CHAPTER 6: HOW TO CALCULATE PRESENT VALUES

Easy:

Question 1: The present value of $100 expected in two years from today at a discount rate of 6%
is:
*a/$89.00
Question 2: Present Value is defined as:
*a/ Future cash flows discounted to the present at an appropriate discount rate
Question3: If the interest rate is 12%, what is the 2-year discount factor?
*a/ 0.7972
Question 4: If the present value of the cash flow X is $240, and the present value cash flow Y
$160, then th present value of the combined cash flow is:
*a/ $400
Question 5: The rate of return is also called: I) discount rate; II) hurdle rate; III) opportunity cost
of capital
*a/ I, II, and III
Question 6: Present value of $121,000 expected to be received one year from today at an interest
rate (discount rate) of 10% per year is:
*a/ $110,000
Question7: One year discount factor at a discount rate of 25% per year is:
*a/ 0.8

Question 8: The one-year discount factor at an interest rate of 100% per year is:
*a/ 0.5
Question9: Present Value of $100,000 that is, expected, to be received at the end of one year at a
discount i of 25% per year is:
*a/ $80,000
Question 10: If the one-year discount factor is 0.8333, what is the discount rate (interest rate) per
year?
*a/ 20%
Question 11: If the present value of $480 to be paid at the end of one year is $400, what is the
one-year disco factor?

*a/ 0.8333
Question 12: If the present value of $250 expected io be received one year from today is $200,
what is the discount rate?
*a/ 25%
Question 13: If the one-year discount factor is 0.90, what is the present value of $120 to be
received one yea from today?
*a/ $108

Question 14: If the present value of $600 expected to be received one year from today is $400,
what is the or year discount rate?
*a/50%
Question 15: The present value formula for one period cash flow is:
*a/ PV = C/(1 +r)
Question 16: An initial investment of $400,000 will produce an end of year cash flow of
$480,000. What is t NPV of the project at a discount rate of 20%?
*a/ $O (zero)
Question 17: If the present value of a cash flow generated by an initial investment of $200,000 is
$250,000. is the NPV of the project? #
*a/ $50,000
Question 18: An annuity is defined as
*a/ Equal cash flows at equal intervals of time for a specified period of time
Question 19: If you receive $1,000 payment at the end each year for the next five years, what
type of cash fl do you have?
*a/ An annuity
Question 20: What is the present value annuity factor at a discount rate of 11% for 8 years?
*a/ 5.1461
Question 21: If you invest $100 at 12% APR for three years, how much would you have at the
end of 3 years using simple interest?
*a/ $136
Question 22: If you invest $100 at 12% APR for three years, how much would you have at the
end of 3 years using compound interest?

*a/ S140.49
Question 23: What is the present value annuity factor at an interest rate of 9% for 6 years?
*a/ 4.4859
Question 29: What is the present value of $1000 per year annuity for five years at an interest rate
of 12%?
*a/ $3,604.78
Question 30: What is the present value of $5000 per year annuity at a discount rate of 10% for 6
years?
*a/ $16.760.78
Question 31: According to the net present value rule, an investment in a project should be made
if the:
*a/ Net present value is positive
Question 32: A perpetuity is defined as:
*/ Equal cash flows at equal intervals of time forever
Ouestion 33: What is the present value of $10,000 per year perpetuity at an interest rate of 10%?
*a/ $100.000
Ouestion 34: You would like to have enough money saved to receive $80,000 per year perpetuity
after retirement so that you and your family can lead a good life. How much would you need to
save in your retirement fund to achieve this goal (assume that the perpetuity payments start one
year from the date of vour retirement. The interest rate is 8%)?
*/ $1,000,000
Question 35: After retirement, you expect to live for 25 years. You would like to have $75,000
income each year. How much should you have saved in the retirement to receive this income, if
the interest is 9% per year (assume that the payments start on the day of retirement)?
#a/ S802,995.88
Question36:
You would like to have enough money saved to receive $100,000 per year perpetuity after
retirement so that you and your family can lead a good life. How much would you need to save
in your retirement fund to achieve this goal (assume that the perpetuity payments start one year
from the date of your retirement. The interest rate is 12.5%)?

