ACC 222 – REVIEW MATERIAL

Working Capital Management

1. Days of working capital is the amount of net operating working capital required per
dollar of daily sales.
a. True
b. False
c. Maybe
d. Neither a and b
2. A firm's collection policy, i.e., the procedures it follows to collect accounts receivable,
plays an important role in keeping its average collection period short, although too
strict a collection policy can reduce profits due to lost sales.
a. True
b. False
c. Maybe
d. Neither a and b
3. A lockbox plan is
a. used to protect cash, i.e., to keep it from being stolen.
b. used to identify inventory safety stocks.
c. used to slow down the collection of checks our firm writes.
d. used to speed up the collection of checks received.
4. A revolving credit agreement is a formal line of credit. The firm must generally pay a
fee on the unused balance of the committed funds to compensate the bank for the
commitment to extend those funds.
a. True
b. False
c. Maybe
d. Neither a and b
5. Other things held constant, which of the following would tend to reduce the cash
conversion cycle?
a. Carry a constant number of receivables as sales decline.
b. Place larger orders for raw materials to take advantage of price breaks.
c. Take all discounts that are offered.
d. Continue to take all discounts that are offered and pay on the net date.
6. Firms generally choose to finance temporary current operating assets with short-term
debt because
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.
b. short-term interest rates have traditionally been more stable than long-term interest
rates.
c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay
the debt than a firm that borrows short term.
d. the yield curve is normally downward sloping.
7. Which of the following statements is most consistent with efficient inventory
management? The firm has a
a. below average inventory turnover ratio.
b. low incidence of production schedule disruptions.
c. below average total assets turnover ratio.
d. relatively high current ratio.
8. Firms generally choose to finance temporary current operating assets with short-term
debt because
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.
b. short-term interest rates have traditionally been more stable than long-term interest
rates.
c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay
the debt than a firm that borrows short term.
d. the yield curve is normally downward sloping. e. short-term debt has a higher cost
than equity capital.
9. Helena Furnishings wants to reduce its cash conversion cycle. Which of the following
actions should it take?
a. Increase average inventory without increasing sales.
 b. Take steps to reduce the DSO.
c. Start paying its bills sooner, which would reduce the average accounts payable but
not affect sales.
d. Sell common stock to retire long-term bonds.
10. Data on Wentz Inc. for 2008 are shown below, along with the payables deferral period
(PDP) for the firms against which it benchmarks. The firm's new CFO believes that the
company could delay payments enough to increase its PDP to the benchmarks’
average. If this were done, by how much would payables increase? Use a 365-day
year.
Cost of goods sold = $75,000
Payables = $5,000
Payables deferral period (PDP) = 24.33
Benchmark payables deferral period = 30.00
a. $ 849
b. $ 943
c. $1,048
d. $1,164

