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Financial Managment

Please see the attached file.

The primary goal of a publicly owned corporation is to:
A)

maximize shareholder wealth.

B)

maximize earnings per share after taxes.
C)

minimize shareholder risk.

D)

maximize dividends per share.

All of the following business organizations provide limited liability to their owners except:
A)

limited liability company.

B)

general partnership.
C)

corporation.

D)

S-type corporation.

Use the tax rate schedule given to answer the following question: a corporation with taxable income of $150,000 faces a marginal tax rate of ________?

Corporate Tax Rates Taxable Income
15% $0 - $50,000
25% $50,001 - $75,000
34% $75,001 - $10,000,000
35% over $10,000,000

Additional surtax of 5% on income between $100,000 and $335,000
Additional surtax of 3% on income between $15,000,000 and $18,333,333

A)

34%

B)

39%

C)

35%

D)

40%

The nominal interest rate is 9% and the expected inflation rate is 4%. Based on the Fisher effect, the real rate of interest is
A)

2.08%.

B)

1.0%.

C)

4.8%.

D)

5.0%.

The real rate of return is the return earned above the
A)

inflation risk premium.
B)

variability of returns measured by standard deviation.
C)

default risk premium.
D)

risk-adjusted return.

The costs associated with issuing securities to the public can be high. Some types of securities have greater expenses associated with them than others. Which of the following is the most costly security to issue?
A)

Corporate bonds

B)

Common stock
C)

Preferred stock

D)

All of the above are about equal in cost to issue.

The basic format of an income statement is
A)

Income - Expenses = EBIT.

B)

Sales - Expenses = Profits.
C)

Sales - Liabilities = Profits.

D)

Assets - Liabilities = Profits.

Li Retailing reported the following items for the current year: Sales = $2,000,000; Cost of Goods Sold = $1,200,000; Depreciation Expense = $140,000; Administrative Expenses = $170,000; Interest Expense = $40,000; Marketing Expenses = $60,000; and Taxes = $20,000. Li's gross profit is equal to:
A)

$410,000.

B)

$800,000.

C)

$430,000.

D)

$490,000.

The two principal sources of financing for corporations are:
A)

common equity and preferred equity.

B)

debt and equity.
C)

cash and common equity.

D)

debt and accounts payable.

Asset efficiency ratios for Fischer, Inc.are given in the table below. Based on this information, Fischer, Inc.'s fixed asset turnover ratio is likely to be

Fischer, Inc. Peer Group
Total Asset Turnover 1.58X 2.05X
Accounts Receivable Turnover 17.55X 14.35X
Inventory Turnover 6.34X 5.22X
Fixed Asset Turnover ????? 3.50X
A)

greater than 3.50.

B)

negative.

C)

less than 3.50.

D)

equal to 3.50.

All of the following measure liquidity except:
A)

acid-test ratio.

B)

accounts receivable turnover.
C)

current ratio.

D)

debt ratio.

Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the company's current ratio:
A)

The company writes a $30,000 check to pay off some existing accounts payable.
B)

The company pays back $50,000 of its long-term debt.
C)

The company collects $500,000 of its accounts receivable.
D)

The company sells $1 million of inventory on credit.

Two brothers each open IRAs in 2007 and plan to invest $2,000 per year for the next 30 years. John makes his first deposit on January 1, 2007, and will make all future deposits on the first day of the year. Bill makes his first deposit on December 31, 2007, and will continue to make his annual deposits on the last day of each year. At the end of 30 years, the difference in the value of the IRAs (rounded to the nearest dollar), assuming an interest rate of 5% per year, will be:
A)

$2,000.

B)

$6,644.

C)

$2,100.

D)

$100.

Bill borrowed $100,000 today that he must repay in 10 annual end-of-year installments of $14,902. What annual interest rate is Bill paying on his loan?
A)

8.0%

B)

4.9%

C)

7.5%

D)

5.4%

The present value of a single future sum:
A)

depends upon the number of discount periods.
B)

increases as the number of discount periods increases.
C)

increases as the discount rate increases.
D)

is generally larger than the future sum.

The capital asset pricing model:
A)

provides a risk-return trade off in which risk is measured in terms of beta.
B)

depicts the total risk of a security.
C)

measures risk as the coefficient of variation between security and market rates of return.
D)

provides a risk-return trade off in which risk is measured in terms of the market volatility.

Stock A has the following returns for various states of the economy:

State of
the Economy Probability Stock A's Return
Recession 5% -50%
Below Average 25% -3%
Average 35% 10%
Above Average 20% 20%
Boom 15% 45%

Stock A's expected return is:
A)

22%.

B)

11%.

C)

9.75%

D)

4.4%.

