Which of the following is NOT a basic function of a budget?
A. Budgets compare historical costs of the firm with its current cost performance.
B. Budgets allow for performance evaluation.
C. Budgets indicate the need for future financing.
D. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
17) Purchases of plant and equipment can be determined from the:
A. Pro forma income statement.
B. Use of ratio analysis.
C. Current cash budget.
D. Previous period's balance sheet.
18) All of the following are found in the cash budget EXCEPT:
A. Cash disbursements.
B. New financing needed.
C. A net change in cash for the period.
19) Which of the following is a non-cash expense?
A. Packaging costs
B. Administrative salaries
C. Depreciation expenses
D. Interest expense
20) A plant can remain operating when sales are depressed:
A. In an effort to cover at least some of the variable cost.
B. Unless variable costs are zero when production is zero.
C. If the selling price per unit exceeds the variable cost per unit.
D. To help the local economy.
21) The break-even model enables the manager of a firm to:
A. Determine the quantity of output that must be sold to cover all operating costs.
B. Determine the optimal amount of debt financing to use.
C. Calculate the minimum price of common stock for certain situations.
D. Set appropriate equilibrium thresholds.
22) How long will it take $750 to double at 8% compounded annually?
A. 9 years
B. 12 years
C. 6.5 years
D. 48 months
23) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
24) If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years?
25) Which of the following is NOT considered a permanent source of financing?
A. Preferred stock
B. Corporate bonds
C. Common stock
D. Commercial paper
26) Which of the following is considered to be a spontaneous source of financing?
B. Operating leases
C. Accounts receivable
D. Accounts payable
27) A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with:
A. Trade credit.
B. Common stock.
C. Selling equipment.
D. preferred stock.
28) Compute the payback period for a project with the following cash flows, if the company's discount rate is 12%. Initial outlay = $450
Cash flows: Year 1 = $325
Year 2 = $ 65
Year 3 = $100
A. 2.88 years
B. 3.43 years
C. 3.17 years
D. 2.6 years
29) Your company is considering a project with the following cash flows: Initial outlay = $1,748.80 Cash flows Years 1–6 = $500 Compute the IRR on the project.
30) We compute the profitability index of a capital-budgeting proposal by:
A. dividing the present value of the annual after-tax cash flows by the cost of the project.
B. Multiplying the IRR by the cost of capital.
C. dividing the present value of the annual after-tax cash flows by the cost of capital.
D. Multiplying the cash inflow by the IRR.
31) You have been asked to analyze a capital investment proposal. The project's cost is $2,775,000. Cash inflows are projected to be $925,000 in Year 1; $1,000,000 in Year 2; $1,000,000 in Year 3; $1,000,000 in Year 4; and $1,225,000 in Year 5. Assume that your firm discounts capital projects at 15.5%. What is the project's MIRR?
32) Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk.
33) Most firms use the payback period as a secondary capital-budgeting technique, which, in a sense, allows them to control for risk.
34) The NPV assumes cash flows are reinvested at the:
A. real rate of return.
D. cost of capital.
35) The firm should accept independent projects if:
A. the IRR is positive.
B. the payback is less than the IRR.
C. the profitability index is greater than 1.0.
D. the NPV is greater than the discounted payback.
36) ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12% (Round your answer to the nearest $1.)
37) The marginal cost of preferred stock is equal to:
A. (1 - tax rate) times the preferred stock dividend divided by net price.
B. the preferred stock dividend divided by market price.
C. the preferred stock dividend divided by its par value.
D. the preferred stock dividend divided by the net market price.
38) The most expensive source of capital is:
B. preferred stock.
C. New common stock.
D. retained earnings.
39) The average cost associated with each additional dollar of financing for investment projects is:
A. risk-free rate.
B. The incremental returns.
D. The marginal cost of capital.
40) J & B, Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently, the yield to maturity on these bonds is 14%. If the firm's tax rate is 40%, what is the cost of debt to J & B?
41) Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually. Investors are expected to pay $918 for the 10-year bond. Bender will have to pay $33 per bond in flotation costs. What is the cost of debt if the firm is in the 34% tax bracket?
42) Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt–10%; preferred stock–11%; and common stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?
43) Zybeck Corporation projects operating income of $4 million next year. The firm's income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will projected EPS be next year?
44) Castle Corp. generated $2 million in operating income from sales of $20 million during the latest fiscal year. The firm's interest expense was $500,000, and the corporate income tax rate was 40%. Investors require a rate of return of 18%. Using the dependence hypothesis approach to valuation, what is the market value of Castle?
A. $7.2 million
B. $9.6 million
C. $5.1 million
D. $8.3 million
E. $6.5 million
45) Farrar, Inc. projects operating income of $4 million next year. The firm's income tax rate is 40%. Farrar presently has 750,000 shares of common stock, no preferred stock, and no debt. The firm is considering the issuance of $6 million of 10% bonds to finance a new product that is not expected to generate an increase in income for two years. If Farrar issues the bonds this year, what will projected EPS be next year?
46) _________ risk is generally considered only a paper gain or loss.
47) Which of the following statements about exchange rates is true?
A. Exchange rates were fixed prior to establishing a floating-rate international currency system, and all countries set a specific parity rate for their currency relative either to the Canadian or to the U.S. dollar.
B. Day-to-day fluctuations in exchange rates currently are caused by changes in parity rates.
C. A floating-rate international currency system has been operating since 1973.
D. All of the choices.
48) Capital markets in foreign countries:
A. Offer lower returns than those obtainable in the domestic capital markets.
B. Provide international diversification.
C. In general are becoming less integrated due to the widespread availability of interest rate and currency swaps.
D. All of the choices.
49) A spot transaction occurs when one currency is:
A. exchanged for another currency at a specified price.
B. deposited in a foreign bank.
C. traded for another at an agreed-upon future price.
D. immediately exchanged for another currency.
50) If the quote for a forward exchange contract is greater than the computed price, the forward contract is:
A. A good buy.
C. At equilibrium.
51) The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the:
A. Interest rate parity theory.
B. Purchasing power parity theory.
C. arbitrage markets theory.
D. Balance of payments quantum theory.
52) Buying and selling in more than one market to make a riskless profit is called:
A. International trading.
B. Profit maximization.
C. cannot be determined from the above information.
53) An important (additional) consideration for a direct foreign investment is:
A. Political risk.
B. Maximizing the firm's profits.
C. Attaining a high international P/E ratio.
D. All of the above.
54) The purchasing power parity theory states that currency exchange rates tend to vary ____________ with their respective purchasing powers in order to provide _________ purchasing powers.
A. inversely; greater
B. inversely; similar
C. directly; greater
D. directly; similar