11. Zarruk Construction’s DSO is 50 days (on a 365-day basis), accounts receivable is $100
million, and its balance sheet shows inventory of $125 million. What is the inventory
turnover ratio?
a. 4.73
b. 5.26
c. 5.84
d. 6.42
12. Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding
was DSO = 35 days. What was its average receivables balance, based on a 365-day
year?
a. $335,616
b. $352,397
c. $370,017
d. $388,518
13. Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps
inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day
year, what is its inventory conversion period?
a. 11.7 days
b. 13.0 days
c. 14.4 days
d. 15.2 days
14. 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?
a. $24,057
b. $26,730
c. $29,700
d. $33,000
15. Cass & Company has the following data. What is the firm's cash conversion cycle?
Inventory conversion period = 50 days
Average collection period = 17 days
Payables deferral period = 25 days
a. 31 days
b. 34 days
c. 38 days
d. 42 days
Cost of Capital
16. It measures the relative variability of the firm’s stock with that of the composite price in
the stock market.
a. Beta coefficient
b. CAPM
c. Dividend per share
d. Flotation cost
17. A group of individuals got together and purchased all of the outstanding shares of
common stock of DL Smith. What is the return that these individuals require on this
investment called?
a. Dividend yield
 b. Cost of equity
c. Cost of capital
d. Capital gains yield
18. The based on the cost of retained earnings but increased for
flotation costs.
a. Preferred stock holder’s equity
b. Market price per share
c. Cost of external equity
d. New common stock
19. A firm’s cost of capital:
a. Will decrease as the risk level of the firm increases
b. For a specific project is primarily dependent upon the source of the funds used for
the project
c. Is independent of the firm’s capital structure
d. Depends upon how the funds raised are going to spent.
20. Which of the following is NOT a capital component when calculating the weighted
average cost of capital (WACC) for use in capital budgeting?
a. Long-term debt
b. Account Payable
c. Retained Earnings
d. Common Stock
21. Miraflores’ Company perpetual preferred stock currently sells for $95 per share, and it
pays an $5 annual dividend. If the company were to sell a new preferred issue, it would
incur a flotation cost of 8.00% of the issue price. What is the firm's cost of preferred
stock?
a. 87.4
b. 5.72
c. 7.6
d. 5.74
22. Gueverra Inc.'s CFO hired you as a consultant to help her estimate the cost of capital.
You have been provided with the following data: rRF = 5%; RPM = 6%; and b = 2.25.
Based on the CAPM approach, what is the cost of common from retained earnings?
a. 17.5
b. 18.5
c. 19
d. 21
23. You were hired as a consultant to Clarito Company, whose target capital structure is
50% debt, 20% preferred, and 60% common equity. The after-tax cost of debt is
5.00%, the cost of preferred is 6.50%, and the cost of common using retained earnings
is 15.00%. The firm will not be issuing any new stock. What is its WACC?
a. 2.5%
b. 1.3%
c. 9.0%
d. 12.80%
24. Assume that Aguilar Inc. hired you as a consultant to help estimate its cost of common
equity. You have obtained the following data: D0 = $1.95; P0 = $30.7; and g = 5.00%
(constant). Based on the DCF approach, what is the cost of common from retained
earnings?
a. 11.67
b. 30.7
c. 12.67
d. 14.65
25. Assume that you are a consultant to Petalcorin Inc., and you have been provided with
the following data: D1 = $1.27; P0 = $30.5; and g = 8.00% (constant). What is the
cost of common from retained earnings based on the DCF approach?
a. 11.5
b. 12.4
c. 8.00
d. 12.16
Risk and Rates of Returns
26. When adding a randomly chosen new stock to an existing portfolio, the higher (or more
positive) the degree of correlation between the new stock and stocks already in the
portfolio, the less the additional stock will reduce the portfolio's risk.
a. True
 b. False
27. Which is the best measure of risk for a single asset held in isolation, and which is the
best measure for an asset held in a diversified portfolio?
a. Variance; correlation coefficient.
b. Standard deviation; correlation coefficient.
c. Beta; variance.
d. Coefficient of variation; beta.
28. You have the following data on three stocks:
Stock Standard Deviation Beta
A 20% 0.59
B 10% 0.61
C 12% 1.29
If you are a strict risk minimizer, you would choose Stock if it is to be held in
isolation and Stock if it is to be held as part of a well-diversified portfolio.
a. A; A.
b. A; B.
c. B; A.
d. C; A.
29. Inflation, recession, and high interest rates are economic events that are best
characterized as being
a. systematic risk factors that can be diversified away.
b. company-specific risk factors that can be diversified away.
c. among the factors that are responsible for market risk.
d. risks that are beyond the control of investors and thus should not be considered by
security analysts or portfolio managers.
30. For a portfolio of 40 randomly selected stocks, which of the following is most likely to
be true?
a. The riskiness of the portfolio is greater than the riskiness of each of the stocks if
each was held in isolation.
b. The riskiness of the portfolio is the same as the riskiness of each stock if it was held
in isolation.
c. The beta of the portfolio is less than the average of the betas of the individual stocks.
d. The beta of the portfolio is equal to the average of the betas of the individual stocks.
31. Acdog Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of
producing a 12% return, and a 25% chance of producing a 18% return. What is the
firm's expected rate of return?
a. 9.29
b. 8.85
c. 9.00
d. 9.55
32. Miraflores Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of
producing a 10% return, and a 20% chance of producing a -28% return. What is the
firm's expected rate of return?
a. 9.41%
b. 9.65%
c. 9.90%
d. 10.15%
33. Wei Inc. is considering a capital budgeting project that has an expected return of 25%
and a standard deviation of 30%. What is the project's coefficient of variation?
a. 1.20
b. 1.26
c. 1.32
d. 1.39
34. Bill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X
and the remainder is invested in Stock Y. X's beta is 1.50 and Y’s beta is 0.70. What is
the portfolio's beta?
a. 0.65
b. 0.80
c. 0.89
d. 0.98
35. Moerdyk Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the
market risk premium is 5.50%. What is the firm's required rate of return?
a. 11.36%
b. 11.65%
 c. 11.95%
d. 12.25%
Capital Structure and Leverage
36. Statement I: Return on Invested Capital measures the underlying risk of the firm
considering the effects of debt.
Statement II: Financial Leverage is the use of fixed cost rather than variable cost.
a. Statement I is true, Statement II is true
b. Statement I is false, Statement II is true
c. Statement I is true, Statement II is false
d. Statement I is false, Statement II is False
37. Business risk is concerned with the operations of the firm. Which of the Following is not
part of the determinants of business risk?
a. Foreign risk exposure
b. Financial leverage
c. Competition
d. Uncertainty about output prices
38. As a general rule, the capital structure that
a. Maximizes expected EPS also maximizes the price per share of common stock.
b. Minimizes the interest rate on debt also maximizes the expected EPS.
c. Minimizes the required rate on equity also maximizes the stock price.
d. Maximizes the price per share of common stock also minimizes the weighted
average cost of capital.
39. The following are the determinants of business risk, except
a. Competition
b. Product obsolescence
c. Financial leverage
d. Foreign risk exposure
40. Additional risk placed on the common stockholders as a result of the decision to
finance with debt
a. Financial leverage
b. Operating risk
c. Business risk
d. Financial risk
41. Barnes Company change its capital structure to 30% debt and 70% equity. The
unlevered beta is .84
Additional data:
Risk Premium = 4%
Market risk = 8%
Tax rate 30%
Compute of Levered beta and Cost of Equity
a. 0.0837
b. 0.84
c. 1.092
d. 1.92
42. Jenny’s Fried Chicken Corp. has a capital structure that consist of 20% debt and 80%
equity. Its debt-to-equity ratio is .25. The risk-free rate is 6% and the market risk
premium is 5 %. The company’s current cost of equity is 12 % and with a tax rate of
40%.
Compute for your current levered Beta and unlevered Beta
a. 1.2
b. 1.0
c. 1.06
d. 1.05
43. Pennington Airlines currently has a beta of 1.2. The company’s capital structure consists
of $7 million of equity and $3 million of debt.
The company is considering changing its capital structure. Under the proposed plan the
company would increase its debt by $2 million and use the proceeds to repurchase
common stock.
The company estimates that if it goes ahead with the plan, its bonds will have a
nominal yield to maturity of 8.5 percent. The company’s tax rate is 40 percent. The
risk-free rate is 6 percent and the market risk premium is 7 percent. What is the
company’s estimated WACC if it goes ahead with the plan?
a. 0.9545
b. 1.5273
 c. 0.1669
d. 0.1090
44. Dirty Linen Inc. will produce 15,000 uniforms next month. Variable cost at 40% percent
of the sales, while fixed costs will total to P180,000. At what price must each uniform
be sold for the company to achieve an EBIT of P115,200?
a. 29.63
b. 24.25
c. 20.00
d. 11.19
45.