* / S800,000
Question 37: After retirement, you expect to live for 25 years. You would like to have $75,000
income each year. How much should you have saved in the retirement to receive this income, if
the interest is 9% per year (assume that the payments start one year after the retirement)?
*a/ $736,693.47
Question 38: John House has taken a $250,000 mortgage on his house at an interest rate of 6%
per year. If the mortgage calls for twenty equal annual payments, what is the amount of each
payment?
*a/ $21,796.14
Question 39: If the present value annuity factor at 8% APR for 10 years is 6.71, what is the
equivalent future value annuity factor?
*a/14.487
Question 40: Mr. Hopper is expected to retire in 25 years and he wishes accumulate $750,000 in
his retirement fund by that time. If the interest rate is 10% per year, how much should Mr.
Hopper put into the retirement fund each year in order to achieve this goal? [Assume that the
payments are made at the end of each vear]
*a/ S7.626.05
Question 41: Mr. Hopper is expected to retire in 30 years and he wishes accumulate $1,000,000
in his retirement fund by that time. If the interest rate is 12% per year, how much should Mr.
Hopper put into the retirement fund each year in order to achieve this goal?
*a/ $4,143.66
Question 42: You would like to have enough money saved to receive a $50,000 per year
perpetuity after retirement so that you and your family can lead a good life. How much would
you need to save in your retirement fund to achieve this goal (assume that the perpetuity
payments starts on the day of retirement. The interest rate is 8%)?
*a/ $675,000
Question 43: You would like to have enough money saved to receive an $80,000 per year
perpetuity after retirement so that you and your family can lead a good life. How much would
you need to save in your retirement fund to achieve this goal (assume that the perpetuity
payments starts on the day of retirement. The interest rate is 10%)?
*a/ S880.000
Question 44: An investment at 10.47% effective rate compounded monthly is equal to a nominal
(annual) rate of: *a/ 10%

Question 45: An investment at 12% nominal rate compounded monthly is equal to an annual rate
of: *a/ 12.68%
Ouestion 46: An investment at 10% nominal rate compounded continuously is equal to an
equivalent annual rate of: *a/ 10.517%
Difficult:
Question 47: You would like to have enough money saved to receive a growing annuity for 20
years, growing at a rate of 5% per year, the first payment being $50,000 after retirement. That
way, you hope that you and your family can lead a good life after retirement. How much would
you need to save in your retirement fund to achieve this goal. (Assume that the growing annuity
payments start one year from the date of your retirement. The interest rate is 10%)?
*a/ $605,604.20
Question 48: You are considering investing in a retirement fund that requires you to deposit
$5,000 per year, and you want to know how much the fund will be worth when you retire. What
financial technique should you use to calculate this value?
*a/ Future value of an annuity
Question 49: The managers of a firm can maximize stockholder wealth by:
*a/ Taking all projects with positive NPVs
Question 50: Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6% per
year. If the mortgage calls for equal monthly payments for twenty years, what is the amount of
each payment? (Assume monthly compounding or discounting.)
*a/ $1254.70
Question 51: You would like to have enough money saved to receive a growing annuity for 25
years, growing at a rate of 4% per year, the first payment being $60,000 after retirement, so that
you and your family can lead a good life. How much would you need to save in your retirement
fund to achieve this goal? (assume that the growing perpetuity payments start one year from the
date of your retirement. (The interest rate is 12%)?
*a/ $632,390
Question 52: Mr. William expects to retire in 30 years and would like to accumulate $1 million in
the pension fund. If the annual interest rate is 12% per year, how much should Mr. Williams put
into the pension fund each month in order to achieve his goal? Assume that Mr. Williams will
deposit the same amount each month into his pension fund and also use monthly compounding.
*a/ $286.13
Question 53: The net present value formula for one period is:
I) NPV = Co + [Ci/(1 + r)]:
II) NPV = PV required investment; and
III) NPV = Co/Ci
*a/ I and II only
Question 54: The following statements regarding the NPV rule and the rate of return rule are true
except:
*a/ Accept a project if its rate of return > O

Question 55: The concept of compound interest is most appropriately described as:
*a/ Interest earned on interest

Question 56: The opportunity cost of capital for a risky project is

*a/ The expected rate of return on a portfolio of securities of similar risks as the project

