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Multiple Choice

Please see the attached and answer the practice problems.
1. Consider the following equally likely project outcomes:
Profit
X Y
Pessimistic prediction $ 0 $500
Expected outcome $ 500 $500
Optimistic prediction $1000 $500
a. Project Y has less uncertainty than Project X.
b. Project X has more variability than Project Y.
c. a and b.
d. Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.

2. Consider the timing of the profits of the following certain investment projects:
Profit
L S
Year 1 $ 0 $ 3000
Year 2 $ 3000 $ 0
a. Project S is preferred to Project L.
b. Project L is preferred to Project S.
c. Projects S and L are equally desirable.
d. A goal of profit maximization would favor Project S only.

3. Maximization of shareholder wealth as a goal is superior to profit maximization because:
a. it considers the time value of the money.
b. following the shareholder wealth maximization goal will ensure high stock prices.
c. it considers uncertainty.
d. a and c.

4. Which of the following best describes the goal of the firm?
a. The maximization of the total market value of the firm's common stock
b. Profit maximization
c. Risk minimization
d. None of the above

Use the table below for questions 5 thru 9.

Table 1
Smith Company Balance Sheet

Assets:
Cash and marketable securities $300,000
Accounts receivable 2,215,000
Inventories 1,837,500
Prepaid expenses 24,000
Total current assets $3,286,500
Fixed assets 2,700,000
Less: accumulated depreciation 1,087,500
Net fixed assets $1,612,500
Total assets $4,899,000
Liabilities:
Accounts payable $240,000
Notes payable 825,000
Accrued taxes 42,500
Total current liabilities $1,107,000
Long-term debt 975,000
Owner's equity 2,817,000
Total liabilities and owner's equity $4,899,000
Net sales (all credit) $6,375,000
Less: Cost of goods sold 4,312,500
Selling and administrative expense 1,387,500
Depreciation expense 135,000
Interest expense 127,000
Earnings before taxes $412,500
Income taxes 225,000
Net income $187,500
Common stock dividends $97,500
Change in retained earnings $90,000

5. Based on the information in Table 1, the current ratio is:
a. 2.97.
b. 1.46.
c. 2.11.
d. 2.23.

6. Based on the information in Table 1, and using a 360-day year, the average collection period is:
a. 71 days.
b. 84 days.
c. 64 days.
d. 125 days.

7. Based on the information in Table 1, the debt ratio is:
a. 0.70.
b. 0.20.
c. 0.74.
d. 0.42.

8. Based on the information in Table 1, the net profit margin is:
a. 4.61%.
b. 2.94%.
c. 1.97%.
d. 5.33%.

9. Based on the information in Table 1, the inventory turnover ratio is:
a. 0.29 times.
b. 2.35 times.
c. 0.43 times.
d. 3.47 times.

10. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?
a. $25,000
b. $15,000
c. $35,000
d. None of the above

Use for 11-14
Table 1
Dorian Industries' projected sales for the first six months of 2004 are given below:
Jan. $200,000 April $400,000
Feb. $240,000 May $320,000
March $280,000 June $320,000

25% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale, and the remaining 25% is collected in the second month following the sale. Cost of goods sold is 75% of sales. Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale. Total other cash expenses are $60,000/month. The company's cash balance as of February 28, 2004 will be $40,000. Excess cash will be used to retire short-term borrowing (if any). Dorian has no short-term borrowing as of February 28, 2004. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $25,000 at the beginning of each month. Round all Answers to the nearest $100.

11. Based on the information in Table 1, what are Dorian Industries' total cash receipts (collections) for April 2004?
a. $400,000
b. $300,000
c. $100,000
d. ($60,000)

12. Based on the information in Table 1, what is Dorian Industries' total disbursement in May (not including interest on short-term borrowing)?
a. $300,000
b. $240,000
c. $25,900
d. ($60,000)

13. Based on the information in Table 1, what is Dorian's projected cumulative short-term borrowing as of April 30, 2004?
a. $15,000
b. $60,000
c. $35,150
d. None of the above

