Which of the following business forms is the easiest to
raise capital?
a. sole proprietorship.
b. partnership.
c. corporation
d. limited liability partnership
Which of the following factors or activities can be
controlled by management of the firm?
a. capital budgeting
b. the level of interest rates
c. stock market conditions
d. the level of economic activity
Tre-Bien Bakeries generated net income of $233,412 this
year. At year end, the company had accounts receivables of $47,199, inventory
of $63,781, and cash of $21,461. It also had accounts payables of $51,369,
short-term notes payables of $11,417, and accrued taxes of $6,145. The net
working capital of the firm is
a. None of these
b. $63,510
c. $69,655
d. $68,931
Which of the following best represents cash flows to
investors?
a. Cash flow from operating activity, minus cash flow invested in net working
capital, minus cash flow invested in long-term assets.
b. Cash flow from operating activity, plus cash flow generated from net working
capital.
c. Earnings before interest and taxes time 1 minus the firm’s tax rate.
d. net income minus dividends paid to preferred stockholders.
Coverage ratios: Sectors, Inc., has an EBIT of $7,221,643
and interest expense of $611,800. Its depreciation for the year is $1,434,500.
What is its cash coverage ratio?
a. None of these
b. 15.42 times
c. 18.34 times
d. 14.15 times
Multiples analysis: Turner Corp. has debt of $230 million
and generated a net income of $121 million in the last fiscal year. In attempting
to determine the total value of the firm, an investor identified a similar firm
in Jacobs, Inc., an all-equity firm. This firm had 150 million shares
outstanding, a share price of $14.25, and net income of $182 million. What is
the total value of Turner Corp.? Round to the nearest million dollars.
a. $1,651 million
b. $1,191 million
c. $1,421 million
d. $1,715 million
Efficiency ratio: If Viera, Inc., has an accounts receivable
turnover of 3.9 times and net sales of $3,436,812, what is its level of
receivables?
a. $881,234
b. $13,403,567
c. $1,340,357
d. $81,234
The operating cycle
a. To measure operating cycle we need another measure called the days’ payables
outstanding.
b. begins when the firm receives the raw materials it purchased that would be
used to produce the goods that the firm manufactures.
c. begins when the firm uses its cash to purchase raw materials and ends when
the firm collects cash payments on credit sales.
d. ends not with the finished goods being sold to customers and the cash
collected on the sale; but when you take into account the time taken by the
firm to pay for its purchases.
The asset substitution problem occurs when
a. managers substitute less risky assets for riskier ones to the detriment of
bondholders.
b. managers substitute risker assets for less risker ones to the detriment of
equity holders.
c. managers substitute riskier assets for less risky ones to the detriment of
bondholders.
d. managers substitute less risky assets for riskier ones to the detriment of
equity holders.
The financing plan of a firm will indicate
a. the firm’s dividend policy, the desired capital structure for the firm, and
the firm’s working capital policy.
b. the dollar amount of funds that has been raised externally and the sources
of funds available to the firm, the firm’s dividend policy, and the firm’s
working capital policy.
c. the dollar amount of funds that has been raised externally and the sources
of funds available to the firm, the desired capital structure for the firm, and
the firm’s dividend policy.
d. the dollar amount of funds that has been raised externally, and the sources
of funds available to the firm, the desired capital structure for the firm, and
the firm’s working capital policy.
Present value: Tommie Harris is considering an investment
that pays 6.5 percent annually. How much must he invest today such that he will
have $25,000 in seven years? (Round to the nearest dollar.)
a. $16,088
b. $38,850
c. $23,474
d. $26,625
PV of multiple cash flows: Hassan Ali has made an investment
that will pay him $11,455, $16,376, and $19,812 at the end of the next three
years. His investment was to fetch him a return of 14 percent. What is the
present value of these cash flows? (Round to the nearest dollar.)
a. $36,022
b. $39,208
c. $33,124
d. $41,675
Present value of an annuity: Transit Insurance Company has
made an investment in another company that will guarantee it a cash flow of
$37,250 each year for the next five years. If the company uses a discount rate
of 15 percent on its investments, what is the present value of this investment?
(Round to the nearest dollar.)
a. $251,154
b. $186,250
c. $101,766
d. $124,868
PV of dividends: Cortez, Inc., is expecting to pay out a
dividend of $2.50 next year. After that it expects its dividend to grow at 7
percent for the next four years. What is the present value of dividends over
the next five-year period if the required rate of return is 10 percent?
a. $11.50.
b. $10.76
c. $9.80
d. $11.88.
The process of identifying the bundle of projects that
creates the greatest total value and allocating the available capital to the
projects is known as
a. budgeting
b. risk analysis
c. rationing
d. capital rationing
What might cause a firm to face capital rationing?
a. if a firm rejects some capital investments that are expected to generate
positive NPVs.
b. if investors require returns for their capital that are too high
c. if a firm has several projects that are expected to generate negative IRRs.
d. If a firm has more than one project with a positive NPV.
The cost of equity: RadicalVenOil, Inc., has a cost of
equity capital equal to 22.8 percent. If the risk-free rate of return is 10
percent and the expected return on the market is 18 percent, then what is the
firm’s beta if the firm’s marginal tax rate is 35 percent?
a. 1.28.
b. 4.10.
c. 1.60.
d. 1.0.
Which type of project do financial managers typically use
the highest cost of capital when evaluating?
a. Efficiency projects
b. Extension projects
c. New product projects
d. Market expansion projects
Planning models that are more sophisticated than the percent
of sales method have:
a. all variable costs change directly with sales
b. working capital accounts like inventory, accounts receivable, and accounts
payables vary directly with sales.
c. fixed assets that do not always vary with sales.
d. all of these are true.
External financing needed: Triumph Company has total assets
worth $6,413,228. Next year it expects a net income of $3,145,778 and will pay
out 70 percent as dividends. If the firm wants to limit its external financing
to $1 million, what is the growth rate it can support?
a. 6.4%
b. 32.9%
c. 30.3%
d. 26.5%
Forms of business organizations
Sole proprietorships
⢠Form of organization wherein one person owns and runs the business
⢠Benefits: Easy to set up, easy to manage, tax advantages, distribution of
income is simple
⢠Challenges: Unlimited liability, limited capital, lack of synergy
Partnerships
⢠Form of organization wherein two or more people own a company and agree to
work as partners to finance and run the business
⢠Benefits: Leadership synergy, simple to set up and dissolve, more access to
capital