Question 57: Which of the following is generally

*a/ Consols

CHAPTER 7: THE VALUE OF COMMON STOCKS AND PAYOUT

POLICY
Easy
Question 1: The market in which new securities are originally sold to investors is called the
market. *a/ primary
Question 2:
*a/ dealer
Question 3: An agent who arranges security transactions among investors without maintaining an
inventory is called a:
*a broker
Question 4: ALP Inc. has decided to issue preferred stock with an annual dividend of $4 a share.
Similar stocks are currently yielding 11 percent. What price should the firm expect to receive for
each new share issued?
*a/ $36.36
Question 5: The underlying assumption of the dividend growth model is that a stock is worth:
*a/ the present value of the future income provided by that stock.
Question 6: Assume General Electric (GE) has about 10.3 billion shares outstanding and the
stock price is $37.10. Also assume the P/E ratio is about 18.3. Calculate the market capitalization
for GE. (Approximately)
*a/ $382 billion
Question 7: Company X has a P/E ratio of 10 and a stock price of $50 per share. Calculate
earnings per share of the company.
*a/ $5 per share

Question 8: The Wall Street Journal quotation for a company has the following values: Div:
$1.12, PE: 18.3, Close: $37.22. Calculate the dividend pay out ratio for the company
(Approximately).
*a/ 55%
Question 9: Super Computer Company's stock is selling for $100 per share today. It is expected
that this stock will pay a dividend of 6 dollars per share, and then be sold for $114 per share at
the end of one year. Calculate the expected rate of return for the shareholders.
*a/ 20%
Question 10: The value of a common stock today depends on:
*a/ The expected future dividends and the discount rate
Question 11: CK Company stockholders expect to receive a year-end dividend of S5 per share
and then be sold for SI15 dollars per share. If the required rate of return for the stock is 20%,
what is the current value of the stock?
*a/ $100
Question 12: MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What
is the stable dividend growth rate for the firm?
*a/ 6%
Question 13: Michigan Co. is currently paying a dividend of $2.00 per share. The dividends are
expected to grow at 20% per year for the next four years and then grow 6% per year thereafter.
Calculate the expected dividend in year 5.
*a/ $4.40
Question 14: Otobai Motor Company is currently paying a dividend of $1.40 per year. The
dividends are expected to grow at a rate of 18% for the next three years and then a constant rate
of 5% thereafter. What is the expected dividend per share in year 5?

*a/ $2.54
Question 15: Deluxe Company expects to pay a dividend of S2 per share at the end of year-1, S3
per share at the end of year-2 and then be sold for $32 per share. If the required rate on the stock
is 15%, what is the current value of the stock?
*a/ $28.20

Question 16: Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (Di)
and these dividends are expected to grow at a constant rate of 6% per year forever. If the required
rate of return on the stock is 18%, what is current value of the stock today?
*a/ $25
Question 17: Lester's Diner just paid an annual dividend of S.24 a share and plans on increasing
this amount by 2 percent annually. What is the expected dividend for Year 6?
*a/ S.27
Question 18: Firms can pay out cash to their shareholders in the following ways:
I) Dividends ;II) Share repurchases; III) Interest payments
*a/ I and II only
Question 19: Dividends are decided by:
I) The managers of a firm; II) The government ; III) The board of directors
*a/ III only

Question 20: Which of these dates occurs last in time (when arranged in the chronological
order)?
*a/ Payment date
Question 21: Which of the following lists events in the chronological order from earliest to
latest?
*a/ Declaration date, ex-dividend date, record date
Question 22: Which of the following dividends is never in the form of cash?
I) Regular dividend; II) Special dividend
III) Stock dividend; IV) Liquidating dividend
*a/ III only
Question 23: The par value of the outstanding shares is defined as: *a/ Legal capital
Question 24: Which of the following is not true?
*a/ All of the answers are correct.
Question 25: According to financial executives views about dividend policy, the following
statement is the most frequently cited one:
I) we try to avoid reducing the dividend ; II) we try to maintain a smooth dividend stream

