Financial Decision Making Final
Exam
Course Introduction
Financial Decision Making explores the fundamental principles and analytical tools used to guide sound financial choices within organizations and personal finance contexts. This course covers topics such as capital budgeting, investment appraisal, risk assessment, cost of capital, financial forecasting, and the evaluation of financing options. Students will learn to analyze financial statements, assess the impact of financial decisions on firm value, and utilize quantitative and qualitative data to support strategic choices. Real-world case studies and practical exercises help build the skills necessary to make informed and effective financial decisions in a variety of business environments.
Recommended Textbook
Corporate Finance 6th Canadian Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) The need to manage net working capital arises because:
A) Financial management is naturally broken into those areas.
B) Shareholders want to ensure they receive dividend payments.
C) there is a mismatch between the timing of cash inflows and cash outflows.
D) the sum of current assets and current liabilities usually is zero.
E) the capital structure pie is limited in size.
Answer: C
Q2) Do you think agency problems arise in sole proprietorships and/or partnerships?
Answer: Agency conflicts typically arise when there is a separation of ownership and management of a business. In a sole proprietorship and a small partnership, such separation is not likely to exist to the degree it does in a corporation. However, there is still potential for agency conflicts. For example, as employees are hired to represent the firm, there is once again a separation of ownership and management.
Q3) Corporate securities are contingent claims because:
A) they don't represent a direct claim on the firm.
B) the firm may be bought out.
C) the securities value is derived from the total value of the firm.
D) book value can be negative.
Answer: C
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Page 3
Chapter 2: Accounting Statements and Cash Flow
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Q1) Logit Co. paid dividends of $400. And retained 33.33% of their earnings. The sales for the year were $12,000 and total assets of 10,000. What was the rate of return on assets?
A) 5%
B) 6%
C) 10%
D) 12%
Answer: B
Q2) Assuming that the current ratio is currently 2, which of the following actions will increase it?
A) Purchasing inventory with cash?
B) Purchasing inventory on short-term credit?
C) Paying off a short-term bank loan with long-term debt.
D) A customer paying an overdue bill.
Answer: C
Q3) Pion Inc. reported current assets of $80 and fixed assets of $150 as of December 31. The company, as of December 31, also reports current liabilities of $72 and long-term liabilities of $149. Calculate Pion's shareholder's equity.
Answer: ($80 + $150) - ($72 + $149) = $9
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Chapter 3: Financial Planning and Growth
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Q1) A firm has a fixed debt-to-equity ratio and dividend policy. Assets and net income are proportional to sales, and new equity will not be issued. Which of the following statements is most correct?
A) Almost any growth rate is theoretically possible.
B) Only one growth rate is possible.
C) The firm cannot grow.
D) The firm's growth rate must be less than some maximum.
Answer: B
Q2) Altering the inputs to a financial plan by changing one of the assumptions is called:
A) a redundancy check.
B) a pro forma evaluation.
C) goal seeking.
D) sensitivity analysis.
Answer: D
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Page 5
Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Q1) When lenders and borrowers are satisfied the financial markets will clear at A) the treasury bill rate of interest.
B) the equilibrium rate of interest.
C) the federal funds rate of interest.
D) several different rates of interest under certainty.
Q2) At what market rates of interest would make the individual indifferent between (1) all consumption in Period 0 and none in Period 1 and (2) no consumption in Period 0 and all consumption in Period 1?
Q3) If the market interest rate is 11%, what is the optimal investment? What is maximum consumption in period 1 if the individual takes on the optimal set of investment projects and consumes all other period 0 income?
Q4) An individual with no investment opportunities has income of $15,000 in period 0 and income of $10,000 in period 1. If the interest rate is 7%, which of the following points is on the individual's consumption possibility line?
A) $3,000 in period 0 and $21,215 in period 1
B) $4,000 in period 0 and $21,116 in period 1
C) $10,000 in period 0 and $15,350 in period 1
D) $16,000 in period 0 and $9,000 in period
E) $18,800 in period 0 and $6,200 in period 1.
