A corporationmay use different depreciation methods for tax and financial reporting purposes.Cash receipts in the cash budget includeAll of the above: cash sales, collection of accounts receivable, interest receivedAll of the following are uses of cash EXCEPTa decrease in accounts receivableA firm has just ended the calendar year making a sale in the amount of $150,000 of merchandise purchased during the year at a total cost of $112,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow for the year are$37,500 and -$112,500 respectively.The financial planning process begins with _____ plansstrategic financialInputs to short-term financial plans include all of the following EXCEPTall of the above, fixed asset outlays, sales forecast, production plans, fixed asset outlayThe cash flows from operating activities of the firm includecost of raw materialsDonna makes annual end-of-year payments of $5,043.71 on a four year loan with an interest rate of 13 percent. The original principal amount was __________.$15,000Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 3?$1,900Find the present value of the following stream of cash flows received at the end of each year, assuming the firm can earn 8 percent on its investments. Year Amount $10,000 16,000 9,000$38,059Free cash flow represents the amount of cash flow available toinvestorsThe present value of an $20,000 perpetuity at a 7 percent discount rate is __________.$285,714Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end of the twentieth year$144,104The annual rate of return is variously referred to asall of the above; the discount rate. the opportunity cost. the cost of capital.In comparing an ordinary annuity and an annuity due, which of the following is true:The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuityThe present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is __________.$77The future value of $100 received today and deposited in an account for four years paying semiannual interest of 6 percent is __________.$126The present value of an ordinary annuity of $2,350 each year for eight years, assuming an opportunity cost of 11 percent, is __________.$12,093Young Sook owns stock in a company which has consistently paid a growing dividend over the last 10 years. The first year Young Sook owned the stock, she received $4.50 per share and in the 10th year, she received $4.92 per share. What is the growth rate of the dividends over the last 10 years?1 percentThe three summary ratios basic to the DuPont system of analysis arenet profit margin, total asset turnover, and financial leverage multiplierGross profits are defined assales revenue minus cost of goods sold.The implementation of a pro-active ethics program is expected to result ina positive corporate image and increased respect, a reduction in risk, and enhanced cash flow resulting in an increase in share price.ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would be considered poor if its average collection period was57 daysAll of the following are operating cash flows EXCEPT net profit/earnings after tax. increase or decrease in current liabilities. increase or decrease in fixed assets. depreciation expense.increase or decrease in fixed assets.A firm had year end 2011 and 2012 retained earnings balances of $560,000 and $670,000, respectively. The firm paid $10,000 in dividends in 2012. The firm's net profit after taxes in 2012 was ________.$120,000The ________ ratio may indicate the firm is experiencing stockouts and lost sales.inventory turnoverUsing the DuPont system, a decrease in total asset turnover will result in ________ in the return on equitya decreaseSecurities exchanges create efficient markets that do all of the following EXCEPT ensure a market in which the price reflects the true value of the security. Allocate funds to the most productive uses. control the supply and demand for securities through price fixing. allow the price to be determined by tsupply and demand of securities.control the supply and demand for securities through price fixingA firm with a total asset turnover that is lower than industry standard but with a current ratio which meets industry standard must have excessivefixed assetsWhich of the following legal forms of organization's income is NOT taxed under individual income tax rate?CorporationThe key inputs for preparing pro forma income statements using the simplified approaches are thesales forecast for the coming year and financial statements for the preceding year.A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total cash receipts in Januaryare $2,100In April, a firm had an ending cash balance of $35,000. In May, the firm had total cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is $25,000. At the end of May, the firm hadan excess cash balance of $0.Return and riskhave an inverse effect on share priceAmong solutions to the agency problem in publicly-held corporations are all of the following EXCEPT stock options. performance shares. cash bonuses tied to goal achievement. bonuses based on short-term results.bonuses based on short-term resultsThe _____ method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while others are calculated. In this method, the firm's external financing is used as a balancing, or plug, figure.judgmentalJohnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are$3,000 and -$7,000, respectivelyThe key variables in the owner wealth maximization process arecash flows and riskRetained earnings on the balance sheet representsnet profits after taxes minus preferred and common stock dividendsThe primary concern of creditors when assessing the strength of a firm is the firm'sshort-term liquidityUnder MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period (20%, 32%, 19%, 12%, 12%, 5%). What is the book value of the asset after year 2?$4,800The goal of profit maximization would result in priority forearnings per shareCalculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.$70,000A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for __________ today.