Based on the security market line, Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%. Robo-Tech has a standard deviation of returns of 18%. Therefore:
A)

All rational investors will prefer Friendly over Robo-Tech.
B)

The beta for Friendly must be greater than the beta for Robo-Tech because Friendly is the better buy for a risk-averse investor.
C)

Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo-Tech.
D)

For a well-diversified investor, Friendly is less risky than Robo-Tech.

Shafer Corporation issued callable bonds. The bonds are most likely to be called if:
A)

Interest rates decrease.
B)

Shafer Corporation's stock price increases dramatically.
C)

Shafer Corporation needs additional financing.
D)

Interest rates increase.

Which of the following statements concerning junk bonds is most correct?
A)

A rational investor will always prefer a AAA-rated bond to a junk bond.
B)

Junk bonds are priced higher than AAA-rated bonds because junk bonds are more risky.
C)

Junk bonds may also be called low-yielding securities.
D)

Junk bonds have higher interest rates than AAA-rated bonds because of the higher risk.

A corporate bond has a coupon rate of 9%, a yield to maturity of 11.1%, a face value of $1,000, and a market price of $850. Therefore, the annual interest payment is:
A)

$76.50.

B)

$90.

C)

$109.

D)

$111.

Preferred stock valuation usually treats the preferred stock as a:
A)

perpetuity.

B)

capital asset.

C)

common stock.

D)

long-term bond.

Which of the following statements concerning the required rate of return on stocks is true?
A)

The required return on preferred stock is generally higher than the required return on common stock.
B)

If risk is reduced, the required return will decrease because more investors are risk-averse.
C)

The higher the risk, the higher the required return, other things being equal.
D)

The higher an investor's required rate of return, the higher the value of the stock.

Nuray Corp. preferred stock pays a $.50 annual dividend. What is the value of the stock if your required rate of return is 10%?
A)

$5.00

B)

$.50

C)

$.05

D)

$50.00

The net present value always provides the correct decision provided that
A)

capital rationing is not imposed.
B)

the required rate of return is greater than the internal rate of return.
C)

the internal rate of return is positive.
D)

cash flows are constant over the asset's life.

Rent-to-Own Equipment Co. is considering a new inventory system that will cost $450,000. The system is expected to generate positive cash flows over the next four years in the amounts of $250,000 in year one, $125,000 in year two, $110,000 in year three, and $80,000 in year four. Rent-to-Own's required rate of return is 10%. What is the payback period of this project?
A)

2.68 years

B)

4.00 years

C)

3.02 years

D)

2.42 years

The advantages of NPV are all of the following except:
A)

it recognizes the timing of the benefits resulting from the project.
B)

it provides the amount by which positive NPV projects will increase the value of the firm.
C)

it allows the comparison of benefits and costs in a logical manner through the use of time value of money principles.
D)

it can be used as a rough screening device to eliminate those projects whose returns do not materialize until later years.

A bakery company is considering one capital budgeting project involving the replacement of a sophisticated brick oven, and another capital budgeting project involving research and development into synthetic food substitutes. Which of the following statements is most correct concerning the risk-adjusted discount rate(s) for the projects?
A)

The rate will likely be higher for the replacement project because the likelihood of success is higher.
B)

The rate should be higher for the replacement project because the company is more certain of the returns from a project similar to their existing business.
C)

The rate should be the same for both projects because they are being considered by one company with the same common shareholders.
D)

The rate will likely be higher for the research and development project because of the uncertainty involved with research and development projects.

Which of the following should be included in the initial outlay?
A)

increased investment in inventory and accounts receivable
B)

preexisting firm overhead reallocated to the new project
C)

first year depreciation expense on any new equipment purchased
D)

taxable gain on the sale of old equipment being replaced

Sunk costs are:
A)

not deductible for tax purposes.

B)

recoverable.
C)

not relevant in capital budgeting.

D)

incremental.

Due to changes in regulatory requirements, the transactions costs associated with selling corporate securities increased by $1 per share. This change will
A)

have no effect on the cost of capital because transactions costs are expensed immediately.
B)

cause the cost of capital to decrease.
C)

cause the cost of capital to increase.
D)

cause the cost of capital to decrease only if investors may be billed for part of the increase in transactions costs.

In general, which of the following rankings, from highest to lowest cost, is most accurate?
A)

cost of new common stock, cost of retained earnings, cost of preferred stock, cost of debt
B)

cost of preferred stock, cost of new common stock, cost of retained earnings, cost of debt
C)

cost of new common stock, cost of preferred stock, cost of debt, cost of retained earnings
D)

cost of debt, cost of preferred stock, cost of new common stock, cost of retained earnings

A firm's cost of capital is influenced by:
A)

the current ratio.

B)

capital structure.
C)

net income.

D)

par value of common stock.

Kocher Steel typically achieves one of three production levels in any given year: 8 million pounds of steel, 10 million pounds of steel, or 16 million pounds of steel. In tracking some of its costs, Kocher Steel's controller discovered one cost that was $10 per pound no matter what the production level for the year. This is an example of a
A)

semifixed cost.