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Chapter 5: The Time Value of Money
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Q1) Present value may be defined as:
A) future cash flows discounted to the present.
B) official prescribed price.
C) present cash flows compounded into the future.
D) the average of the bid and asked price.
Q2) An equal stream of payments that lasts forever is:
A) a growing annuity.
B) a zero coupon bond.
C) a perpetuity.
D) valueless.
Q3) Charles Carr borrowed $3,500 to consolidate his debts. Since Charles had an excellent credit rating, he was able to borrow at a 12% effective annual rate. Charles is required to make monthly payments. Charles will make equal payments for the next 36 months. Which one of the following values is closest to his monthly payments?
A) $121.
B) $122.
C) $115.
D) $118.
E) $123.
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Page 7
Chapter 6: How to Value Bonds and Stocks
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Q1) Show that a firm with earnings of $10,000 a year in perpetuity would be better off paying all earnings in dividends rather than investing 25% of its earnings (also in perpetuity) in projects earning 14% if its discount rate is 15%.
Q2) The value of a 20 year zero-coupon bond when the market required rate of return of 9% (semi-annual) is:
A) $414.64
B) $318.38
C) $171.93
D) $178.43
Q3) If the quoted dividend yield in the paper was 2.2% and the dividend was listed as $0.72 what price is used in the calculation of dividend yield?
A) the day open of $32.15.
B) the day low of $32.
C) the day close of $32.75.
D) the day high of $33.50.
Q4) A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible? Does this violate our basic principle of stock valuation? Explain.
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Page 8
Chapter 7: Net Present Value and Other Investment Rules
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Q1) The internal rate of return may be defined as:
A) the discount rate that makes the NPV cash flows equal to zero.
B) the difference between the market rate of interest and the NPV.
C) the market rate of interest less the risk-free rate.
D) the project acceptance rate set by management.
Q2) The two fatal flaws of the internal rate of return rule are:
A) arbitrary determination of a discount rate and failure to consider initial expenditures. B) arbitrary determination of a discount rate and failure to correctly analyze mutually exclusive investment projects.
C) arbitrary determination of a discount rate and the multiple rate of return problem.
D) failure to consider initial expenditures and failure to correctly analyze mutually exclusive investment projects.
E) failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.
Q3) Explain the differences and similarities between net present value (NPV) and the profitability index (PI).
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9
Chapter 8: Net Present Value and Capital Budgeting
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Q1) The QT Company is generating cashflow of $333,000 per year. If they invest in a new press they expect to increase their cashflow to $400,000 per year. The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider: A) the press cost of $250,000 and total cashflow of $400,000 B) the change in cashflow of $67,000 versus the price cost of $250,000 C) the current cashflow of $333,000 and the price cost of $250,000 D) the opportunity cost of the facility of $333,000.
Q2) The Expresso Roast Corporation is considering the purchase of a new bean roaster and grinder. The revenues are expected to be the same for Expresso Roast no matter which machine is acquired. The Quick-Roast machine has a cost of $75,000 and is expected to last 4 years with operating costs of $12,000 per year. The Mellow-Roast Co. machine has a cost of $50,000 and operating costs of $4,500 per year but will last for only 2 years. The discount rate is 8%. What is the present value of the costs? What is the EAC and which machine should be chosen?
Q3) A machine lasts 3 years and has a purchase price of $100. It costs $40 per year to operate and can be sold as junk for $15 at the end of its life. What is the EAC of the costs of operating a series of such machines into perpetuity if the discount rate is 15%?
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Page 10
Chapter 9: Risk Analysis, Real Options, and Capital
Budgeting
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Sample Questions
Q1) The Mini-Max Company has the following cost information on their new prospective project. Fixed costs are $200/year. (Initial investment is $700)
Variable costs: $3/unit.
Depreciation: $140/year.
Price: $8/unit.
Discount rate: 12%.
Project life: 5 years.
Tax rate: 34%.
Calculate the accounting break-even point.