14. Based on the information in Table 1, what is Dorian's projected EBIT for March 2004?
a. ($10,000)
b. ($30,000)
c. $70,000
d. None of the above

Table 2
Fielding Wilderness Outfitters had projected its sales for the first six months of 2004 to be as follows:
Jan. $ 50,000 April $180,000
Feb. $ 60,000 May $240,000
March $100,000 June $240,000

Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the month following the sale, and the remaining 20% in the second month following the sale. Total other cash expenses are $40,000/month. The company's cash balance as of March 1, 2004 is projected to be $40,000, and the company wants to maintain a minimum cash balance of $15,000. Excess cash will be used to retire short-term borrowing (if any exists). Fielding has no short-term borrowing as of March 1, 2004. Assume that the interest rate on short-term borrowing is 1% per month.

15. Based on the information contained in Table 2, what are Fielding's projected total receipts (collections) for April?
a. $124,000
b. $180,000
c. ($4,000)
d. $36,000

16. If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years?
a. $3,525.62
b. $5,008.76
c. $3,408.88
d. $2,465.78

17. If you invest $750 every six months at 8% compounded semi-annually, how much would you accumulate at the end of 10 years?
a. $10,065
b. $10,193
c. $22,334
d. $21,731

18. You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?
a. $25,000
b. $31,060
c. $38,720
d. $34,310

19. A commercial bank will loan you $7,500 for two years to buy a car. The loan must be repaid in 24 equal monthly payments. The annual interest rate on the loan is 12% of the unpaid balance. What is the amount of the monthly payments?
a. $282.43
b. $390.52
c. $369.82
d. $353.05

20. Your company has received a $50,000 loan from an industrial finance company. The annual payments are $6,202.70. If the company is paying 9% interest per year, how many loan payments must the company make?
a. 15
b. 13
c. 12
d. 19

21. Given the following information, determine the risk-free rate.
Cost of equity = 12%
Beta = 1.50
Market risk premium = 3%
a. 8.0%
b. 7.5%
c. 7.0%
d. 6.5%

22. Armadillo Mfg. Co. has a target capital structure of 50% debt and 50% equity. They are planning to invest in a project which will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds. No new outside equity will be issued. If the required rate of return on the firm's stock is 15% and its marginal tax rate is 40%, compute the firm's cost of capital.
a. 13.5%
b. 12.5%
c. 7.2%
d. 11.1%

23. As financial manager for ABZ Corporation, you are trying to determine the appropriate cost of capital for the firm. The firm is considering an investment which will require an initial outlay of $100,000. The firm can issue bonds at a price of $940.82 which have a coupon rate of 8% on 10 years to maturity and a face value of $1,000. However, the underwriter would charge flotation costs of $5 per bond. The company can issue new equity at a before-tax cost of 16%. It has $75,000 of internal equity available for investment projects at this time. The required rate of return on the company's stock is 14%, and its marginal tax rate is 34%. If the company wishes to maintain its current capital structure of 60% debt and 40% equity, what is the appropriate cost of capital to use for this project's capital budgeting analysis?
a. 14%
b. 8.77%
c. 9.16%
d. 10%

24. PepsiCo calculates unlevered betas for each peer group in order to:
a. eliminate different business risks.
b. eliminate competitive factors.
c. eliminate judgment factors.
d. eliminate different financial risks.

25. Your company is considering an investment in a project which would require an initial outlay of $300,000 and produce expected cash flows in Years 1 through 5 of $87,385 per year. You have determined that the current after-tax cost of the firm's capital (required rate of return) for each source of financing is as follows:
Cost of debt 8%
Cost of preferred stock 12%
Cost of common stock 16%
Long-term debt currently makes up 20% of the capital structure,
preferred stock 10%, and common stock 70%. What is the net present
value of this project?
a. $463
b. $871
c. $1,241
d. $1,568

26. The effective annual rate increases when the _______ increases.
a. number of compounding periods in a year
b. number of years invested
c. quoted rate
d. both a and c
e. all of the above

27. If the cash flow pattern for a project has two sign reversals, then there can be as many as ____________ positive IRR(s).
a. one
b. two
c. three
d. four

28. A project has an initial outlay of $4,000. It has a single payoff at the end of Year 4 of $6,996.46. What is the IRR for the project (round to the nearest percent)?
a. 16%
b. 13%
c. 21%
d. 15%

29. Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,520.
Year Net Cash Flow
1 $1,000
2 $1,500
3 $ 500
a. 48%
b. 40%
c. 32%
d. 28%

30. Depreciation expenses affect capital budgeting analysis by increasing
a. taxes paid.
b. incremental cash flows.
c. the initial outlay.
d. working capital.

