Fin 486- name___________________________________ multiple choice.

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fin 486-

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of
merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for
the merchandise during the year, it has yet to collect at year end from the customer. The net profit
and cash flow from this sale for the year are

A) $3,000 and $7,000, respectively. B) $3,000 and -$7,000, respectively.
C) $3,000 and $10,000, respectively. D) $7,000 and -$3,000, respectively.

2) A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandise
purchased during the year at a total cost of $112,500. Although the firm paid in full for the
merchandise during the year, it has yet to collect at year end from the customer. The net profit and
cash flow from this sale for the year are

A) $37,500 and -$112,500, respectively. B) $37,500 and -$150,000, respectively.
C) $0 and $150,000, respectively. D) $150,000 and $112,500, respectively.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

3) Dividend payments change directly with changes in earnings per share. F

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

4) The primary goal of the financial manager is

A) minimizing risk. B) maximizing profit.
C) minimizing return. D) maximizing wealth.

5) A financial manager must choose between three alternative investments. Each asset is expected to
provide earnings over a three-year period as described below. Based on the wealth maximization
goal, the financial manager would

Year     Asset 1         Asset 2         Asset 3
1     $21,000         $ 9,000         $15,000
2     15,000         15,000         15,000
3     9,000         21,000         15,000
$    45,000         $45,000         $45,000

A) choose Asset 1.
B) choose Asset 2.
C) choose Asset 3.
D) be indifferent between Asset 1 and Asset 2.

6) The ________ provides a financial summary of the firm’s operating results during a specified
period.

A) statement of cash flows B) balance sheet
C) income statement D) statement of retained earnings

7) Earnings available to common shareholders are defined as net profits

A) before taxes. B) after taxes minus common dividends.
C) after taxes. D) after taxes minus preferred dividends.

8) A firm had the following accounts and financial data for 2005.
Sales Revenue $3,060         Cost of goods sold $1,800
Accounts Receivable 500     Preferred stock dividends 18
Interest expense 126         Tax rate 40%
Total oper. expenses 600     Number of shares of common 1,000
Accounts payable 240               stocks outstanding
The firm’s earnings available to common shareholders for 2005 were ________.

A)    $302.40 B) $516.60 C) $195.40 D) -$224.25

ESSAY. Write your answer on a separate sheet of paper.

9) At the end of 2005, the Long Life Light Bulb Company announced it had produced a gross profit of $1 million.
The company has also established that over the course of this year it has incurred $345,000 in operating
expenses and $125,000 in interest expenses. The company is subject to a 30% tax rate and has declared $57,000
total preferred stock dividends.

(a) How much is the earnings available for common stockholders?
(b) Compute the increased retained earnings for 2005 if the company were to declare a $4.25 common stock
dividend. The company has 15,000 shares of common stock outstanding.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

10) The two basic measures of liquidity are

A) inventory turnover and current ratio. B) current ratio and total asset turnover.
C) gross profit margin and ROE. D) current ratio and quick ratio.

11) As a firm’s cash flows become more predictable,

A) the return on equity should increase. B) the current ratio should expand.
C) current liabilities should decrease. D) current assets should decrease.

12) If Nico Corporation has annual purchases of $300,000 and accounts payable of $30,000, then
average purchases per day are ________ and the average payment period is ________.

A)    821.9; 36.5 B) 833.3; 36.0 C) 36.0; 833.3 D) 36.5; 821.9

13) The ________ is a popular approach for evaluating profitability in relation to sales by expressing
each item on the income statement as a percent of sales.

A) source and use statement B) retained earnings statement
C) profit and loss statement D) common-size income statement

14) A firm with a gross profit margin which meets industry standard and a net profit margin which is
below industry standard must have excessive

A) principal payments. B) cost of goods sold.
C) general and administrative expenses. D) dividend payments.

15) Examples of sophisticated capital budgeting techniques include all of the following EXCEPT

A) annualized net present value. B) payback period.
C) net present value. D) internal rate of return.

16) A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of
$15,000 per year for five years. The payback period of the project is

A)    1.5 years. B) 4 years. C) 3.3 years. D) 2 years.
B)   
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

17) If the NPV is greater than the cost of capital, a project should be accepted.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
18) A firm is evaluating three capital projects. The net present values for the projects are as follows:
Project         NPV
1         $100
2         $0
3         $100
The firm should

A) accept Projects 1 and 2 and reject Project 3.
B) accept Projects 1 and 3 and reject Project 2.
C) reject all projects.
D) accept Project 1 and reject Projects 2 and 3.

19) What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax
cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year
1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?

A) $1,700,000. B) ($137,053).
C) $371,764. D) None of the above.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

20) If its IRR is greater than the cost of capital, a project should be accepted.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

21) What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to
provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in
year 3 and $1,300,000 in year 4?

A) 13.57%. B) 15.57%.
C) 0.00%. D) None of the above.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
22) Tangshan Mining Company is considering investing in a new mining project. The firm’s cost of capital is 12 percent and the project is expected to have an initial after tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $2,500,000 in year 1, $2,300,000 in year 2, $2,200,000 in year 3 and ($1,300,000) in year 4?

(a) Calculate the project’s NPV.
(b) Calculate the project’s IRR.
(c) Should the firm make the investment?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

23) Generally the least expensive source of long-term capital is

A) short-term debt. B) retained earnings.
C) long-term debt. D) preferred stock.

24) A firm has determined its cost of each source of capital and optimal capital structure, which is
composed of the following sources and target market value proportions:
Target Market
Source of Capital     Proportions     After-Tax Cost
Long-term debt         40%         6%
Preferred stock         10         11
Common stock equity     50         15
The weighted average cost of capital is

A)    15 percent. B) 11 percent. C) 6 percent. D) 10.7 percent.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
25) Promo Pak has compiled the following financial data:
Source of Capital     Book Value     Market Value     Cost
Long-term debt         $10,000,000     $8,500,000     5.0%
Preferred stock         1,000,000     1,500,000     14.0
Common stock equity     9,000,000     15,000,000     20.0
            $20,000,000     $25,000,000

(a) Calculate the weighted average cost of capital using book value weights.
(b) Calculate the weighted average cost of capital using market value weights.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

26) An increase in current assets increases net working capital, thereby reducing the risk of technical
insolvency.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

27) Net working capital is defined as

A) current assets minus current liabilities.
B) current liabilities minus current assets.
C) a ratio measure of liquidity best used in cross-sectional analysis.
D) the portion of the firm’s assets financed with short-term funds.

28) The goal of working capital management is to

A) pay off short-term debts.
B) achieve a balance between short-term and long-term assets so that they add to the
achievement of the firm’s overall goals.
C) achieve a balance between risk and return in order to maximize the firm’s value.
D) balance current assets against current liabilities.

29) The two major sources of short-term financing are

A) accounts receivable and notes payable. B) accounts payable and accruals.
C) a line of credit and accruals. D) a line of credit and accounts payable.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

30) Fixed assets are the most desirable short-term loan collateral since they normally have a longer life,
or duration, than the term of the loan.

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