Please see attached sheet for problems and instructions. Do not take if not willing to follow instructions.
For the multiple choice/true false answers only submit the question number and answer -- do not include the question in your answer sheet. For other questions/problems, please show all of your work. One Excel attachment is preferred.
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
1. The required rate of return reflects the costs of funds needed to finance a
2. The weighted average cost of capital is computed using before-tax costs of
each of the sources of financing that a firm uses to finance a project.
3. Tax credits that cannot be used by one firm can take on value if the firm is
acquired by another firm.
4. For the risk-averse financial manager, the more risky a given course of
action, the higher the expected return must be.
5. Economic exposure refers to the overall impact of exchange rate changes on
the value of the firm.
6. Tax credits that cannot be used by one firm can take on value if the firm is
acquired by another firm.
7. The cash budget can be used as an accurate standard for control purposes
by adjusting the cost figures for planned sales in proportion to total assets
8. Carrying inventory reduces the costs associated with periodic bad debt
9. A conflict can occur when using NPV and IRR to evaluate a project because
the IRR assumes reinvestment at the IRR rate while the NPV assumes
reinvestment at the cost of capital.
10. Corporate debt markets clearly dominate the corporate equity markets when
new funds are being raised.
.MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
11. A project costs $10,000 and is expected to return after-tax cash flows of
$3,000 each year for the next 10 years. This project's payback period is:
a. three years.
b. three and one-third years.
c. four years.
d. 10 years
12. Which of the following financial ratios is the best measure of how effectively
a firm's management is serving its stockholders?
a. Current ratio
b. Debt ratio
d. Return on equity
13. The rate that a subsidiary or parent of the multinational corporation charges
other divisions of the firm for its products is called a(n):
a. forward price.
b. transaction price.
c. transfer price.
d. exchange price.
14. __________ is a method of offering securities to a limited number of
a. Initial public offering
b. Private placement
c. Public offering
d. Syndicated underwriting
15. Fixed costs include all of the following EXCEPT:
a. administrative salaries.
b. property taxes.
c. sales commissions.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Please provide any back-up of your calculations on a separate sheet of paper so that partial credit can be assigned. You may provide either a Word document or an Excel spreadsheet.
16. 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?
d. None of the above
17. National Geographic is replacing an old printing press with a new
one. The old press is being sold for $350,000 and it has a net
book value of $75,000. Assume that National Geographic is in the
40% income tax bracket. How much will National Geographic pay in
income taxes from the sale?
18. Three years from now, Barbara Waters will purchase a laptop computer that
will cost $2,250. Assume that Barbara can earn 6.25% (compounded
monthly) on her money. How much should she set aside today for the
purchase? Round off to the nearest $1.
19. How much would an investor be willing to pay today for an investment that
returns $1,000 every year at year-end for five years if he wants to earn a
10% annual return on the investment?
20. Kannan Carpets, Inc. has asked you to calculate the company's current
ratio for 2001. All you have is a partial balance sheet and some
assumptions. Using the information provided, calculate Kannan's quick ratio
Gross profit margin = 50%
Inventory turnover (COGS/Inv) = 5
2001 sales = $3,000
Assets Liabilities & Equity
Cash ? Accounts payable $50
AR $40 Accruals ?
Inventory ? Long-term debt $400
Net fixed assets $500 Equity $250
Total assets $900 Total liab. & equity ?
21. If Challenge Corporation has sales of $2 million per year (all credit) and an
average collection period of 35 days, what is its average amount of
accounts receivable (assume a 360-day year)?
b. $ 57,143
c. $ 5,556
d. $ 97,222
22. The cost of capital for a firm which uses 45% debt at an after-tax cost of 10%
and 55% common stock at a 15% cost is:
John R. Scherzi Page 4 6/22/2009
PROBLEMS. Write your answer in the space provided and provide back-up of your work on a separate sheet of paper so that partial credit can be assigned. You may provide either a Word document or an Excel
spreadsheet. Each problem is worth
23. As the financial manager for a manufacturing firm, you have constructed
the following partial pro forma income statement for the next fiscal year.
Variable costs 5,600,000
Revenue before fixed costs 5,600,000
Fixed costs 2,400,000
Interest expenses 1,600,000
Earnings before taxes 1,600,000
Taxes (40%) 640,000
Net income $ 960,000
a. What is the degree of operating leverage at this level of output?
b. What is the degree of financial leverage?
c. What is the degree of combined leverage?
d. What is the break-even point in sales dollars for the firm?
e. If the average variable unit cost is $8, what is the break-even point in
24. TABLE 1
Financial Data for Dooley Sportswear December 31, 1996
Long-Term Debt $300,000
Interest Expense $ 5,000
Accumulated Depreciation $442,500
Net Sales $1,500,000
Common Stock $800,000
Accounts Receivable $225,000
Operating Expenses $525,000
Notes Payable - Current $187,500
Cost of Goods Sold $937,500
Plant and Equipment $1,312,500
Accounts payable $168,750
Marketable Securities - current $95,000
Prepaid Insurance $80,000
Accrued Wages $65,000
Federal income Taxes $5,750
From the information presented in Table 5, calculate the following financial ratios for the Dooley Sportswear Company. Assume a 360 day year.