Market Price = P25 Preferred Stock = 80,000

Fair Value = P25 Tax rate = 30%
EBIT= 300,000

Determine the EPS and TIE where: D = 500,000, rd= 9.0%

a. 3.00, 5.4
b. 2.94, 6.80
c. 2.97, 6.67
d. 3.02, 4.05
Capital Budgeting, Cash Flow and Risk Estimation
46. The acceptance or rejection decision made for this type of project does not affect the
acceptance or rejection of another proposed capital project.
a. Mutually exclusive project
b. Independent Project
c. Net present value
d. Profitability index
47. This is defined as the expected number of years required to recover the project's
original investment from the project's net cash flows. Also, can be asked in question
form: How long will it take to get the business's money back from the project's net cash
flows?
a. Discounted Payback
b. Profitability Index
c. Payback period
d. Net present value
48. Two (or several) projects are mutually exclusive if the company is only choosing one of
the projects. Chose whatever with the lowest payback period.
a. Accounting rate of return
b. Mutually expanded project
c. Independent project
d. Internal rate of return
49. What is the term used for time that it takes to earn back the initial investment?
a. Reinvestment integer
b. Waiting time
c. Payback period
d. Sunk cost
50. Which of the following capital budgeting ignores the time value of money?
a. Payback period
 b. Net present value
c. Internal rate of return
d. Profitability index
51. S Company is considering the purchase of a new piece of equipment for laying sod.
Relevant information concerning the equipment follows:
Cost of the equipment $180,000
Annual cost savings from new equipment $37,500
Life of the new equipment 12 YEARS
Expected Annual Net Income $15,000
Compute the payback period for the equipment. If the company requires a payback
period of four years or less, would the equipment be purchased?
a. 4.8 years
b. 4.7 years
c. 4.0 years
d. 4.5 years
52. Compute for the Profitability Index of the three (3). (ROUND TO 2 DECIMAL POINT)
PROPOSAL X PROPOSAL Y PROPOSAL Z
PV OF CASH FLOW 212,000 171,800 185,200
INVESTMENT REQUIRED (200,000) (160,000) (180,000)
NET PRESENT VALUE 12,000 11,800 5,200
a. X – 1.06; Y – 1.07; Z – 1.03
b. X – 1.07; Y – 1.03; Z – 1.06
c. X – 1.07; Y – 1.06; Z – 1.03
d. X – 1.03; Y – 1.07; Z – 1.06
53. Fernando Designs is considering a project that has the following cash flow and WACC
data. What is the project's discounted payback?

