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1. Which one of the following terms is defined as the management of a firm's long-term investments?
A. agency cost analysis
B. capital budgeting
C. financial allocation
D. working capital management
E. capital structure
2. Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
A. cost analysis
B. capital budgeting
C. working capital management
D. cash management
E. capital structure
3. Which one of the following is defined as a firm's short-term assets and its short-term liabilities?
A. net capital
B. investment capital
C. capital structure
D. debt
E. working capital
4. A business owned by a solitary individual who has unlimited liability for its debt is called a:
A. general partnership.
B. limited liability company.
C. sole proprietorship.
D. corporation.
E. limited partnership.
5. A business partner whose potential financial loss in the partnership will not exceed his or her investment in
that partnership is called a:
A. generally partner.
B. zero partner.
C. sole proprietor.
D. corporate shareholder.
E. limited partner.
6. Which of the following accounts are included in working capital management?
I. accounts payable
II. accounts receivable
III. fixed assets
IV. inventory
A. II, III, and IV only
B. II and IV only
C. I, II, and IV only
D. I and III only
E. I and II only
7. Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life
A. I, III, and IV only
1
ch1 Answers
1
2
B
E
3
E
4
C
5
E
6
C
7
A
8
B
9
b
10
A
B. $300
C. $600
D. $1,700
E. $1,800
7. Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained
earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is
$680. What are the earnings before interest and taxes?
A. $589.46
B. $1,269.46
C. $1,331.54
D. $1,951.54
E. $1,949.46
8. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $311,360?
A. 28.25 percent
B. 31.09 percent
C. 33.62 percent
D. 35.48 percent
E. 39.00 percent
9. Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is
34 percent. The firm does not have any interest expense. What is the operating cash flow?
A. $129,152
B. $171,852
C. $179,924
D. $281,417
E. $309,076
10. At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the
end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is
the amount of the cash flow to creditors?
A. -$18,348
B. -$1,001
C. $11,129
D. $13,861
E. $19,172
Ch2 Answers
1
2
D
E
3
B
4
A
5
B
6
B
7
B
8
C
5.
Current assets = $520 + $190 + $70 = $780
6.
Net working capital = $4,900 - $3,200 - $1,400 = $300
7.
Net income = $75 + $418 = $493
Taxable income = $493/(1 - .35) = $758.46
Earnings before interest and taxes = $758.46 + $511 = $1,269.46
8.
Tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($211,360) = $104,680.40
Average tax rate = $104,680.40/$311,360 = 33.62 percent
9.
Earnings before interest and taxes = $1,349,800 - $903,500 - $42,700 = $403,600
Tax = $403,600
.34 = $137,224
Operating cash flow = $403,600 + $42,700 - $137,224 = $309,076
10.
Cash flow to creditors = $6,430 - ($68,219 - $72,918) = $11,129
9
E
10
C
Ch3 Answers
1
2
C
D
3
E
4
B
5
D
6
D
7
A
8
B
6.
7.
Common-size inventory = $310/($1,600 + $720) = 13.36 percent
8.
Interval measure = ($311,770 - $167,532)/$2,980 = 48.40 days
9.
Inventory turnover = $628,300/$208,400 = 3.014875
Days in inventory = 365/3.014875 = 121.07 days
10.
Return on equity = (.0968 $807,200)/[$1,105,100 (1 - .78)] = 32.14 percent
9
C
10
E
Ch4 Answers
1
2
B
E
3
B
4
E
5
B
6
E
7
A
8
C
7.
Projected assets = ($1,600 + $27,500) 1.045 = $30,409.50
Projected liabilities = $1,200 1.045 = $1,254
Current equity = $1,600 + $27,500 - $1,200 = $27,900
Projected increase in retained earnings = $29,000 .05 1.045 = $1,515.25
Equity funding need = $30,409.50 - $1,254 - $27,900 - $1,515.25 = -$259.75
8.
Full-capacity sales = $21,900/0.45 = $48,667
9.
Return on equity = 0.045 1.60 (1 + 0.60) = 0.1152
Sustainable growth = [0.1152 (1 - 0.15)]/{1 - [.1152 (1 - 0.15)]} = 10.85 percent
10.
0.062 = [ROE 0.45]/[1 - (ROE 0.45)]; ROE = .129734
0.129734 = PM (1/1.2) (1 + .064); PM = 14.63 percent
9
E
10
E
7. You are depositing $1,500 in a retirement account today and expect to earn an average return of 7.5 percent
on this money. How much additional income will you earn if you leave the money invested for 45 years instead
of just 40 years?
A. $10,723.08
B. $11,790.90
C. $12,441.56
D. $12,908.19
E. $13,590.93
8. You would like to give your daughter $75,000 towards her college education 17 years from now. How much
money must you set aside today for this purpose if you can earn 8 percent on your investments?