31. Which of the following is included in the terminal cash flow?
a. The expected salvage value of the asset
b. Tax impacts from selling asset
c. Recapture of any working capital
d. All of the above

32. Which of the following is included in the calculation of the initial outlay for a capital investment?
a. Investment in working capital
b. Shipping expenses
c. Installation
d. All of the above

33 . Which of the following would decrease free cash flows? A decrease in:
a. depreciation expense.
b. interest expense.
c. incremental sales.
d. both a & c.
e. all of the above.

34. Which of the following is not an advantage of a private placement (as compared to a public offering)?
a. Greater financing flexibility
b. Lower flotation costs
c. Lower interest costs
d. Quicker availability of funds

35. Which of the following relationships is true, regarding the costs of issuing the below securities?
a. Common stock > bonds > preferred stock
b. Preferred stock > common stock > bonds
c. Bonds > common stock > preferred stock
d. Common stock > preferred stock > bonds

36. Which of the following involves the issuing of securities where the investment banker assumes the risk of sale to the public?
a. Private placement
b. Privileged subscription
c. Underwriting
d. Best efforts

37. 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.

38. Which of the following is the least costly method of issuing securities to the public?
a. Underwriting
b. Negotiated purchase
c. Best efforts
d. Competitive bid

39. Which of the following relationships is true, regarding the costs of issuing the below securities?
a. Common stock > bonds > preferred stock
b. Preferred stock > common stock > bonds
c. Bonds > common stock > preferred stock
d. Common stock > preferred stock > bonds

40. Which of the following involves the issuing of securities where the investment banker assumes the risk of sale to the public?
a. Private placement
b. Privileged subscription
c. Underwriting
d. Best efforts

41. What is an example of an organized exchange?
a. OTC
b. CAPM
c. NYSE
d. NASDAQ

42. Which of the following is the least costly method of issuing securities to the public?
a. Underwriting
b. Negotiated purchase
c. Best efforts
d. Competitive bid

43. Disadvantages of using current liabilities as opposed to long-term debt include:
a. greater risk of illiquidity.
b. uncertainty of interest costs.
c. higher cash flow exposure.
d. both a and b.
e. all of the above.

44. According to the hedging principle, permanent assets should be financed with _______ liabilities.
a. permanent
b. spontaneous
c. current
d. fixed

45. Which of the following is most consistent with the hedging principle in working capital management?
a. Fixed assets should be financed with short-term notes payable.
b. Inventory should be financed with preferred stock.
c. Accounts receivable should be financed with short-term lines of credit.
d. Borrow on a floating rate basis to finance investments in permanent assets.

46. According to the net operating income theory of firm valuation, an increase in ____________ will increase the cost of common equity.
a. dividends per share
b. market price per share
c. earnings available to common stockholders
d. both a and c

47. The primary objective of capital structure management is to mix the _______ sources of funds obtained by a firm to minimize the cost of the company's __________.
a. short-term; common stock
b. permanent; common stock
c. short-term; debt
d. permanent; debt

48. Which of the following is inconsistent with an optimal capital structure policy?
a. Lower the blended cost of debt and equity.
b. Maximize a firm's common stock price.
c. Minimize the cost of capital.
d. Maximize EPS.

49. Dependence theory assumes that as debt usage increases, _______ increases.
a. explicit costs
b. cost of debt
c. common stock price
d. both b and c

50. A merger that is driven by the potentially large reduction in the staffing of overlapping functions and the integration of the two companies' strong similar product lines is referred to as a:
a. conglomerate merger.
b. vertical merger.
c. horizontal merger.
d. diversification merger.

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