A) 68.00 units/year.
B) 103.03 units/year.
C) 113.33 units/year.
D) 25.00 units/year.
Q2) In a decision tree, the NPV to make the yes/no decision is dependent on:
A) only the cashflows from successful path.
B) on the path where the probabilities add up to one.
C) all cashflows and probabilities.
D) only the cashflows and probabilities of the successful path.
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?
A) 20.0%.
B) 4.0%.
C) 12.0%.
D) Greater than 20%.
Q2) The elements in the off-diagonal positions of the Variance Covariance matrix are:
A) covariance's.
B) security selections.
C) variances.
D) security weights.
Q3) The CML is the pricing relationship between:
A) efficient portfolios and beta
B) the risk-free asset and standard deviation of the portfolio return
C) the optimal portfolio and the standard deviation of portfolio return
D) beta and the standard deviation of portfolio return
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Chapter 11: Risk and Return: the Capital Asset Pricing Model
Capm
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Q1) A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in Security D. Security C has an expected return of 8% and a standard deviation of 6. Security B has an expected return of 10% and a standard deviation of 10. The securities have a coefficient of correlation of .6. Which of the following values is closest to portfolio return and variance?
A) .095; .001675.
B) .095; .0072.
C) .100; .00849.
D) .090; .0081.
Q2) The total number of variance and covariance terms in portfolio is N<sup>2</sup>. How many of these would be (including non-unique) covariance's?
A) N B) N<sup>2</sup>
B) N<sup>2</sup>- N
C) N<sup>2</sup>- N/2
Q3) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
Q4) Draw and explain the relationship between the opportunity set for a two asset portfolio when the correlation is: [Choose from -1, -.5, 0, +.5, and +1]
Page 13
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Chapter 12: An Alternative View of Risk and Return: The Arbitrage Pricing Theory
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Q1) If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, <sub>I</sub>, would result in a change in any security return of:
A) 9.2%
B) 3.2 <sub>I</sub>.
C) -3.2 <sub>I</sub>
D) 3.0%
E) 6.2 <sub>I</sub>
Q2) Systematic risk is defined as:
A) a risk that specifically affects an asset or small group of assets.
B) any risk that affects a large number of assets.
C) any risk that has a huge impact on the return of a security.
D) the random component of return.
Q3) The term Corr(å <sub>R</sub>, <sub>T</sub>) = 0 tells us that:
A) the error terms of company R and T are 0.
B) the unsystematic risk of companies R and T is unrelated or uncorrelated.
C) the correlation between the returns of companies R and T is zero.
D) the systematic risk companies R and T is unrelated.
Q4) Explain the conceptual differences in the theoretical development of the CAPM and APT.
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Chapter 13: Risk, Return, and Capital Budgeting
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Q1) Regression analysis can be used to
A) estimate beta.
B) estimate the risk-free rate.
C) estimate standard deviations.
D) estimate variances.
E) estimate expected returns.
Q2) Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%?
A) 10.8%.
B) 12.8%.
C) 10.4%.
D) 14.4%.
Q3) The beta of a security provides:
A) an estimate of the market risk premium.
B) an estimate of the slope of the CML.
C) an estimate of the slope of the SML.
D) an estimate of the systematic risk of the security.
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Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) An investor discovers that for a certain group of stocks, large positive price changes are always followed by large negative price changes. This finding is a violation of the: A) moderate form of the efficient market hypothesis.
B) semi-strong form of the efficient market hypothesis.
C) strong form of the efficient market hypothesis.
D) weak form of the efficient market hypothesis.
Q2) Evidence on stock prices finds that the sudden death of a chief executive officer causes stock prices to fall and the sudden death of an active founding chief executive officer causes stock price to rise. This contrary evidence happens because:
A) markets are inefficient and unsure of the real value of the events.
B) death is inevitable and market prices are random.
C) things simply happen.
D) the value of the founding executive was a negative to the firm.
