are obligations of the U.S. Treasury with common maturities

FIN 504

· ________ are obligations of the U.S. Treasury with common maturities of one to seven years and that are generally issued in minimum denominations of $5,000.

A.

Treasury notes

B.

Treasury bills

C.

Federal agency issues

D.

Banker’s acceptances

· The firm’s financing requirements can be separated into

A.

current liabilities and long-term funds

B.

current assets and fixed assets

C.

current liabilities and long-term debt

D.

seasonal and permanent

· Debt is generally the least expensive source of capital. This is primarily due to

A.

fixed interest payments

B.

its position in the priority of claims on assets and earnings in the event of liquidation

C.

the tax deductibility of interest payments

D.

the secured nature of a debt obliga

· The capital impairment restrictions are established to

A.

reduce dividends equal to or below the current earnings level

B.

constrain the firm to paying dividends which do not require additional borrowing

• c

protect the shareholder

D

provide a sufficient base to protect creditors’ claims

· The portion of a firm’s current assets financed with long-term funds may be called

A.

working capital

B.

accounts receivable

C.

net working capital

D.

Inventory

· Earnings before interest and taxes (EBIT) is a descriptive label for

A.

operating profits

B.

net profits before taxes

C.

earnings per share

D.

gross profits

· At a firm’s quarterly dividend meeting held on December 5, the directors declared a $1.50 per share cash dividend to be paid to the holders of record on Monday, January 1. Before the dividend was declared, the firm’s accumulated retained earnings balance and cash balance were $1,280,000 and $30,000 respectively. The firm has 10,000 shares of common stock outstanding. On January 2, the cash, dividends payable, and retained earnings accounts had balances of

A.

$15,000, $0, and $1,265,000, respectively

B.

$30,000, $15,000, and $1,280,000, respectively

C.

$30,000, $0, and $1,265,000, respectively

D.

$15,000, $0, and $1,280,000, respectively

· If a firm has a limited capital budget and too many good capital projects to fund them all, it is said to be facing the problem of

A.

constrained capital

B.

wealth optimization

C.

capital rationing

D.

profitability

· ________ analysis is a technique used to assess the returns associated with various cost structures and levels of sales.

A.

Time-series

B.

Marginal

C.

Breakeven

D.

Ratio

· Systematic risk is also referred to as

A.

diversifiable risk

B.

economic risk

C.

nondiversifiable risk

D. Not Relevant

· Net working capital is defined as

A.

a ratio measure of liquidity best used in cross-sectional analysis

B.

the portion of the firm’s assets financed with short-term funds

C.

current liabilities minus current assets

D.

current assets minus current liabilities

________ is a series of equal annual cash flows.

A.

A mixed stream

B.

A conventional

C.

A non-conventional

D.

An annuity

· A corporation is selling an existing asset for $21,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is

A.

$0 tax liability

B.

$7,560 tax liability

C.

$4,400 tax liability

D.

$7,720 tax liability

· The ________ is the rate of return a firm must earn on its investments in projects in order to maintain the market value of its stock.

A.

net present value

B.

cost of capital

C.

internal rate of return

D.

gross profit margin

· A behavioral approach that evaluates the impact on the firm’s return of simultaneous changes in a number of project variables is called

A.

sensitivity analysis

B.

scenario analysis

C.

simulation analysis

D.

All of the above

· The objective of ________ is to select the group of projects that provides the highest overall net present value and does not require more dollars than are budgeted.

A.

capital rationing

B.

scenario analysis

C.

certainty equivalents

D.

sensitivity analysis

· A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is

A.

$42,000

B.

$52,440

C.

$54,240

D.

$50,000

· A $60,000 outlay for a new machine with a usable life of 15 years is called

A.

capital expenditure

B.

operating expenditure

C.

replacement expenditure

D.

None of the above

· A $60,000 outlay for a new machine with a usable life of 15 years is called

A.

capital expenditure

B.

operating expenditure

C.

replacement expenditure

D.

None of the above

· A bank lends a firm $500,000 for one year at 8 percent and requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is

A.

8.9 percent

B.

8 percent

C.

7.2 percent

D.

7.0 percent

· Most firms employ ________ financing strategy.

A.

an aggressive

B.

a conservative

C.

a trade-off

D.

a seasonal

· The theoretical basis from which the concept of risk-adjusted discount rates is derived is

A.

the Gordon model

B.

the capital asset pricing model

C.

simulation theory

D.

the basic cost of money

· The conversion of current assets from inventory to receivables to cash provides the ________ of cash used to pay the current liabilities, which represents a(n) ________ of cash.

A.

outflow; inflow

B.

use; source

C.

source; use

D.

inflow; outflow

· A common approach of estimating the variability of returns involving forecasting the pessimistic, most likely, and optimistic returns associated with the asset is called

A.

marginal analysis

B.

sensitivity analysis

C.

break-even analysis

D.

financial statement analysis

· A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $70,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $30,000. The new asset will cost $80,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is

A.