$840.67In the present value model, risk is generally incorporated intothe discount rateAll of the following are examples of restrictive debt covenants EXCEPT a prohibition on selling accounts receivable. supplying the creditor with audited financial statements. a constraint on subsequent borrowing. a prohibition on entering certain types of lease arrangements.supplying the creditor with audited financial statements.The value of a bond is the present value of theinterest payments and maturity valueAn upward-sloping yield curve that indicates generally cheaper short-term borrowing costs than long-term borrowing costs is calleda normal yield curveThe theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is calledthe liquidity preference theoryThe __________ value of a bond is also called its face value. Bonds which sell at less than face value are priced at __________, while bonds which sell at greater than face value sell at __________.par; a discount; a premiumWhat is the approximate yield to maturity for a $1000 par value bond selling for $1120 that matures in 6 years and pays 12 percent interest annually?9.4 percentAll of the following are examples of long-term debt EXCEPT bonds. lines of credit. term loans. debentures.lines of credit.What is the current price of a $1000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent?$1060Treasury stock results from therepurchase of outstanding stock.A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a required return of 10 percent. The value of a share of the firm's common stock is __________.$12All of the following features may be characteristic of preferred stock EXCEPT callable. no maturity date. tax-deductible dividends. convertible.tax-deductible dividends__________ is the value of the firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders.Book valueEmmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is __________.$56.00An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of __________.$8.00The __________ is utilized to value preferred stock.zero-growth modelThe use of the __________ is especially helpful in valuing firms that are not publicly tradedP/E multipleThe goal of an efficient portfolio is tominimize risk for a given level of returnAdvantages of issuing common stock versus long-term debt include all of the following EXCEPTthe effects of dilution on earnings and voting power.Asset Y has a beta of 1.2. The riskfree rate of return is 6 percent, while the return on the market portfolio of assets is 12 percent. The asset's required return is13.2 percent__________ in the risk of the company normally causes __________ in the required return and therefore __________ in the price of the stock, all else remaining the sameAn increase; an increase; a decreaseThe portion of an asset's risk that is attributable to firm-specific, random causes is calledunsystematic riskStrikes, lawsuits, regulatory actions, and increased competition are all examples ofdiversifiable riskThe __________ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.coefficient of variationAn investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000 will be invested in asset F, with a beta of .5. The beta of the portfolio is __________ .1.45If a person's required return does not change when risk increases, that person is said to berisk-neutralThe __________ is the extent of an asset's risk. It is found by subtracting the pessimistic outcome from the optimistic outcomerangeYou are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z as follows: Asset X has an annual return of 10%, a beta of 1.2, and a 0.333 proportion of the portfolio. Asset Y has an annual return of 8%, a beta of 1.6, and a 0.333 proportion of the portfolio. Asset Z has an annual return of 16%, a beta of 2.0, and a 0.333 proportion of the portfolio. Given this information, what is the expected annual return of this portfolio?11.3%The four basic sources of long-term funds for the business firm arelong-term debt, common stock, preferred stock, and retained earnings.An increase in the beta of a corporation indicates __________, and, all else being the same, results inan increase in risk; a higher required rate of return and hence a lower share priceThe __________ is the rate of return a firm must earn on its investments in projects in order to maintain the market value of its stock.cost of capitalThe cost of new common stock financing is higher than the cost of retained earnings due toflotation costs and underpricingA tax adjustment must be made in determining the cost of __________.long-term debtThe firm's optimal mix of debt and equity is called itstarget capital structure.The before-tax cost of debt for a firm which has a 40 percent marginal tax rate is 12 percent. The after-tax cost of debt is7.2 percentA firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. The cost of the preferred stock is10.2 percentWhen determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amount by consideringthe flotation costsA firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm's common stock equity is13 percentWeighing schemes for calculating the weighted average cost of capital include all of the following EXCEPToptimal value weightsIn comparing the internal rate of return and net present value methods of evaluationnet present value is theoretically superior, but financial managers prefer to use internal rate of returnThe underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods isthe reinvestment rate assumption regarding intermediate cash flowsA firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project isbetween 2 and 3 years.Comparing net present value and internal rate of return analysisalways results in the same accept/reject decision.The __________ is the exact amount of time it takes the firm to recover its initial investment.payback periodThe __________ is the discount rate that equates the present value of the cash inflows with the initial investment.internal rate of returnA firm would accept a project with a net present value of zero becausethe project would maintain the wealth of the firm's owners.A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of return are as follows :Internal rate Project of Return 12% 2.15 3.13 he firm should __________.accept Projects 2 and 3 and reject Project 1Among the reasons many firms use the payback period as a guideline in capital investment decisions are all of the following EXCEPTit recognizes cash flows which occur after the payback period.A corporation is selling an existing asset for $1,700. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is$0 tax liabilityA firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is __________.