Reference no: EM131146283

Reference: Foundations of Finance (7th Edition), Arthru J. Keown, John D. Martin, J. William Petty, Prentice Hall 2011

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1. A discretionary form of financing would be

a. notes payable.

b. accounts payable.

c. accrued expenses.

d. A and B.

2. (True/False) When preparing pro forma financial statement, the income statement must be prepared first because the projected retained earnings balance on the balance sheet is based on the expected net income.

3. (True/False)The key ingredient in a firm's financial planning is an accurate sales forecast.

4. What differentiates "discretionary financing needs" from "external financing needs"?

a. assets

b. retained earnings

c. sales

d. spontaneous liabilities

5. Gerentology Associates, a highly profitable company, is considering two growth strategies, one that will achieve sales growth of 20% in one year, and the other that will achieve 20% growth in sales, but over a 4-year time frame. Assuming Gerentology Associates uses the percent of sales method, which of the following statements is true?

a. Discretionary financing needed will be much greater for the 4-year growth strategy.

b. Discretionary financing needed could be much less for the 4-year growth strategy due to retained earnings.

c. The asset balances at the end of 4 years for strategy two will be much greater than the asset balances required at the end of year one for strategy one.

d. Discretionary financing needed could be much greater for the slow growth strategy because interest charges will accumulate on the company's debt.

6. (True/False) If external financing needed cannot be obtained due to poor market conditions, a firm could reduce the amount needed by increasing its retention ratio.

7. A company collects 25% of its sales during the month of sale, 65% one month after the sale, and 10% two months after the sale. The company expects sales of $50,000 in August, $80,000 in September, $90,000 in October, and $60,000 in November. How much money is expected to be collected in October?

a. $90,000

b. $79,500

c. $55,000

d. $22,500

8. Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts receivable. Make the following assumptions: current year's sales are $45,450,000; current year's cost of goods sold is $26,950,000; sales are expected to rise by 20%. The firm's investment in accounts receivable in the current year is $8,600,000. The firm's marginal tax rate is 35%. What is the projection for next year's accounts receivable?

a. $11,345,000

b. $10,320,000

c. $9,575,000

d. $8,772,000

9. (True/False) Financial forecasting is the process of attempting to estimate a firm's future financing requirements.

10. A company calculates its discretionary financing needed and determines this amount of capital cannot be raised at a reasonable cost. Which of the following would reduce the amount of discretionary financing needed?

a. reduce the company's net profit margin

b. reduce the company's sales growth rate

c. increase the company's dividend payout ratio

d. increase the proportion of the company's sales that are made on credit

11. Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the APY, or annual percentage yield, calculation?

a. 4.33%

b. 10.34%

c. 12.25%

d. 12.46%

12. Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the APR, or annual percentage rate, calculation?

a. 3.33%

b. 4.00%

c. 10.00%

d. 11.75%

13. The prime rate of interest is

a. the rate the bank charges its most credit-worthy borrowers.

b. the rate the bank charges for money it borrows from the Federal Reserve Board.

c. the rate the bank charges its average borrower.

d. the rate the bank charges on home mortgages.

14. (True/False) The primary sources of collateral for secured loans are accounts receivable and inventory.

15. Which of the following statements concerning liquidity and debt is true?

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

b. Long-term debt is generally less costly than short-term debt.

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

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

16. The Missouri River Pendant Company uses commercial paper to satisfy part of its short-term financing requirements. Next week, it intends to sell $18 million in 90-day maturity paper on which it expects to have to pay discounted interest at an annual rate of 7 percent per annum. In addition, Stoney River expects to incur a cost of approximately $25,000 in dealer placement fees and other expenses of issuing the paper. What is the effective annual cost of credit to Missouri River?

a. 7.7%

b. 7.5%

c. 7.3%

d. 7.1%

17. Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. What will be the annual percentage rate, or APR, for this financing?

a. 10.00%

b. 12.12%

c. 10.67%

d. 13.33%

18. (True/False) The cash conversion cycle is a measure of a firm's effectiveness in managing its working capital.

19. Which of the following is considered a spontaneous source of financing?

a. short-term notes payable

b. accounts payable

c. long-term notes payable

d. preferred stock

20. Which of the following would normally occur if a firm increases its investment in current assets?

a. The firm's liquidity would be improved.

b. The firm's net working capital would decline.

c. The firm's liquidity would be worsened.

d. The firm's profit margin would improve.

21. Money market funds

a. are tax exempt.