Q3) Suppose your cousin invests in the stock market and doubles her money in a single year while the market, on average, earned a return of only about 15%. Is your cousin's performance a violation of market efficiency?
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Page 16
Chapter 15: Long-Term Financing: an Introduction
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Q1) If a firm retires or extinguish a debt issue before maturity the specific amount they pay is:
A) the amortization amount.
B) the call price.
C) the sinking fund amount.
D) the spread premium.
Q2) Financial economist prefer to use market values when measuring debt ratios because:
A) market values are more stable than book values.
B) Market values are a better reflection of current value than historical value.
C) Market values are readily available and do not have to be calculated like book values.
D) Market values are more difficult to calculate which makes financial economists more valuable.
Q3) Rework the shareholder's equity as it appears on the books if the company issues 40,000 new share of common at $70 per share.
Q4) The Knot Knit Corporation needs to elect 9 directors. There are 120,000 shares outstanding. Under cumulative voting, how many shares would you need to own to guarantee that your favorite candidate is elected?
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Page 17
Chapter 16: Capital Structure: Basic Concepts
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Q1) In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because:
A) more shares are outstanding for the same level of EBI.
B) the break-even point is higher with debt.
C) a fixed interest charge must be paid even at low earnings.
D) the amount of interest per share has only a positive effect on the intercept.
E) the higher the interest rate the greater the slope.
Q2) A firm is all equity with 5,000 shares outstanding worth $7 each. They are planning on issuing $10,000 of new perpetual debt at the 8% market rate of interest. The effective tax rate is 25%. What is the change in equity value if they make the debt for equity exchange?
A) $.50 per share
B) $200
C) $800
D) $.16 per share
Q3) The weighted average cost of capital is invariant to the use of leverage under MM conditions of no taxes. Graph the relationship of the weighted average cost of capital and leverage; be sure to include the cost of equity and debt. Explain why this relationship holds.
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Page 18
Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) The TrunkLine Company will earn $60 if it does well. The debtholders are promised payments of $35 if the firm does well. If the firm does poorly the repayment will be $20 because of the dead weight cost of bankruptcy, expected earnings will be $30. The probability of the firm performing poorly or well is 50%. If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 10%.
A) $32.50.
B) $27.50.
C) $25.00.
D) $29.55.
E) $35.00.
Q2) While difficult to determine exactly, studies that have examined direct costs of financial distress put an estimate in the range of _____ of the firm's market value.
A) 1% to 3%
B) 3% to 5%
C) 5% to 7%
D) 7% to 9%
Q3) Is there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or why not?
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Page 19
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) The non-market rate financing impact on the APV is:
A) calculated by Tc B because the tax shield depends only on the amount of financing.
B) calculated by subtracting the all equity NPV from the FTE NPV.
C) irrelevant because it is always less than the market financing rate.
D) calculated by the NPV of the loan using both debt rates.
Q2) The Alto Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $200,000 with total fixed and variable costs representing 70% of sales. The discount rate on the unlevered equity is 17%, but the firm plans to raise $77,820 of the initial $150,000 investment as 9% perpetual debt. The corporate tax rate is 34% and the target debt to value ratio is .3. Calculate the all equity NPV and the levered NPV using the flow-to-equity method.
Q3) The WACC approach to valuation is not as useful as the APV approach in LBO because:
A) there is greater risk with a LBO.
B) the capital structure is changing over time.
C) there is no tax shield with the WACC.
D) the value of the levered and unlevered firms are equal.
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Page 20
Chapter 19: Dividends and Other Payouts
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Q1) Recent changes in the tax code have changed the taxation of cash dividends and capital gains as follows:
A) cash dividends are taxed at the ordinary rate and all capital gains at a special rate of 50%.
B) all cash dividends and capital gains as ordinary income.
C) capital gains as ordinary income and cash dividends for a stock owned more than 18 months at the special rate of 20%.
D) Short term gains and cash dividends as ordinary income, capital gains earned over less than 18 months at a maximum rate of 28% and capital gains earned over more than 18 months at a 20% rate.