A. $18,388.19
B. $20,270.17
C. $28,417.67
D. $29,311.13
E. $32,488.37
9. Your older sister deposited $5,000 today at 8.5 percent interest for 5 years. You would like to have just as
much money at the end of the next 5 years as your sister will have. However, you can only earn 7 percent
interest. How much more money must you deposit today than your sister did if you are to have the same amount
at the end of the 5 years?
A. $321.19
B. $360.43
C. $387.78
D. $401.21
E. $413.39
10. One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn?
A. 6.59 percent
B. 6.67 percent
C. 6.88 percent
D. 6.92 percent
E. 7.01 percent
11
Ch5 Answers
1
2
A
E
3
C
4
C
5
E
6
A
3.
Ending value = $6,200 + ($6,200 .05 10) = $9,300
4.
Ending value = $10,500 + ($10,500 .06 4) = $13,020
5.
Simple interest = $1,650 + ($1,650 .05 20) = $3,300
Annual compounding = $1,650 (1.05)20 = $4,377.94
Difference = $4,377.94 - $3,300 = $1,077.94
6.
Future value = $36,000 (1 + .036)12 = $55,032.54
7.
Future value = $1,500 (1 + .075)45 = $38,857.26
Future value = $1,500 (1 + .075)40 = $27,066.36
Difference = $38,857.26 - $27,066.36 = $11,790.90
8.
Present value = $75,000 [1/(1 + .08)17] = $20,270.17
9.
Future value = $5,000 (1 + .085)5 = $7,518.28
Present value = $7,518.28 [1/(1 + .07)5] = $5,360.43
Difference = $5,360.43 - $5,000 = $360.43
10.
$1,924.62 = $1,800 (1 + r)1; r = 6.92 percent
12
7
B
8
B
9
B
10
D
7. You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75
percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on
the last day of each month. Which one of the following statements is correct concerning these two annuities?
A. These two annuities have equal present values but unequal futures values at the end of year five.
B. These two annuities have equal present values as of today and equal future values at the end of year five.
C. Annuity B is an annuity due.
D. Annuity A has a smaller future value than annuity B.
E. Annuity B has a smaller present value than annuity A.
8. You are comparing two annuities with equal present values. The applicable discount rate is 8.75 percent. One
annuity pays $5,000 on the first day of each year for 20 years. How much does the second annuity pay each
year for 20 years if it pays at the end of each year?
A. $5,211
B. $5,267
C. $5,309
D. $5,390
E. $5,438
9. You are scheduled to receive annual payments of $4,800 for each of the next 7 years. The discount rate is 8
percent. What is the difference in the present value if you receive these payments at the beginning of each year
rather than at the end of each year?
A. $1,999
B. $2,013
C. $2,221
D. $2,227
E. $2,304
10. Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How much will she
have in her account at the end of 45 years?
A. $1,806,429
B. $1,838,369
C. $2,211,407
D. $2,333,572
E. $2,508,316
14
Ch6 Answers
1
2
C
D
3
A
4
E
5
D
6
C
7
E
8
E
8.
Because each payment is received one year later, then the cash flow has to equal:
$5,000 (1 + 0.0875) = $5,438
9.
15
9
A
10
D
D. $85.00
E. $86.29
7. The current yield is defined as the annual interest on a bond divided by which one of the following?
A. coupon
B. face value
C. market price
D. call price
E. dirty price
8. Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate
coupon bond?
A. real rate risk
B. interest rate risk
C. default risk
D. liquidity risk
E. taxability risk
9. Last year, you purchased a "TIPS" at par. Since that time, both market interest rates and the inflation rate
have increased by 0.25 percent. Your bond has most likely done which one of the following since last year?
A. decreased in value due to the change in inflation rates
B. experienced an increase in its bond rating
C. maintained a fixed real rate of return
D. increased in value in response to the change in market rates
E. increased in value due to a decrease in time to maturity
10. Bryceton, Inc. has bonds on the market with 13 years to maturity, a yield-to-maturity of 9.2 percent, and a
current price of $895.09. The bonds make semiannual payments. What is the coupon rate?
A. 7.80 percent
B. 8.00 percent
C. 8.25 percent
D. 8.40 percent
E. 8.65 percent
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Ch7 Answers
1
2
C
C
3
B
4
D
5
B
6
B
5.
6.
10.
18
7
C
8
B
9
C
10
A
B. Preferred shareholders determine the outcome of any election that involves a proxy fight.
C. Preferred shareholders are considered to be the residual owners of a corporation.
D. Preferred stock normally has a stated liquidating value of $1,000 per share.
E. Cumulative preferred shares are more valuable than comparable non-cumulative shares.
7. Great Lakes Health Care common stock offers an expected total return of 9.2 percent. The last annual
dividend was $2.10 a share. Dividends increase at a constant 2.6 percent per year. What is the dividend yield?
