1. An increase in financial leverage generally results in a higher return on equity (ROE).
True
False
2. A company's return on assets should be greater than its return on equity.
True
False
3. An optimal current ratio should be greater than 1.0.
True
False
4. GoodTimes, Inc. has asset turnover of 0.5 times, a net profit margin of 10% and average total assets of $100, what is its net income (assuming no unusual items)?
$50
$500
$5
The answer cannot be determined with the information provided
5. Which of the following ratios appears on a common-size balance sheet?
I. Debt to asset ratio
II. Net working capital to total assets
III. Net profit margin
I , II, III
I only
I and III
III only
6. Common-size financial statements are constructed in order to:
Adjust for inflation and risk
Facilitate comparisons of different-sized companies
To comply with SEC requirements
All of the above
7. A company builds a new plant and finances its construction by issuing stock. Which ratio is least likely to be affected, all else being equal?
Current ratio
Debt to equity ratio
Debt to asset ratio
Net fixed assets to total assets
8. A company has net working capital of $0, current liabilities of $25 and total assets equal to $100. What is its current ratio?
0.0
1.0
0.5
4.0
9. Analysis of a company's financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer question9.
Sales in 2003 were $10,000. Therefore, the compounded average growth rate is:
8.6%
6.7%
6.3%
not enough information available
10. Analysis of a company's financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer question 10.
A 15% increase in inventory turns for Toys by Tom, Inc. would bring this ratio to ____, suggesting ________ in ________.
109 days; a deterioration; profitability
3.9 days; a deterioration; profitability
4.8 times; an improvement; efficiency
3.9 times; an improvement; efficiency
11. The cash cycle measures the days required to produce finished goods or delivered services.
12. In general, an increase in a liability is a source of funds.
13. The sustainable growth rate is the maximum growth rate achievable over an extended period of time.
14. The cash conversion cycle is calculated as:
Days in Inventory + Collection Period
Days in Inventory - Payables Period
Days in Inventory + Collection Period - Payables Period
None of the above
15. Which of following are sources of cash in a statement of sources and uses?
I. Collection of accounts receivables
II. Reduction of long-term debt
III. Payment of dividends
IV. Reduction in the cash account
I only
II and III
III and IV
I and IV
16. Which of the following actions, all else being equal, will increase the sustainable growth rate?
Increasing asset turnover
Reducing dividend payout
Increasing leverage
All of the above
17. Biases can and should always be eliminated in financial forecasts.
18. Which of the following is commonly forecasted as a percent of sales:
Common stock
Gross profit
Long-term debt
Revolving credit
19. External funding needs are computed as:
Projected total assets - (projected liabilities + projected net worth)
Projected total assets - (actual liabilities + net worth)
Projected current assets - (projected current liabilities + net worth)
None of the above
20. "Real" activities create cash for a business, while "financial" activities distribute cash within the company.
21. The item that roughly divides "real" from "financial" activities on an income statement is:
EBIT
Interest Expense
SG&A Expense
None of the above
22. The cost of debt is generally lower than the cost of equity.
23. The Static Tradeoff theory of capital structure implies that firms with higher business risk have should have lower leverage.
24. A share repurchase is financially equivalent to a dividend.
25. The Pecking Order Theory of capital structure implies a unique optimum capital structure.
26. A firm is all equity financed, with 10,000 outstanding shares with a market value of $20 each. Its net income was $30,000, and it decides to pay a cash dividend of $2,000. Calculate the value of each share after the dividend payout.
$22.8
$20.0
$19.8
Not enough information
27. Grandma's Applesauce, Inc. has a 0.60 probability of a good year with operating cash flow of $50,000; and 0.40 probability of a bad year with operating cash flow of $30,000. The company has a debt of $35,000 with 8 percent interest due next year. Assuming the company has no means of servicing its debt other than operations, and a 0% tax rate, which of the following is true?
Shareholders expected claim is $12,200
Creditors expected claim is $37,800
Creditors expected claim is $34,680
None of the above
28. The owners of a firm facing a high probability of bankruptcy prefer to invest in ____ projects, because ______.
safer; riskier projects make bankruptcy more likely
no new; the firm is likely to go bankrupt anyway
risky; the shareholders have little to lose and might win if successful
risky; creditors prefer taking a gamble rather than having the company default
29. Which of the following expresses the value of a levered firm (VL) in the Static Tradeoff model of optimal capital structure? [Note: VU denotes the value of the unlevered firm; CFD denotes expected costs of financial distress; and PV denotes present value.]