B)

semivariable cost.

C)

fixed cost.

D)

variable cost.

Ames Drilling Corp. reported that its sales and EBIT increased by 10%, but its EPS increased by 30%. The much larger change in earnings per share could be the result of
A)

high financial leverage.
B)

a high percentage of credit sale collections from prior years.
C)

high operating leverage.
D)

high fixed costs of production.

Moline Manufacturing Corporation reported the following items: Sales = $5,000,000; Variable Costs of Production = $2,000,000; Variable Selling and Administrative Expenses = $250,000; Fixed Costs = $1,650,000; EBIT = $1,100,000; and the Marginal Tax Rate = 40%. Moline's break-even point in sales dollars is:
A)

$3,750,000.

B)

$2,340,000.

C)

$3,000,000.

D)

$3,900,000.

Jones Corporation declared a dividend of $1 per share on January 1. The date of record is January 15th, and the payment date is February 1st. The most likely ex-dividend date is
A)

January 13th.

B)

December 31st.

C)

February 2nd.

D)

January 2nd.

GB Auto, Inc. stock is currently selling for $24 per share. The company completed a 3-for-1 stock split two days earlier. Last year the company had a 2-for-1 stock split. If the stock splits had not happened, the price of GB Auto, Inc. stock would, other things being equal, be
A)

$144.00 per share.

B)

$4.00 per share.

C)

$36.00 per share.

D)

$120.00 per share.

John owns 500 shares of stock in Zebar Corporation with a market value of $2,000. Zebar declares a 10% stock dividend. After the dividend is paid, John owns
A)

550 shares with a market value of $2,200.

B)

500 shares with a market value of $2,200.
C)

550 shares with a market value of $2,050.

D)

550 shares with a market value of $2,000.

Using the percent of sales method and assuming that no excess capacity exists, a 20% increase in sales will result in
A)

a 20% increase in the company's profit margin.

B)

a 20% increase in total liabilities.
C)

a 20% increase in total assets.

D)

a 20% increase in retained earnings.

Potential sources of financing to support an increase in sales include all of the following except:
A)

decrease in accounts payable.

B)

increase in spontaneous liabilities.
C)

current year addition to retained earnings.

D)

issuance of bonds and/or common stock.

A firm's cash position would most likely be hurt by:
A)

decreasing excess inventory.

B)

establishing stricter (shorter) credit terms.
C)

increasing the net profit margin.

D)

retiring outstanding debt.

Which of the following statements concerning liquidity and debt is true?
A)

A firm can reduce its risk for illiquidity by shifting from short-term debt to long-term debt.
B)

Long-term debt is generally less costly than short-term debt.
C)

The greater the use of short-term debt, the lower the risk of illiquidity.
D)

The risk of illiquidity does not depend on the mix of short-term versus long-term debt.

As a company accounts payable manager, which of the following credit terms are most likely to entice you to take the cash discount?
A)

2/10 net 90

B)

1/10 net 30

C)

1/10 net 45

D)

2/10 net 60

All of the following are potential advantages of commercial paper except
A)

no compensating balance requirements.
B)

ability to borrow very large amounts.
C)

lower interest rates than comparable sources of short-term financing.
D)

flexible repayment terms.

A company is technically insolvent when:
A)

cash outflows in a given period are greater than cash inflows.
B)

current ratio is less than 1.0.
C)

it lacks the necessary liquidity to promptly pay its current debt obligations.
D)

earnings before interest payments are less than the interest payments.

Money market funds
A)

typically invest in a diversified portfolio of short-term, high-grade debt instruments.
B)

are tax exempt.
C)

are generally very profitable but fail to provide liquidity to the small investor.
D)

typically sell shares to the public in $25,000 denominations.

The financial manager is concerned with:
A)

minimizing the chance of insolvency.
B)

maintaining high levels of profitability.
C)

striking a balance between holding too much and too little cash.
D)

all of the above.

A corporate investment manager needs to invest $1,000,000 for the next 6 months. The current nominal rate of interest in the United States is 5%, while the nominal rate of interest in Brazil is 8%. Which of the following statements is most correct?
A)

The manager may decide to invest the funds in the United States due to the international Fisher effect, which suggests inflation in Brazil may make the extra interest income worth less in one year.
B)

The manager should invest the funds in Brazil and make an extra $30,000 for the year.
C)

The manager cannot invest in Brazil because his company is investing dollars.
D)

The manager is indifferent between investing the funds in the United States or Brazil because real returns will always be the same in the end.

Which of the following is a reason for international investment?
A)

to gain access to foreign currency

B)

to increase P/E ratio
C)

to reduce portfolio risk

D)

to gain an advantage in a foreign country

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The solution provides answers to a number of financial management questions.

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