month. In January, Budget is expected to have total cash disbursements of $120,000, and Budget requires a minimum of cash balance of $50,000. Budget's expected cash receipts for January are:
a. $80,000
b. $100,000
c. $110,000
d. $140,000

21. The present value of $1,000 to be received at the end of five years, if the discount rate is 10%, is:
a. $621
b. $784
c. $614
d. $500

22. ZZZ Corp. ended the day with a cleared balance in its bank account of $7,000. The company deposited $50,000 in checks received from customers the next day. It wrote checks to its suppliers the same day that totaled $20,000. If $14,000 of the firm's deposited checks have cleared by the end of the third day but only $8,000 of its checks to suppliers have cleared, what is its "float"?
a. $14,000
b. $28,000
c. $36,000
d. $41,000

Problems:
23. Table 1

Hokie Corporation Comparative Balance Sheet
For the Years Ending March 31, 1995 and 1996
(Millions of Dollars)

Assets 1995 1996
Current assets:
Cash $2.00 $10
Accounts Receivable 16 10
Inventory 22 26
Total current assets $40 $46
Gross fixed assets $120 $124
Less accumulated depreciation 60 64
Net fixed assets 60 60
Total assets $100 $106
Liabilities and Owners' Equity
Current liabilities:
Accounts payable $16 $18
Notes payable 10 10
Total current liabilities $26 $28
Long-term debt 20 18
Owners' equity
Common stock 40 40
Retained earnings 14 20
Total liabilities and owners' equity $100 $106

Hokie had net income of $26 million for 1996 and paid total cash dividends of $20 million to their common stockholders.

Calculate the following financial ratios for the Hokie Corporation using the information given in Table 1 and 1996 information.

a. current ratio
b. acid-test ratio
c. debt ratio
d. long-term debt to total capitalization
e. return on total assets
f. return on common equity

24. The following is an analytical income statement for the Swill & Spoon, a fine dining establishment:
Sales $150,000
Variable costs 90,000
Revenue before fixed costs $60,000
Fixed costs 35,000
EBIT $25,000
Interest expenses $10,000
Earning before taxes $15,000
Taxes (.34) 5,100
Net income 9,900

a. Calculate the degree of operating leverage at this output level.
b. Calculate the degree of financial leverage at this level of EBIT
c. What is the degree of combined leverage?

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