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

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.

22. A retailer sells most of its merchandise on credit and bills clients monthly. Which of the following elements of float does the retailer have the most control over?

a. mail float

b. processing float

c. transit float

d. disbursing float

23. Transit float is caused by

a. the time necessary for a deposited check to clear the banking system and become usable funds to the company.

b. the time funds are not available, through the company's bank account, until its payment check has cleared the banking system.

c. the elapsed time from the moment a customer mails his remittance check until the firm begins to process it.

d. the time required for the firm to process remittance checks.

24. The PMI, Inc. processes an estimated 200,000 checks per year from its customers. Total revenue collected by check is $40,000,000. The average float time until the funds are credited to PMI's checking account is 6 days. For an extra cost of $ .06/check, PMI's bank will install a lock-box system that will reduce float time from 6 days to 2.5 days. If PMI earns 3.5% on its checking account, how much per check will PMI make if it uses the lock-box system?

a. $.005

b. $.006

c. $.007

d. $.008

25. Krause Precision Tools, Inc. will use an estimated 700,000 small processors in its manufacturing process next year. The carrying cost of processor inventory is $3.00 per unit and the cost of reordering processors is $100 per order. What is Krause's economic ordering quantity for small processors?

a. 6,340

b. 6,831

c. 7,118

d. 7,300

26. (True/False) One of the attractive features of commercial paper is an active secondary market.

27. In the basic EOQ model the optimal inventory level is the point at which

a. total cost is minimized.

b. total revenue is maximized.

c. carrying costs are minimized.

d. ordering costs are minimized.

28. A company is technically insolvent when

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

b. earnings before interest payments are less than the interest payments.

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

d. current ratio is less than 1.0.

29. The purpose of carrying inventory is to

a. make different production processes more dependent on sales.

b. make sales more independent of the production process.

c. have collateral for loans.

d. improve the current ratio.

30. (True/False) An extremely liquid asset is one that can be sold for cash quickly without a reduction in price below its current market value.

31. IMXP Corp. enters into a 30-day forward exchange contract to buy 113,540,000 yen for $100,000. Which of the following statements is true concerning this transaction?

a. IMXP will pay $100,000 and receive 113,540,000 yen 30 days from now.

b. IMXP will pay $100,000 today and receive 113,540,000 yen 30 days from now.

c. The spot exchange rate in 30 days will be 113.54 yen per dollar.

d. IMXP will receive 113,540,000 yen today and pay $100,000 30 days from now.

32. Which of the following is a reason for international investment?

a. to reduce portfolio risk

b. to increase P/E ratio

c. to gain an advantage in a foreign country

d. to gain access to foreign currency

33. Money-market hedges and forward market hedges rely on the

a. interest rate parity theory.

b. purchasing power parity theory.

c. law of large numbers.

d. capital asset pricing model.

34. (True/False) The forward-spot differential is the difference between the forward rate and the expected future spot rate.

35. A bottle of German wine costs $21 euros in Berlin. According to the purchasing power parity theory, what would the bottle sell for in New York if it costs the New York company $1.25 per bottle to transport the wine to the United States? Assume the exchange rate is $1.32 per euro.

a. $40.54

b. $28.97

c. $27.22

d. $39.50

36. (True/False) Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.

37. A wide bid/ask spread could indicate which of the following?

a. the presence of arbitrageurs

b. large volume transactions are taking place

c. frequent trading of a currency

d. an inefficient market

38. A forward exchange contract

a. gives the owner the right, but not the obligation, to buy a foreign currency at a fixed exchange rate for a fixed period of time.

b. gives the owner the right to purchase a foreign currency at some point in the future and any gains or losses are credited/debited to the account at the close of business each day.

c. requires delivery, at a specified future date, of one currency for a specified amount of another currency.

d. requires delivery, within two working days, of one currency for a specified amount of another currency.

39. A U.S.-based multinational corporation has 100% owned subsidiary in Argentina. The subsidiary operates only domestically, that is, all transactions occur within Argentina. Therefore, the U.S. multinational corporation

a. is exposed to translation risk only.

b. is not exposed to exchange rate risk because the subsidiary operates 100% domestically.

c. is exposed to both translation exposure and economic exposure.

d. is most concerned with transactions exposure.

40. Why do currency exchange rates throughout the world trade within a very narrow range on any given day?

a. because of purchasing power parity

b. because of the international translation effect

c. because of arbitrage

d. because of the law of one price