Q2) It has been shown that in the absence of taxes and other market imperfections firm value will be unaffected by dividend policy. Explain the logic behind this conclusion. Next, describe three real-world factors that may cause one dividend policy to be preferable to another.
Q3) On the date of record the stock price drop is:
A) a full adjustment for the dividend payment.
B) a partial adjustment for the dividend payment because of the tax effect.
C) zero because it happened on ex-dividend date.
D) zero because it happens on payment date.
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Page 21
Chapter 20: Issuing Equity Securities to the Public
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Q1) To determine the value of a rights the stockholder needs to know what two pieces of information in addition to the current stock price:
A) the subscription price and the number of rights needed to acquire a new share.
B) the amount of new equity to be raised and the number of rights needed to acquire a new share.
C) the amount of new equity to be raised and standby fee.
D) the detachment date and the subscription price.
Q2) Yoma Inc. is attempting to raise $5,000,000 in new equity with a rights offering. The subscription price for the 125,00 new shares will be $40 per share. The stock currently sells for $50 per share and there are 250,000 shares outstanding. What will the price per share be if all rights are exercised?
Q3) The evidence on IPO sales is varied from issue to issue, but there are three common themes; underpricing, underperformance, and the reasons for going public. Explain these three themes.
Q4) If the Ex-Rights price were set at $7.90, would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?
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Page 22
Chapter 21: Long-Term Debt
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Q1) From the corporate perspective callable bonds may have value over non-callable bonds because:
A) the corporation has the option to control market interest rates.
B) interest rates may rise prohibiting the holders from earning higher returns.
C) call prices vary inversely with the interest rates.
D) the corporation has the option to call the bond if interest rates fall.
E) the corporation has the option to call the bond if interest rates rise.
Q2) Milonas Mining has $30 million in land value and $15 in mortgage bonds issued on the property. Given that the indenture does not limit the amount of additional bonds that can be issued, the company issues an additional $10 million in mortgage bonds against the property. If Milonas is forced to liquidate its property for $20 million, and the company has no other assets, how much will the original bondholders receive?
Q3) What is the bond's value today if the coupon is set at $100?
Q4) Bonds above below BBB or Baa are called:
A) income bonds.
B) deep-discount bonds.
C) junk bonds.
D) investment grade bonds.
Q5) If the bond sells for par today, what is the coupon?
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Chapter 22: Leasing
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Q1) What is the appropriate discount rate for valuing the lease?
A) 12.12%.
B) 8.0%.
C) 5.28%.
D) 2.72%.
Q2) Debt displacement is associated with leases because:
A) all assets not purchased with equity use debt financing.
B) debt is always a cheaper source of financing and is lost as leasing is used.
C) ICA3065 and the CCRA mandate debt displacement.
D) lease financing is all debt and causes an imbalance in the optimal debt to equity ratio which reduces future debt financing.
Q3) Which of the following would not be a characteristic of a financial lease?
A) They are not usually fully amortized.
B) They usually require the lessor to maintain and insure the leased assets.
C) They usually do not include a cancellation option.
D) The lessee usually has the right to renew the lease at expiration.
Q4) Should the asset be purchased or leased? Support your answer.
Q5) Calculate the NPV of the lease versus the purchase decision.
Q6) What is the discount rate to be used?
Q7) What are the cashflows in years 1 through 8?
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) Explain the rationale behind the statement that equity is a call option on the firm's assets. When would a shareholder allow the call to expire?
Q2) If a firm with risky debt outstanding pays a large cash distribution, the value of the bonds:
A) will be unaffected as payment is to the stockholders.
B) will increase because the value of the call options increases.
C) will increase because the value of the call option decreases.
D) will decrease because the value of the put option will decrease.
E) will decrease because the value of the put option will increase.
Q3) If the time to expiration of the underlying stock decreases, then the:
A) value of the put option will increase, but the value of the call option will decrease.
B) value of the put option will decrease, but the value of the call option will increase.
C) value of both the put and call option will increase.