a. current ratio d. operating profit margin
b. Inventory Turns e. net profit margin
c. average collection period
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The solution explains various multiple choice and short answer questions relating to finance
Multiple choice/ short answer questions : multiplier model, recession, automatic stabilizers, budget deficit, money, reserve ratio, currency to deposit ratio, Monetary policy, stimulate aggregate demand, expansionary monetary policy, AS/AD model, Countercyclical monetary policy, nominal interest rates, real interest rates, recessionary gap, autonomous expenditures, Crowding out, Automatic stabilizer, Money multiplier, Open market operations, Budget deficit, money supply, tight (restrictive) monetary policy.
1. According to the multiplier model, the best way to reduce inflation is to
a. increase aggregate demand by cutting government spending or raising taxes.
b. increase aggregate demand by raising government spending or cutting taxes.
c. decrease aggregate demand by cutting government spending or raising taxes.
d. decrease aggregate demand by raising government spending or cutting taxes.
2. If the economy goes into a recession, automatic stabilizers will do all of the following except
a. increase income tax revenues.
b. increase the budget deficit.
c. increase unemployment insurance.
d. increase welfare payments.
Refer to the following table as you answer the next question.
Year Surplus or deficit (-)
billions of dollars
3. Which statement is true?
a. The budget deficit in 1950 was $2.3 billion.
b. From 1946 to 1950, the debt was $2.3 billion.
c. From 1945 to 1950, the debt rose by $2.3 billion.
d. In 1950, the debt was $2.3 billion.
4. Money can be many things, but it is not
a. a financial liability.
b. a financial asset.
5. A reserve ratio of 0.10 means that a bank loans out __________ percent of its_______
a. 10; deposit liabilities
b. 10; excess reserves
c. 90; deposit liabilities
d. 90; excess reserves
6. In the real world, the currency to deposit ratio is
c. greater than 0 but less than or equal to 1.
d. greater than 1.
7. Monetary policy affects
a. inflation only.
b. output only.
c. both inflation and output.
d. neither inflation nor output.
8. If the Bank of Canada wanted to stimulate aggregate demand, it could
a. raise the target range for the overnight financing rate, thereby reducing interest rates throughout the economy.
b. raise the target range for the overnight financing rate, thereby increasing interest rates throughout the economy.
c. lower the target range for the overnight financing rate, thereby reducing interest rates throughout the economy.
d. lower the target range for the overnight financing rate, thereby increasing interest rates throughout the economy.
9. Which of the following is an example of an expansionary monetary policy?
a. Raising the bank rate.
b. Raising the overnight financing rate.
c. Selling bonds.
d. Buying bonds.
10. Bank of Canada sales of government bonds ________ bank reserves, and _______ the money supply.
a. increase; increase
b. decrease; decrease
c. decrease; increase
d. increase; decrease
11. In the AS/AD model, an expansionary monetary policy
a. increases aggregate demand by reducing interest rates.
b. increases aggregate demand by raising interest rates.
c. reduces aggregate demand by reducing interest rates.
d. reduces aggregate demand by raising interest rates.
12. Countercyclical monetary policy in the AS/AD model involves
a. contractionary monetary policy throughout the business cycle.
b. expansionary monetary policy throughout the business cycle.
c. contractionary monetary policy during boom periods and expansionary monetary policy during recession.
d. contractionary monetary policy during recession and expansionary monetary policy during boom periods.
13. Which of the following gives the correct relationship between nominal and real interest rates?
a. real interest rate = nominal interest rate + expected inflation rate
b. nominal interest rate = real interest rate + expected inflation rate
c. expected inflation rate = nominal interest rate + real interest rate
d. nominal interest rate = real interest rate ? expected inflation rate
14. Suppose an expansionary monetary policy reduces nominal interest rates. If this is the case, it follows that the expansionary monetary policy must have
a. reduced expected inflation.
b. increased expected inflation.
c. increased expected inflation less than it reduced real interest rates.
d. reduced real interest rates less than it increased expected inflation
15. Suppose the Japanese economy faces a recessionary gap of 120. If mpc is 0.6 and the price level is constant, the government should increase autonomous expenditures
a. by 20
b. by 48
c. by 72
d. by 120
Questions 16 and 17 (Short Answer)
16. Define and briefly explain the significance of each of the following terms.
a. Crowding out
b. Automatic stabilizer
c. Money multiplier
d. Open market operations
e. Budget deficit
17. Explain how the Bank of Canada can influence interest rates and the money supply in Canada. Be specific about the tools that the Bank of Canada has available for these purposes, and describe how these tools would be used in the case of a tight (restrictive) monetary policy.
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