A. 3.75 percent
B. 4.20 percent
C. 4.55 percent
D. 5.25 percent
E. 6.60 percent
8. The Stiller Corporation will pay a $3.80 per share dividend next year. The company pledges to increase its
dividend by 2.4 percent indefinitely. How much are you willing to pay to purchase this company's stock today if
you require a 6.9 percent return on your investment?
A. $55.07
B. $63.09
C. $72.22
D. $78.47
E. $84.44
9. You want to be on the board of directors of Wisely Foods. Since you are the only shareholder that will vote
for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the
board. What is the type of voting called that requires this level of stock ownership to be successfully elected
under these conditions?
A. democratic
B. cumulative
C. straight
D. deferred
E. proxy
10. Springboro Tech is a young start-up company. No dividends will be paid on the stock over the next 15 years,
because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend
in 16 years and will increase the dividend by 3 percent per year thereafter. What is the current share price if the
required return on this stock is 8 percent?
A. $75.66
B. $88.19
C. $120.00
D. $164.59
E. $240.00
20
Ch8 Answers
1
2
B
D
3
E
4
A
5
B
6
E
2.
3.
4.
5.
7.
Dividend yield = 0.092 - 0.026 = 6.6 percent
8.
10.
21
7
E
8
E
9
C
10
A
Based on the net present value of _____, you should _____ the project.
A. -$15,030.75; reject
B. -$12,995.84; reject
C. -$9,283.60; accept
D. $9,283.60; accept
E. $12,995.84; accept
4. Which one of the following correctly applies to the average accounting rate of return?
A. It considers the time value of money.
B. It measures net income as a percentage of the sales generated by a project.
C. It is the best method of analyzing mutually exclusive projects from a financial point of view.
D. It is the primary methodology used in analyzing independent projects.
E. It can be compared to the return on assets ratio.
5. Which one of the following methods determines the amount of the change a proposed project will have on the
value of a firm?
A. net present value
B. discounted payback
C. internal rate of return
D. profitability index
E. payback
22
6. The Chandler Group wants to set up a private cemetery business. According to the CFO, Barry M. Deep,
business is "looking up". As a result, the cemetery project will provide a net cash inflow of $57,000 for the firm
during the first year, and the cash flows are projected to grow at a rate of 7 percent per year forever. The project
requires an initial investment of $759,000. The firm requires a 14 percent return on such undertakings. The
company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows. At what
constant rate of growth would the company just break even?
A. 4.48 percent
B. 5.29 percent
C. 5.61 percent
D. 6.49 percent
E. 6.75 percent
7. The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next 4 years. The
profit margin is estimated at 6 percent. The project will cost $90,000 and will be depreciated straight-line to a
book value of zero over the life of the project. The firm has a required accounting return of 11 percent. This
project should be _____ because the AAR is _____ percent.
A. rejected; 10.03
B. rejected; 10.25
C. rejected; 11.60
D. accepted; 10.25
E. accepted; 11.60
8. You are considering the following two mutually exclusive projects. Both projects will be depreciated using
straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.
23
A. 14.72 percent; A
B. 14.72 percent; B
C. 15.99 percent; A
D. 15.99 percent; B
E. 16.08 percent; B
10. A project with financing type cash flows is typified by a project that has which one of the following
characteristics?
A. conventional cash flows
B. cash flows that extend beyond the acceptable payback period
C. a year or more in the middle of a project where the cash flows are equal to zero
D. a cash inflow at time zero
E. cash inflows which are equal in amount
24
Ch9 Answers
1
2
B
E
3
E
4
E
5
A
6
D
7
E
8
A
9
C
10
D
3.
6.
The minimum growth rate is the IRR as that is the rate that produces a zero NPV.
This problem is solved using the growing perpetuity formula.
0 = -$759,000 + $57,000/(0.14 - g); g = 6.49 percent
7.
8.
Accept Project A is it pays back within the required 2.5 years. Reject B as it does not.
9.
The crossover rate is 15.99 percent. At a rate lower than the crossover rate, such as 15 percent, Project A will
have the higher NPV and should be accepted.
25
E. the minimum price you should charge if you want to financially breakeven.
6. Hollister & Hollister is considering a new project. The project will require $522,000 for new fixed assets,
$218,000 for additional inventory, and $39,000 for additional accounts receivable. Short-term debt is expected
to increase by $165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line to a zero
book value over the life of the project. At the end of the project, the fixed assets can be sold for 20 percent of
their original cost. The net working capital returns to its original level at the end of the project. The project is
expected to generate annual sales of $875,000 and costs of $640,000. The tax rate is 34 percent and the required
rate of return is 14 percent. What is the amount of the aftertax cash flow from the sale of the fixed assets at the
end of this project?