WACC: 10.00%
Year 0 1 2 3
Cash flows -$900 $500 $500 $500
a. 2.0
b. 0.94
c. 0.094
d. 2.094
54. B Company is considering purchasing equipment that costs $235,000. The equipment
has an estimated useful life of 5 years and no salvage value. B Company believes that
the annual cash inflows from using the equipment will be $65,000. Calculate the net
present value of the equipment assuming that B Company's cost of capital is 10%.
a. $11,401
b. $11,450
c. $11, 490
d. $11,560
55. Calculate the net present value of the equipment assuming that B Company's cost of
capital is 12%.
a. 590
b. -690
c. -590
d. 697
An Overview of Financial Management
56. Which of the following statements is CORRECT?
a. It is usually easier to transfer ownership in a corporation than it is to transfer
ownership in a sole proprietorship.
b. Corporate shareholders are exposed to unlimited liability.
c. Corporations generally face fewer regulations than sole proprietorships.
d. Corporate shareholders are exposed to unlimited liability, and this factor may be
compounded by the tax disadvantages of incorporation.
57. Which of the following statements is CORRECT?
a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to
unlimited liability.
b. It is generally easier to transfer one’s ownership interest in a partnership than in a
corporation.
c. One of the advantages of the corporate form of organization is that it avoids double
taxation.
 d. One of the advantages of a corporation from a social standpoint is that every
stockholder has equal voting rights, i.e., “one person, one vote.”
58. Which of the following could explain why a business might choose to operate as a
corporation rather than as a sole proprietorship or a partnership?
a. Corporations generally find it relatively difficult to raise large amounts of capital.
b. Less of a corporation’s income is generally subjected to taxes than would be true if
the firm were a partnership.
c. Corporate shareholders escape liability for the firm's debts, but this factor may be
offset by the tax disadvantages of the corporate form of organization.
d. Corporate investors are exposed to unlimited liability.
59. Cheers Inc. operates as a partnership. Now the partners have decided to convert the
business into a regular corporation. Which of the following statements is CORRECT?
a. Assuming Cheers is profitable, less of its income will be subject to federal income
taxes.
b. Cheers will now be subject to fewer regulations.
c. Cheers’ shareholders (the ex-partners) will now be exposed to less liability.
d. Cheers’ investors will be exposed to less liability, but they will find it more difficult to
transfer their ownership.
Financial Planning and Forecasting
60. The term “additional funds needed (AFN)” is generally defined as follows:
a. Funds that are obtained automatically from routine business transactions.
b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by
borrowing or by selling new stock to support operations.
c. The amount of assets required per dollar of sales.
d. The amount of internally generated cash in a given year minus the amount of cash
needed to acquire the new assets needed to support growth.
61. Which of the following is NOT a key element in strategic planning as it is described in
the text?
a. The statement of the corporation’s scope.
b. The statement of cash flows.
c. The statement of corporate objectives.
d. The corporation's strategies.
62. Which of the following assumptions is embodied in the AFN equation?
a. None of the firm's ratios will change.
b. Accounts payable and accruals are tied directly to sales.
c. Common stock and long-term debt are tied directly to sales.
d. Fixed assets, but not current assets, are tied directly to sales.
63. Which of the following is NOT one of the steps taken in the financial planning process?
a. Forecast the funds that will be generated internally. If internal funds are insufficient
to cover the required new investment, then identify sources from which the required
external capital can be raised.
b. Determine the amount of capital that will be needed to support the plan.
c. Develop a set of forecasted financial statements under alternative versions of the
operating plan in order to analyze the effects of different operating procedures on
projected profits and financial ratios.
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
64. Last year Godinho Corp. had P 250 million of sales, and it had P 75 million of fixed
assets that were being operated at 80% of capacity. In millions, how large could sales
have been if the company had operated at full capacity?
a. 312.5
b. 328.1
c. 344.5
d. 361.8
65. 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?
a. 74.81
b. 78.75
c. 82.69
d. 86.82