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This is a study guide to help us prepare for our final.

1. When actual sales are greater than forecasted sales
a. inventory will decline.
b. production schedules might have to be revised upward.
c. accounts receivable will rise.
d. all of the above

2. Proper risk-return management means that
a. the firm should take as few risks as possible.
b. consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined.
c. the firm should earn the highest return possible.
d. the firm should value future profits more highly than current profits.

3. Maximization of shareholder wealth is a concept in which
a. increased earnings is of primary importance.
b. profits are maximized on a quarterly basis.
c. virtually all earnings are paid as dividends to common stockholders.
d. optimally increasing the long-term value of the firm is emphasized.

4. Depreciation is a source of cash inflow because
a. it is a tax-deductible noncash expense.
b. it supplies cash for future asset purchases.
c. it is a tax-deductible cash expense.
d. it is a taxable expense.

5. Assuming a tax rate of 40%, the after-tax cost of a $200,000 dividend payment is
a. $200,000
b. $70,000
c. $130,000
d. none of the above.

6. A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is
a. 60%
b. 15%
c. 30%
d. not enough information

7. For a given level of profitability as measured by profit margin, the firm's return on equity will
a. increase as its debt-to-assets ratio decreases.
b. decrease as its current ratio increases.
c. increase as its debt-to assets ratio increases.
d. decrease as its times-interest-earned ratio decreases.

8. The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.
a. fixed costs
b. variable costs
c. marginal costs
d. semi-variable costs

9. If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is $3.00 per unit and fixed costs are $60,000, what will the firm's net income be at sales of 30,000 units?
a. $90,000
b. $30,000
c. $15,000
d. $45,000

10. Required production during a planning period will depend on the
a. beginning inventory of products.
b. sales during the period.
c. desired level of ending inventory.
d. all of the above

11. Corporate restructuring has been one result of more institutional ownership. Restructuring can cause
a. changes in the asset and liabilities of the firm.
b. the sale of low-profit margin divisions.
c. the removal of current management and/or large reductions in the workforce.
d. all of the above.

12.The purpose of secondary trading is to
a. provide liquidity and competition between investments.
b. provide a market for securities not handled in primary trading.
c. provide jobs for brokers and dealers.
d. provide lower commissions than on the organized exchanges.

13.If you believe the stock market is heading up on a sustained basis, you should invest in stocks
a. With low beta
b. With high beta
c. With large amounts of unique risk
d. That plot below the security market line

14.The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if
a. It results in a negative NPV
b. The proposal has a different degree of risk
c. The company has unique risk
d. The company expects to earn more than the risk-free rate

15.Which of the following changes will increase the NPV of a project?
a. A decrease in the discount rate
b. A decrease in the size of the cash inflows
c. An increase in the initial cost of the project
d. A decrease in the number of cash inflows

16.When a depreciable asset is ultimately sold, the sales price is
a. Fully taxable
b. Non-taxable
c. Taxable only if accelerated depreciation is used
d. Potentially taxable

17.Which of the following actions will increase a firm's current ratio if it is now less than 1.0?
a. Convert marketable securities to cash
b. Pay accounts payable with cash
c. Buy inventory with short-term credit
d. Sell inventory at cost

18. How much does each additional sales dollar contribute toward profit for a firm with $5 million break-even level of revenues and $1.5 million in fixed costs?
a. $0.30
b. $0.33
c. $0.50
d. $0.70

19.Which of the following will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?
a. A leverage ratio of .0667
b. A P/E ratio of 14
c. A profit margin of 15%
d. A profit margin of 6.4%

20.A decrease in cash can be eliminated by an increase in
a. Dividends paid
b. Accounts payable
c. Accounts receivable
d. Inventories

21.Which of the following would be most harmful to a firm's current ratio that is currently 1.8?
a. Buy raw materials on credit
b. Sell marketable securities at cost
c. Pay off accounts receivable with cash
d. Pay off a portion of long-term debt with cash