-$1,000Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are calledmutually exclusive projectsA conventional cash flow pattern associated with capital investment projects consists of an initialoutflow followed by a series of inflowsA corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000.The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is __________.$54,240The tax treatment regarding the sale of existing assets which are sold for more than the book value but less than the original purchase price results inrecaptured depreciation taxed as ordinary incomeWhen evaluating a capital budgeting project, the change in net working capital must be considered as part ofthe initial investmentThe final step in the capital budgeting process isfollow-up monitoringA corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is __________.an increase of $60,000One basic technique used to evaluate after-tax operating cash flows is toadd noncash charges to net incomeA $60,000 outlay for a new machine with a usable life of 15 years is calledcapital expenditureAccording to the traditional approach to capital structure, the value of the firm will be maximized whenthe weighted average cost of capital is minimizedIf a firm's fixed operating costs decrease, the firm's operating break-even point willdecreaseThe three basic types of leverage are:operating, financial, and totalThe firm's __________ is the level of sales necessary to cover all operating costs, i.e., the point at which EBIT = $0operating break-even pointThe firm's __________ is the mix of long-term debt and equity utilized by the firm, which may significantly affect its value by affecting return and riskcapital structureWhich of the following is NOT a variable costrentGenerally, __________ in leverage result in __________ return and __________ riskincreases, increased, increasedThe firm's __________ is the level of sales necessary to cover all operating costs, i.e., the point at which EBIT = $0.operating break-even pointA firm has fixed operating costs of $150,000, total sales of $1,500,000, and total variable costs of $1,275,000. The firm's operating break-even point in dollars is ___________.$1,000,000In theory, the firm should maintain financial leverage consistent with a capital structure thatmaximizes the owner's wealth.The higher financial leverage causes __________ to increase more for a given increase in __________.EPS, EBIT__________ risk is the risk of being unable to cover operating costs.BusinessCash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are calledsunk costs.__________ risk is the risk of being unable to cover operating costs.BusinessTable 11.3 Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. The book value of the existing asset is ________. (See Table 11.3)$7,250__________ risk is the risk of being unable to cover financial costs.FinancialA firm has fixed operating costs of $650,000, a sales price per unit of $20, and a variable cost per unit of $13. At a base sales level of 500,000 units, the firm's degree of operating leverage is __________.1.23A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent. The firm's financial break-even point is __________.$186,667The book value of an asset is equal to theoriginal purchase price minus accumulated depreciationThe tax treatment regarding the sale of existing assets that are sold for their book value results inno tax benefit or liabilityA firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent. The firm's financial break-even point is _________186,667Benefits expected from proposed capital expenditures must be on an after-tax basis becauseno benefits may be used by the firm until tax claims are satisfied.A corporation is considering expanding operations to meet growing demand. With the capital expansion the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by $30,000, and long-term debt by $80,000. The change in net working capital isa decrease of $10,000.The change in net working capital when evaluating a capital budgeting decision isthe change in current assets minus the change in current liabilitiesTable 11.3 Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. The incremental depreciation expense for year 1 is ________. (See Table 11.3)$7,600At the operating break-even point, __________ equals zero.earnings before interest and taxesA corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $15,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal cash flow is16,000A firm is selling an existing asset for $5,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is$1,320 tax liability.A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating break-even point in units is __________ and its breakeven point in dollars is __________.1,000; $25,000__________ results from the use of fixed-cost assets or funds to magnify returns to the firm's owners.LeverageAll of the following would be used in the computation of an investment's initial investment EXCEPT the annual after tax inflow expected from the investment. the initial purchase price of the investment. the resale value of an old asset being replaced. the tax on the sale of an old asset being replaced.the annual after tax inflow expected from the investment.The annual incremental after-tax cash flow from operations for year 1 is ________. (See Table 8.4)$19,240The reason why maximizing share value and maximizing EPS do not give the same optimal capital structure is becauseEPS maximization does not consider risk.If a firm's variable costs per unit increase, the firm's operating break-even point willincreaseA firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and 50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT is expected to be $200,000, the firm's earnings per share will be __________.$1.82With the existence of fixed operating costs, a decrease in sales will result in __________ in EBIT.a more than proportional decreaseAt a base sales level of $400,000, a firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5. The firm's degree of total leverage is __________.3.0The portion of an asset's sale price that is below its book value and below its initial purchase price is calleda capital loss

Finanical Managment Final Exam

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