Pecking order of long-term financing strategy

Question

Problem 1: Your local travel agent is advertising an extravagant global vacation. The package deal requires that you pay $5,000 today, $15,000 one year from today, and a final payment of $25,000 on the day you leave two years from today. What is the cost of this vacation in today's dollars if the discount rate is 6%?

• $39,057.41
• $41,400.85
• $43,082.39
• $44,414.14
• $46,518.00

Problem 2: Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for fifty years. What is the value of this inheritance today if the applicable discount rate is 6.35%?

• $36,811.30
• $37,557.52
• $39,204.04
• $39,942.42
• $40,006.09

Problem 3: There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by:

• the change in the accounting rules of the period.
• the difference between tax accounting and accounting for financial accounting purposes.
• a large increase in the market value of equity that was greater than the increase in debt.
• All of the above.
• None of the above.

Problem 4: The book value of the shareholders' ownership is represented by:

• the sum of the par value of common stock, the capital surplus and the accumulated retained earnings.
• the total assets minus the net worth.
• the sum of the preferred stock, debt and the capital surplus.
• the sum of the total assets minus the current liabilities.
• None of the above.

Problem 5: Based on historical experience, which of the following best describes the "pecking order" of long-term financing strategy in the U.S.?

• Long-term debt first, new common equity, internal financing last.
• Long-term debt first, internal financing, new common equity last.
• Internal financing first, new common equity, long-term borrowing last.
• Internal financing first, long-term borrowing, new common equity last.
• None of the above.

Problem 6: A firm has 5,000 shares of stock outstanding, sales of $6,000, net income of $800, a price-earnings ratio of 10, and a book value per share of $.50. What is the market-to-book ratio?

• 1.6
• 2.4
• 3.0
• 3.2
• 3.6

Problem 7. Rosita's Restaurant has sales of $4,500, total debt of $1,300, total equity of $2,400, and a profit margin of 5%. What is the return on assets?

• 5.00%
• 6.08%
• 7.39%
• 9.38%
• 17.31%

Problem 8. Syed's Industries has accounts receivable of $700, inventory of $1,200, sales of $4,200, and cost of goods sold of $3,400. How long does it take Syed's to both sell its inventory and then collect the payment on the sale?

• 128 days
• 146 days
• 163 days
• 190 days
• 211 days

Problem 9. What is the taxable income for 2006?

• $360
• $520
• $640
• $780
• $800

Problem 10: Thompson's Jet Skis has operating cash flow of $218. Depreciation is $45 and interest paid is $35. A net total of $69 was paid on long-term debt. The firm spent $180 on fixed assets and increased net working capital by $38. What is the amount of the cash flow to stockholders?

• -$104
• -$28
• $28
• $114
• $142

Problem 11: Which of the following statements concerning NASDAQ are correct?

(I.) Most smaller firms are listed on NASDAQ rather than on the NYSE.
(II.) NASDAQ is an electronic market.
(III.) NASDAQ is an auction market.
(IV.) NASDAQ is an OTC market.

• I and II only
• I and III only
• II and IV only
• I, II, and IV only
• I, II, III, and IV

Problem 12: Which one of the following statements is correct concerning the NYSE?

• A firm is expected to have a market value for its publicly held shares of at least $100 million to be listed on the NYSE.
• The NYSE is the largest dealer market for listed securities in the United States.
• The NYSE accounts for only 50% of the shares traded in the auction markets.
• Any corporation desiring to be listed on the NYSE can do so.
• The NYSE is an over-the-counter exchange functioning as both a primary and a secondary market.

Problem 13: Working capital management includes decisions concerning which of the following?

(I.) accounts payable
(II.) long-term debt
(III.) accounts receivable
(IV.) inventory

• I and II only
• I and III only
• II and IV only
• I, II, and III only
• I, III, and IV only