Question 1

Firms generally choose to finance temporary current assets with short-term debt because

Answer Correct Answer:

a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.

Question 2

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Answer Correct Answer:

d. Continue to take all discounts that are offered and pay on the net date.

Question 3

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Answer

Correct Answer:
b. Depreciation

Question 4

Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, $35,000 in February, and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?

Answer Correct Answer:

d. $33,000

Question 5

The term additional funds needed (AFN) is generally defined as follows: c. The amount of assets required per dollar of sales.

Answer Correct Answer:

b. Funds that a firm must raise externally from nonspontaneous sources, i.e., by borrowing or by selling new stock, to support operations.

Question 6

Which of the following is NOT one of the steps taken in the financial planning process?

Answer Correct Answer:

d. Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.

Question 7

Fairchild Garden Supply expects $600 million of sales this year, and it forecasts a 15% increase for next year. The CFO uses this equation to forecast inventory requirements at different levels of sales: Inventories = $30.2 + 0.25(Sales). All dollars are in millions. What is the projected inventory turnover ratio for the coming year?

Answer Correct Answer:

a. 3.40

Question 8

Last year Emery Industries had $450 million of sales and $225 million of fixed assets, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?

Answer Correct Answer:

b. $78.75

Question 9

Which of the following are reasons why companies move into international operations?

Answer Correct Answer:

d. All of the above.

Question 10

If one Swiss franc can purchase $0.76 U.S. dollars, how many Swiss francs can one U.S. dollar buy?

Answer

Correct Answer:
d. 1.3158

Question 11

Suppose 144 yen could be purchased in the foreign exchange market for one U.S. dollar today. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?

Answer Correct Answer:

a. 155.5200

Question 12

Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 0.64 euros. What is the cross rate of Swiss francs to euros?

Answer Correct Answer:

b. 2.2031

Question 13

Which of the following statements is most CORRECT?

Answer

Correct Answer:

c. From the issuer's point of view, preferred stock is less risky than bonds.

Question 14

Orient Airlines common stock currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2020. What is the conversion value of the bond?

Answer

Correct Answer:
d. $825.00

Question 15

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of

common stock. What is the conversion price, Pc?

Answer Correct Answer:

a. $40.00

Question 16

Moniker Manufacturing's bonds were recently issued at their $1,000 par value. At any time prior to maturity (20 years from now), a bond holder can exchange a bond for a share of common stock at a conversion price of $40. What is the conversion ratio?

Answer Correct Answer:

c. 25.00

Question 17

Which of the following actions does NOT help managers defend against a hostile takeover?

Answer Correct Answer:

d. Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm's financial position.

Question 18

Which of the following statements is most CORRECT?

Answer Selected Answer: Correct Answer:

d. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, research of U.S. firms suggests that in most cases, diversification through mergers does not increase the firm's value.

Question 19

Simpson Inc. is considering a vertical merger with The Lachey Company. Simpson currently has a required return of 11%, while Lachey's required return is 15%. The market risk premium is 5% and the risk-free rate is 5%. Assume the market is in equilibrium. If Simpson is going to make up 67% of the new firm (and Lachey will comprise the remaining 33%), what will be the beta of the new merged firm? There will be no additional infusion of debt in the merger.

Answer Correct Answer:

a. 1.46

Question 20

In early 2009 Ham Inc.'s management was considering making an offer to buy Egg Corporation. Egg's projected operating income (EBIT) for 2009 was $30 million, but Ham believes that if the two firms were merged, it could consolidate some operations, reduce Egg's expenses, and raise its EBIT to $40 million. Neither company uses any debt, and they both pay income taxes at a 40% rate. Ham has a better reputation among investors, who regard it as better managed and also less risky, so Ham's stock has a P/E ratio of 15 versus a P/E of 12 for Egg. Since Ham's management will be running the entire enterprise after a merger, investors will value the resulting corporation based on Ham's P/E. Based on expected market values, how much synergy should the merger create?

Answer Correct Answer:

c. $144.00