22.What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?
a. It raises the break-even level
b. It has no effect on the break-even level
c. It reduces the break-even level
d. Effect cannot be determined

23.An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 10% capital gain. How much was received in dividend income during the year?
a. $2.00
b. $0.20
c. $4.00
d. $6.00

24.The major benefit of diversification is to
a. Increase the expected return
b. Remove negative risk assets from the portfolio
c. Reduce the portfolio's systematic risk
d. Reduce the expected risk

25.Which of the following is the best course of action?
a. Accept all projects with cash inflows exceeding actual cost
b. Reject all projects with rates of return exceeding the opportunity cost of capital
c. Accept all projects with positive net present values
d. Reject all projects lasting longer than 10 years

26.A budget forecasts that sales will grow by 20% next year. If cost of goods sold are 70% of sales, then cost of goods sold will
a. Grow to 90% of sales
b. Grow in dollars by 70%
c. Not change in dollar amount
d. Increase by 20%

27.The company cost of capital for a firm with 60% debt, 8% cost of debt, 15% cost of equity and a 35% tax rate is
a. 7.02%
b. 9.12%
c. 10.80%
d. 13.80%

28.Why is debt financing said to include a tax shield for the company?
a. Taxes are reduced by the amount of the debt
b. Taxes are reduced by the amount of interest
c. Taxable income is reduced by the amount of the debt
d. Taxable income is reduced by the amount of the interest

29.When securities are issued under a rights issue
a. Existing shareholders have the opportunity to maintain their percentage holdings
b. Shares are offered to the public at a discount
c. Existing shares will increase in price
d. Current shareholders have the right to resell their stock to the issuer

30.An asset's liquidity measures its
a. Potential for generating a profit
b. Cash requirements
c. Proportion of debt financing
d. Ease and cost of being converted to cash

31.The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if
a. It results in a negative NPV
b. The proposal has a different degree of risk
c. The company has unique risk
d. The company expects to earn more than the risk-free rate

32.A policy of dividend smoothing involves
a. Maintaining a constant dividend payout ratio
b. Keeping the regular dividend at the same amount indefinitely
c. Maintaining a steady progression of dividend increases over time
d. Alternating cash dividends with stock dividends

33.Which of the following signals is most likely to elicit a decrease in share price for a slow growth company that pays a small dividend?
a. Repurchase of company stock
b. Increase in the regular quarterly dividend
c. Decrease in the regular quarterly dividend
d. Borrowing

34.Synergy includes
a. Revenue enhancements
b. Cost reductions
c. Tax savings
d. All of these

35.Which of the following is created when a firm is purchased above book value?
a. Retained earnings
b. Net income
c. Goodwill
d. Capital gains

36.A major problem in corporate governance is
a. Poor audits
b. High executive pay
c. Government protection
d. Lack of transparency

37.What problem is caused by capital rationing?
a. Accepting projects with negative NPVs
b. Accepting projects with the highest IRRs first
c. Bypassing projects with positive NPVs
d. Bypassing projects that have positive IRRs

38.When is it appropriate to include sunk costs in the evaluation of a project?
a. Never
b. When the sunk costs are relatively large
c. When the sunk costs are considered to be overhead
d. If it improves the IRR

39.Minimizing carrying costs of current assets
a. Is likely to maximize profits
b. Does not consider spoilage costs
c. May increase costs due to shortages
d. Also minimizes ordering costs

40.The benefits of portfolio diversification are highest when the individual securities have returns that
a. Vary directly with the rest of the portfolio
b. Vary indirectly with the rest of the portfolio
c. Are uncorrelated with the rest of the portfolio
d. Are countercyclical

41.A project will generate $1 million annually in perpetuity. If the project costs $7 million, what is the lowest WACC shown below that will make the NPV negative?
a. 10%
b. 12%
c. 14%
d. 16%


Solution Summary

This solution helps describe forecasted sales, and what to do when actual sales are greater.