A. $35,496
B. $68,904
C. $104,400
D. $287,615
E. $344,520
7. Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The
equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. The
equipment can be scraped at the end of the project for 5 percent of its original cost. Annual sales from this
project are estimated at $420,000. Net working capital equal to 20 percent of sales will be required to support
the project. All of the net working capital will be recouped. The required return is 16 percent and the tax rate is
35 percent. What is the amount of the aftertax salvage value of the equipment?
A. $17,150
B. $31,850
C. $118,800
D. $237,600
E. $343,000
8. Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices,
have differing operating costs, differing machine lives, and will be replaced when worn out. Which one of the
following computational methods should Dan use as the basis for his decision?
A. internal rate of return
B. operating cash flow
C. equivalent annual cost
D. depreciation tax shield
E. bottom-up operating cash flow
9. Webster & Moore paid $139,000, in cash, for a piece of equipment 3 years ago. At the beginning of last year,
the company spent $21,000 to update the equipment with the latest technology. The company no longer uses
this equipment in its current operations and has received an offer of $89,000 from a firm that would like to
purchase it. Webster & Moore is debating whether to sell the equipment or to expand its operations so that the
equipment can be used. When evaluating the expansion option, what value, if any, should the firm assign to this
equipment as an initial cost of the project?
A. $0
B. $21,000
C. $89,000
D. $110,000
E. $160,000
10. Net working capital:
27
A. can be ignored in project analysis because any expenditure is normally recouped at the end of the project.
B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project.
C. is rarely affected when a new product is introduced.
D. can create either a cash inflow or a cash outflow at time zero of a project.
E. is the only expenditure where at least a partial recovery can be made at the end of a project.
28
Ch10 Answers
1
2
D
A
3
E
4
E
5
E
6
B
1.
OCF = $28,000 - $17,500 - $3,000 = $7,500
2.
Depreciation tax shield = $980,000/7 0.35 = $49,000
4.
OCF = $122,400(1 - 0.33) + ($397,800/7)(0.33) = $100,761.43
6.
Aftertax salvage value = $522,000 0.20 (1 - 0.34) = $68,904
7.
Aftertax salvage value = $980,000 0.05 (1 - 0.35) = $31,850
9.
Relevant value = $89,000
29
7
B
8
C
9
C
10
D
firm's profits. Which one of the following represents the price that should be charged for the additional units
during this sale?
A. average variable cost
B. average total cost
C. average total revenue
D. marginal revenue
E. marginal cost
7. The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division
managers. These requests are seeking funding for positive net present value projects. The CFO continues to
deny all funding requests due to the financial situation of the company. Apparently, the company is:
A. operating at the accounting break-even point.
B. operating at the financial break-even point.
C. facing hard rationing.
D. operating with zero leverage.
E. operating at maximum capacity.
8. Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each
division submit its capital budgeting proposals for next year. These proposals represent positive net present
value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million,
$3.1 million, and $6.8 million, respectively. For the firm as a whole, Uptown Promotions is limited to spending
$10 million for new projects next year. This is an example of:
A. scenario analysis.
B. sensitivity analysis.
C. determining operating leverage.
D. soft rationing.
E. hard rationing.
9. We are evaluating a project that costs $854,000, has a 15-year life, and has no salvage value. Assume that
depreciation is straight-line to zero over the life of the project. Sales are projected at 154,000 units per year.
Price per unit is $41, variable cost per unit is $20, and fixed costs are $865,102 per year. The tax rate is 33
percent, and we require a 14 percent return on this project. Suppose the projections given for price, quantity,
variable costs, and fixed costs are all accurate to within
14 percent. What is the worst-case NPV?
A. $984,613
B. $1,267,008
C. $1,489,511
D. $1,782,409
E. $1,993,870
10. Brubaker & Goss has received requests for capital investment funds for next year from each of its five
divisions. All requests represent positive net present value projects. All projects are independent. Senior
management has decided to allocate the available funds based on the profitability index of each project since the
company has insufficient funds to fulfill all of the requests. Management is following a practice known as:
A. scenario analysis.
B. sensitivity analysis.
C. leveraging.
D. hard rationing.
E. soft rationing.
31
Ch11 Answers
1
2
B
E
3
C
4
E
5
C
6
E
7
C
8
D
9
E
10
E
1.
FCcash break-even = 22,600 ($28 - $13) = $339,000
2.
DOL = 0.053/0.02 = 2.65
3.
Marginal total revenue = 10,000 ($14.95 + $18.46) = $334,100
5.
Total variable costs = [($21.20 + $37.18) 1.05][42,000 0.95] = $2,445,830
9.
OCFWorst = {[($41 0.86) - ($20 1.14)][154,000 0.86] - ($865,102 1.14)}{1 - 0.33) + ($854,000/15)(0.33)
= $463,658.70
32