$48,560

B.

$44,360

C.

$49,240

D.

$27,600

· The advantage of using the low-regular-and-extra dividend policy is that

A.

the firm avoids giving the shareholders false hopes

B.

if the firm’s earnings drop, so does the dividend payment

C.

the extra dividend may become a regular event

D.

cyclical shifts in earnings may be avoided

· The ________ measures the amount of time it takes the firm to recover its initial investment.

A.

average rate of return

B.

internal rate of return

C.

net present value

D.

payback period

· In a revolving credit agreement, the firm pays interest on

A.

the full line of credit

B.

the unused portion of the line of credit

C.

only the amount actually borrowed

D.

the amount actually borrowed and commitment fees on any unused portion of the loan

· The two major sources of short-term financing are

A.

a line of credit and accounts payable

B.

accounts payable and accruals

C.

a line of credit and accruals

D.

· accounts receivable and notes payable

· The purpose of adding an asset with a negative or low positive beta is to

A.

reduce profit

B.

reduce risk

C.

increase profit

D.

increase risk

· The shareholder receiving a stock dividend receives

A.

a share of common stock of equal value to their existing shares of common stock.

B.

cash

C.

additional shares of common stock and cash

D.

nothing of value

· The shareholder receiving a stock dividend receives

A.

a share of common stock of equal value to their existing shares of common stock.

B.

cash

C.

additional shares of common stock and cash

D.

nothing of value

· The most difficult set of accounts to predict are

A.

current assets

B.

stockholder’s equity

C.

fixed assets

D.

long-term debt

· In evaluating the initial investment for a capital budgeting project,

A.

an increase in net working capital is considered a cash inflow

B.

a decrease in net working capital is considered a cash outflow

C.

an increase in net working capital is considered a cash outflow

D.

net working capital does not have to be considered

· The evaluation of capital expenditure proposals to determine whether they meet the firm’s minimum acceptance criteria is called

A.

the ranking approach

B.

an independent investment

C.

the accept-reject approach

D.

a mutually exclusive investment

· ________ effectively raises the interest cost to the borrower on a line of credit.

A.

An operating change restriction

B.

An annual cleanup

C.

A compensating balance

D.

A commitment fee

· The primary purpose of a stock split is to

A.

issue additional shares

B.

increase the dividend

C.

reduce the price of stock

D.

reduce trading activity

· The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at $950 is

A.

10 percent

B.

10.6 percent

C.

12 percent

D.

15.4 percent

· The most common motive for adding fixed assets to the firm is

A.

expansion

B.

replacement

C.

renewal

D.

transformation

· firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is ________.

A.

-$1,000

B.

$0

C.

$1,000

D.

$1.25

· The cost of capital reflects the cost of funds

A.

over a short-run time period

B.

at a given point in time

C.

over a long-run time period

D.

at current book values

· The long-term funds of the firm are called

A.

debt

B.

assets

capital

C. Equity

· The net effect of a stock repurchase is

A.

similar to the payment of a stock dividend

B.

similar to a cash dividend

C.

similar to a stock split

D.

similar to a reverse stock split

· When common stock is repurchased and retired, the underlying motive is to

A.

delay taxes

B.

boost the stock’s dividends

C.

distribute the excess cash to the owners

D.

reduce the retained earnings balance

· An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K; $25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will be invested in asset J, with an expected annual return of 18 percent; and $15,000 will be invested in asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is

A.

12.67%

B.

12.00%

C.

10.00%

D.

unable to be determined from the information provided

· Prime-grade commercial paper will most likely have a higher annual return than

A.

a Treasury bill

B.

a preferred stock

C.

a common stock

D.

an investment-grade bond

· The payment of cash dividends to corporate stockholders is decided by the

A.

management

B.

stockholders

C.

SEC

D.

board of directors

· An approach to capital rationing that involves graphing project returns in descending order against the total dollar investment to determine the group of acceptable projects is called the

A.

net present value approach

B.

the internal rate of return approach

C.

the payback approach

D.

the profitability index approach

· The goal of an efficient portfolio is to

A.

maximize risk for a given level of return

B.

maximize risk in order to maximize profit

C.

minimize profit in order to minimize risk

D.

minimize risk for a given level of return

· The before-tax cost of debt for a firm which has a 40 percent marginal tax rate is 12 percent. The after-tax cost of debt is

A.

4.8 percent

B.

6.0 percent

C.

7.2 percent

D.

12 percent

· firm has a line of credit and borrows $25,000 at 9 percent interest for 180 days or half a year. What is the effective rate of interest on this loan if the interest is paid in advance?

A.

4.7 percent

B.

9.4 percent

C.

9.9 percent

D.

10.3 percent