VL = PV(Tax Shield) - PV(CFD)
VL = VU + PV(Tax Shield) / PV(CFD)
VL = VU + PV(Tax Shield) - PV(CFD)
VL = VU + PV(Tax Shield)
30. A company has net income of $20,000 and a tax rate of 35 percent. Its total debt is $25,000, with principal payments of $5,000 due at the end of each year and an annual interest rate of 8%. What will be the company's interest tax shield in the upcoming year?
$8,750
$700
$9,450
$2,450
31. Which of the following is correct?
I. Tax shields make debt financing more attractive, all else equal.
II. A firm's debt ratio falls when it uses excess cash to pay dividends.
III. The cost of equity is low for firms that pay no dividends, all else equal.
IV. Bankruptcy costs decrease the benefits of debt financing all else equal.
I and IV
I, II and IV
I, III and IV
I, II, III and IV
32. The Pecking Order Theory of capital structure rests on an assumption of
Agency costs
Barriers to entry
Asymmetric information
Tax shields and cost of financial distress
33. Which of the following are equivalent under M&M proposition I?
Maximizing firm value and maximizing firm profit
Maximizing firm value and minimizing the cost of capital
Minimizing firm's cost of capital and minimizing firm's debt burden
Maximizing profit and minimizing taxes
34. Share repurchases and dividend payouts are most likely to differ in their
effects on a firm's capital structure
effects on corporate taxes
effects on corporate cash flow
effects on shareholders' personal taxes
35. A perpetuity is a stream of cash flows that lasts forever.
36. The higher the opportunity cost of capital the higher the NPV.
37. A project with an internal rate of return greater than the cost of capital should always be accepted.
38. The phenomenon of compounding connotes which of the following?
Investment of principal for a prolonged period.
Interest earned over a prolonged period.
Earning income on previously earned income.
Rising interest rates over time.
39. If you invest $2,000 today for three years at 5% interest paid annually, you will earn a total of $_____ in interest. Assume you re-invest all interest.
205.00
300.00
315.25
500.00
40. Enterprise Free Cash Flows should include:
I. Capital expenditures
II. Financing costs
III. Taxes
IV. Working capital requirements
I and IV
I, II and IV
I , III and IV
I, II, III, IV
41. You are trying to decide whether to accept or reject a one-year project. The project is estimated to generate $5,000 in incremental gross profit, which includes $200 in depreciation. Incremental SG&A expense is $400. At a 35% tax rate, the after-tax incremental cash flow is:
$2,990
$3,190
$3,250
$3,510
42. You are saving money for a down payment on a house. Suppose you want to have total savings of $20,000 in 10 years time and you have currently $5,000. What annual interest rate do you need to earn on your initial investment, assuming you contribute no additional savings?
10.0%
18.5%
12.5%
15.0%
43. What is the present value of a growing perpetuity that makes a payment of $100 in the first year, which thereafter grows at 3% per year? Apply a discount rate of 7%.
$ 2,000
$ 3,500
$ 2,500
$ 4,000
44. A company's beta (from the CAPM) is affected by its capital structure.
45. The cost of capital for an all-equity-financed company that pays no dividends is zero.
46. The beta for the market as a whole equals 1.0.
47. What is the risk premium for a stock where
the risk free rate is 5.1%
the equity market risk premium is 5.0%
the beta of the stock is 1.2
11.1%
6.1%
6.0%
12.1%
48. What is the expected return on a risky investment where
the risk free rate is 5.1%
the investment's beta is 1.4
the equity market risk premium is 5.0%
the cost of debt is 4.5%
10.8%
9.6%
12.1%
9.2%
49. Which is a commonly used proxy for the "risk-free rate"?
the average historical interest rate on long-term government bonds
the current market rate interest rate on a government-insured savings account
the current yield to maturity on a long-term government bond
the rate of return on a low volatility stock
50. In the CAPM, the parameter beta measures:
non-systematic (diversifiable) risk
systematic (non-diversifiable) risk
total risk
risk-adjusted stock returns