1.) If a foreign currency is expected to depreciate with respect to the home currency, the holder of a net liability in foreign currency will profit.
2.) Coplon, Inc., an industrial firm, earned $180,000 in dividends in 1993 on their stock holding in the Finco Company. How much of the dividends are excluded from Coplon’s taxable income?
3.) A trade credit discount such as 2/10 net 30 means:
a. a 2% penalty is due after 30 days.
b. a 10% discount for cash on delivery and a 2% discount for payment within 30 days.
c. a 2% discount for payment within 10 days, and a 2% penalty if payment is made after 30 days.
d. a 2% discount if payment is made within 10 days; otherwise, the total amount is due in 30 days.
4.) 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.
5.) Dorning Shade Company will use an estimated 50,000 gumbands in its manufacturing process next year. The carrying cost of gumband inventory is $.04 per unit, and the cost of reordering gumbands is $50 per order. What is Dorning Shade’s economic ordering quantity for gumbands (round to the nearest 100 gumbands)?
6.) Holding all other variables constant, as accounts receivable increases, the cash conversion cycle decreases.
7.) Net working capital refers to which of the following?
a. Current assets
b. Current assets minus current liabilities
c. Current assets minus inventory
d. Current assets divided by current liabilities
e. Current assets minus inventory divided by current liabilities
8.) Which of the following is inconsistent with an optimal capital structure policy?
a. Lower the blended cost of debt and equity.
b. Maximize a firm’s common stock price.
c. Minimize the cost of capital.
d. Maximize EPS.
9.) According to the net income approach to valuation, the cost of capital will be lower the more debt financing is used.
10.) Operating leverage means financing a portion of a firm’s earnings per share with debt.
11.) Tom’s Trashbins, Inc. has fixed costs of $225,000. Tom’s trashbins sell for $45 and have a unit variable cost of $20. What is Tom’s break-even point in units?
12.) In order to maximize firm value, management should invest in new assets when the internal rate of return is:
a. greater or equal to the firm’s marginal cost of capital.
b. greater than the cost of debt financing.
c. less than or equal to the accounting rate of return.
d. less than or equal to the firm’s marginal cost of capital.
13. Which of the following is NOT used to calculate the cost of debt?
a. Maturity value of the debt
b. Market price of the debt
c. Number of years to maturity
d. Risk-free rate
14. In measuring cash flows we are interested only in the incremental or differential after-tax cash flows that are attributed to the investment proposal being evaluated.
15. Which of the following would increase the net working capital for a project? An increase in:
a. accounts receivable.
b. fixed assets.
c. accounts payable.
d. common stock.
16. XYZ, Inc. is considering adding a product line that would utilize unused floor place of their manufacturing plant. The floor space would be considered a(n):
a. variable cost.
b. opportunity cost.
c. sunk cost.
d. irrelevant cash flow.
17. One of the disadvantages of the payback method is that it ignores cash flows beyond the payback period.
18. The NPV method of evaluating independent projects:
a. is consistent with the goal of shareholder wealth maximization.
b. recognizes the time value of money.
c. uses cash flows.
d. all of the above.
19. At 8% compounded annually, how long will it take $750 to double?
a. 6.5 years
b. 48 months
c. 9 years
d. 12 years
20. Colton Corp. has current assets of $4.5 million. The current ratio is 1.25 and the quick ratio is 0.75. What is the amount of Colton’s current liabilities (in millions)?
The next section consists of 5 short answer questions worth 10% each (total = 50%). Please show all your work and reasoning to earn full credit on each question.
21.) A firm with sales of $1000 has the following balance sheet.
Balance Sheet as of June 30, 20XX
Assets &n bsp; Liabilities and Equity
Accounts receivable $200 Accounts payable $200
&nbs p; Inventory 400 Long term debt 300
Plan t 400   ; Equity 500
& nbsp; $1,000 $1,000
If the firm earns 10 percent after taxes on sales and pays no dividends,
a. Determine the entries for a new balance sheet for sales of $1,500 using the following estimated equations:
accounts receivable = $120 + 0.21Sales
inventory = $331 + 0.37Sales
accounts payable = $132 + 0.29Sales.
b. Will the firm need external financing?
c. Construct a new balance sheet using the estimates obtained in a. If necessary, issue new stock to cover any external financing needs. If the firm has excess funds, retire the accounts payable.
22.) The treasurer of Beta Electronics is contemplating the purchase of one of two bonds, both with a face value of $1,000. One of the bonds is a 20-year corporate bond paying $90 once each year and selling today for $1,000. The second bond, a municipal, also matures in 20 years and yields 5 1/2%. If Beta Electronics is in the 35% tax bracket, which bond should the treasurer purchase?
23.) Richenstein Enterprises is in the business of selling dishwashers. The firm needs $192,000 to finance an anticipated expansion in receivables due to increased sales. Richenstein’s credit terms are net 40, and its average monthly credit sales are $180,000. In general, the firm’s customers pay within the credit period; thus, the firm’s average accounts receivable balance is $240,000.
The comptroller of Richenstein Enterprises, Mr. Gee, approached their bank for the needed capital, placing the accounts receivable as collateral. The bank offered to make the loan at a rate of 2% over prime plus a 1% processing charge on all receivables pledged. The bank agreed to loan up to 80% of the face value of the receivables pledged.
a. Estimate the cost of the receivables loan to Richenstein where the firm borrows the $192,000. The prime rate is currently 13%.
b. Gee also requested a line of credit for $192,000 from the bank. The bank agreed to grant the necessary line of credit at a rate of 4% over prime and required a 12% compensating balance. Gee currently maintains an average demand deposit of $40,000. Estimate the cost of the line of credit to Richenstein.
c. Which source of credit should Richenstein Enterprises select?
24. The Clearwater Aquarium Company will produce 66,000 10-gallon aquariums next year. Variable costs are 40% of sales while fixed costs total $133,200. At what price must each aquarium be sold for Clearwater to obtain an EBIT of $114,000?
25. Frog Hollow Bakery is a new firm specializing in all-natural-ingredient pastry products. In attempting to determine what the financial position of the firm should be, the financial manager obtained the following average ratios for the baking industry for 2004:
Common equity to total assets = 60%
Total asset turnover = 3 times
Long-term debt to total capitalization = 25%
Current ratio = 1.2
Quick ratio = .75
Average collection period (360-day year) = 10 days
Complete a pro forma balance sheet for Frog Hollow Bakery assuming 2005 sales (all credit) are $450,000.