D) value of both the put and call option will decrease.
E) value of both the put and call option will remain the same.
Q4) Explain how the value of a firm can be viewed as an option. How can the call and put views be resolved?
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) What is the value of a call option?
A) $4.14
B) $4.86
C) $5.13
D) $5.62
E) $6.16
Q2) Rejecting an investment today forever may not be a good choice because:
A) the size of the firm will decline.
B) there are always errors in the estimation of NPVs.
C) the option value is negative.
D) the company's foregoing the future rights or option to the investment.
Q3) The risk-neutral probabilities for an asset, with a current value equal to the present value of future payoffs are:
A) given by the probability of each state occurring.
B) given by the value of the underlying asset under good news and the risk free rate.
C) given by the value of the underlying asset under good news and bad news.
D) given by the value of the underlying asset under good news, bad news, and the risk free rate.
Q4) What is the value of Mr. Maxim's options?
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Chapter 25: Warrants and Convertibles
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Q1) Which of the following would not be a sensible explanation of why convertibles and warrants are issued if markets are efficient?
A) Cash flow from these securities best match cash flow of the firm.
B) If the firm does well, convertible bonds will turn out to have been the better alternative versus issuing common stock.
C) The securities are useful when it is costly to assess the risk of the issuing firm.
D) The securities may resolve agency problems associated with raising money.
Q2) A convertible bond is selling for $800. It has 10 years to maturity, a $1000 face value, and a 10% coupon. Similar nonconvertible bonds are priced to yield 14%. The conversion price is $50 per share. The stock currently sells for $31.375 per share. The conversion premium is:
A) 37.25%.
B) 43.33%.
C) 59.36%.
D) 66.67%.
Q3) Illustrate and explain how a convertible bond value is based on both debt and equity value. What is the option value?
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Chapter 26: Derivatives and Hedging Risk
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Q1) The buyer of a forward contract:
A) will be taking delivery of the good(s) today at today's price.
B) will be making delivery of the good(s) at a later date at that date's price.
C) will be making delivery of the good(s) today at today's price.
D) will be taking delivery of the good(s) at a later date at pre-specified price.
Q2) Credit default swaps:
A) will pay the holder the LIBOR interest rate.
B) pay the borrower the LIBOR interest rate.
C) are like insurance against a loss of value if the firm defaults on a bond.
D) limit the amount of borrowing of all parties in the credit default swap.
Q3) A pure discount bond pays:
A) no coupons, therefore its duration equal to its maturity.
B) discounted coupons, therefore its duration is greater than its maturity.
C) level coupons, therefore its duration is equal to its maturity.
D) declining coupons, therefore its duration is less than its maturity.
Q4) Duration is defined as the weighted average time to maturity of a financial instrument. Explain how this knowledge can help protect against interest rate risk.
Q5) Calculate the duration of Tiger State Bank's assets and liabilities.
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Chapter 27: Short-Term Finance and Planning
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Q1) The most common way to finance a temporary cash deficit is the use of:
A) banker's acceptances.
B) call options.
C) commercial paper.
D) unsecured bank loans.
Q2) A fraction of the available credit on a loan agreement deposited by the borrower with the bank in a low or non-interest-bearing account is called a:
A) compensating balance.
B) cleanup loan.
C) letter of credit.
D) line of credit.
Q3) Which of the following is not included in current assets?
A) Accounts receivable.
B) Accrued wages.
C) Cash.
D) Inventories.
Q4) . What is the operating cycle for White Bluffs, Inc. if all sales are on credit?
B. If you knew that Accounts Receivables were $3,250 the prior year, what effect would this have on your estimate of the operating cycle. Show and explain why.
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Chapter 28: Cash Management
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Q1) Financial managers broaden their definition of cash to include:
A) currency, bank deposits, stocks and bonds.
B) currency, checking deposits, undeposited checks, and bonds.
C) cash, bonds, bank deposits and short term marketable securities.
D) currency, checking deposits, undeposited checks and short term marketable securities.
Q2) Most large firms hold a cash balance greater than most models imply because:
A) it is too difficult to estimate the costs of security transactions.
B) banks are compensated by account balances for payment of services.
C) corporations have few bank accounts and it is difficult to manage their cash.
D) cash is costless and need not be managed closely.
Q3) A financial manager should be concerned about bank cash and net float, which is:
A) the difference between collection and book cash.
B) the difference between collection float and disbursement float.
C) the difference between disbursement float and book cash.
D) the difference between disbursement float and bank credit.
Q4) What is the savings float and what can you earn if the firm takes Mesa's lockbox service?
Q5) If Mesa will charge your firm an annual fee of $35,000 and $.20 per check handled will you accept Mesa's services?
Page 30
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Chapter 29: Credit Management
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Q1) Robinson Rollingpin Corporation has been asked by its customers to please grant them a 2% discount if they pay their bill within 15 days. The purchase size of each order is $75,000. Normally, the customer pays within 30 days with no discount. Robinson's cost of debt capital is 12%. Should the request be granted?
Q2) Risk is incorporated into the decision to grant credit by:
A) decreasing the discount rate.
B) altering the credit period.
C) decreasing the cash inflows, or the numerator of the NPV formula.
D) increasing the cash inflows, or the numerator of the NPV formula.
E) increasing costs per unit.
Q3) Edgeworth Heating is selling a commercial heating unit at the price of $100,000 per unit. The variable cost of producing this unit is $75,000. Edgeworth is considering offering credit terms to their customers, which would allow payment to be delayed one month. Edgeworth predicts that offering these terms will increase monthly sales from 50 units to 60 units. Edgeworth does not expect the increased production to change variable cost and Edgeworth does not expect to charge a higher price. The appropriate discount rate is 1% a month. Determine the probability of payment that would make Edgeworth indifferent between granting credit and the present policy.
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Chapter 30: Mergers and Acquisitions
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Q1) An important reason for acquisitions is that the combined firm may generate greater revenue that the two separate firms could. Examples of revenue enhancement would not include:
A) an elimination of a previously ineffective media effort.
B) an elimination of a previously ineffective advertising effort.
C) an elimination of a weak existing distribution effort.
D) economies of scale.
Q2) When the management and/or a small group of investors takeover a firm and the shares of the firm are delisted and no longer publicly available, this action is known as:
A) a consolidation.
B) a vertical acquisition.
C) a proxy contest.
D) a going-private transaction.
Q3) The complete absorption of one firm by another is called a: A) merger.
B) consolidation.
C) takeover.
D) spin-off.
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Chapter 31: Financial Distress
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Q1) Some of the various events which typically occur around the period of financial distress for a firm are:
A) continued earning losses.
B) steady growth.
C) dividend reductions.
D) dividend increases.
Q2) What will the equityholders receive if they had 5 million shares with a par value of $0.50 each?
A) $1,000,000.
B) $583,333.
C) $35,714.
D) $0.
Q3) A firm that has a series of negative earnings, sales declines and workforce reductions is likely head to:
A) a change in management.
B) a merger.
C) financial distress.
D) new financing.
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Chapter 32: International Corporate Finance
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Q1) The Brazilian inflation rate is expected to be 30% per year for the next 4 years. The U.S. inflation rate is expected to be 3% per year over the same period. A Brazilian real currently costs 87.36 cents. Assuming RPPP holds, how many reals will you need to buy a dollar in four years?
A) 11.447.
B) 2.905.
C) 2.862.
D) 1.676.
Q2) The NPV of a foreign investment will be lower if:
A) not all cash flows are remitted to the parent and unremitted cashflows are reinvested at a rate equal to the domestic cost of capital.
B) not all cash flows are remitted to the parent and unremitted cashflows are reinvested at a rate less than the domestic cost of capital.
C) all cash flows are remitted to the parent and are reinvested at a rate equal to the domestic cost of capital.
D) remittance rates nor foreign reinvestment rates do not affect the NPV.
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