III) we look at the current dividend level ; IV) we are reluctant to make a change that may have
to be reversed
*a/I only
Medium
Question 26: Dirt Bikes just announced that its next annual dividend will be $1.42 a share and
that all future dividends are expected to increase by 2.5 percent annually. What is the market rate
of return if this stock is currently selling for $14.11 a share?
*a/ 12.56%
Question 27: Will Co. is expected to pay a dividend of $2 per share at the end of year - 1(Di) and
the dividends are expected to grow at a constant rate of 4% forever. If the current price of the
stock is $20 per share calculate the expected return or the cost of equity capital for the firm.
*a/ 14%
Question 28: World-Tour Co. has just now paid a dividend of $2.83 per share (Do); the dividends
are expected to grow at a constant rate of 6% per year forever. If the required rate of return on
the stock is 16%, what is the current value on stock?
*a/ $70
Question 29: The In-Tech Co. has just paid a dividend of $1 per share. The dividends are
expected to grow at 25% per year for the next three years and at the rate of 5% per year
thereafter. If the required rate of return on the stock is 18%(APR), what is the current value of
the stock?
*a/ $12.97
Question 30: R&D Technology Corporation has just paid a dividend of $0.50 per share. The
dividends are expected to grow at 24% per year for the next two years and at 8% per year
thereafter. If the required rate of return in the stock is 16% (APR), calculate the current value of
the stock.
*a/ S8.82
Question 31: Wilton's Market just announced its next annual dividend will be $1.50 a share with
future dividends increasing by 1.8 percent annually. How much will one share of this stock be
worth five years from now if the required return is 15.5 percent?
*a/ $11.97
Question 32: Generally, investors interpret the announcement of an increase in dividends as:
*a/ good news and the stock price increases
Quesiton 33:
Generally, investors view the announcement of open-market repurchase of stocks as:
*a/ good news and the stock price increases
Ouestion 34:
One key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that:
*a/ New shares are sold at a fair price
Question 35:
The indifference proposition regarding dividend policy:
*a/ Assumes that investors are indifferent about the timing of dividend payments
Question 36: One key assumption of the Miller and Modigliani (MM) dividend irrelevance is
that: *a/ Capital markets are efficient
Question 37: The dividend-irrelevance proposition of Miller and Modigliani depends on the
following relationship between investment policy and dividend policy.

*a/ The investment policy is set before the dividend decision and not changed by dividend
policy
Question 38: Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay
all of it as dividends. If the firm expects to maintain this dividend forever, Calculate the stock
price today. (The required rate of return is 10%
*a/ $100
Question 39: Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay
all of it as dividends. If the firm expects to maintain this dividend forever, Calculate the stock
price after the dividend payment. (The required rate of return is 10%)
*a/ $90
Question 40: Company X has 100 shares outstanding. It earns $1,000 per year and expects
repurchase its shares in the open market instead of paying dividends. Calculate the number of
shares outstanding at the end of year-1, if the required rate of return is 10%.

*a/ 90
Dificult
Question 41: XanEx is a new firm that just paid an annual dividend of $1 a share. The firm plans
to increase its dividend by 20 percent a year for the next four years and then decrease the growth
rate to 5 percent annually. If the required rate of return is 10.25 percent, what is one share of this
stock worth today?
*a $33.04
Question 42: The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The
company is planning on paying $3, $5, $7.50, and $10 a share over the next four years,
respectively. After that the dividend will be a constant $2.50 per share per year. What is the
current price of this stock if the rate of return is 14 percent?
*a/ $28.03
Question 43: Mario's is going to pay $1, $2.50, and $5 a share over the next three years,
respectively. After that, the company plans to pay annual dividends of $1.25 per share
indefinitely. If your required return is 13 percent, how much are you willing to pay for one share
today?
*a/ $12.97
Question 44: Dille Inc. pays no dividend at the present time. In Years 2 and 3, the firm will pay
annual dividends of $3 a share. After that, it will pay a constant $1 a share dividend indefinitely.
What is this stock worth at a required return of 15 percent?

*a/ $8.62
Question 45: New Tours last annual dividend was $2 a share. The company plans to lower the
dividend by $.50 each year for the next three years. In Year 5, it will pay a final liquidating
dividend of $22 a share. If the required return is 16 percent, what is the current per share value of
this stock?
*a/ $12.83
Question 46: Midtown Enterprises paid its first annual dividend yesterday in the amount of S.28
a share. The company plans to double each annual dividend payment for the next three years.
After that, it will pay a constant $1.50 per share dividend indefinitely. What is one share of this
stock worth today if the market rate of return on similar securities is 11.5 percent?
*a/ $12.43
Question 47: Last week, Railway Cabooses paid its annual dividend of $1.20 a share. The
company has been reducing its dividends by 6 percent each year. What is one share of stock
worth at a required return of 14 percent?
*a/ $5.64
Question 48: Nu-Tek, Inc. is expecting a period of intense growth, so it has decided to retain
more of its earnings to help finance that growth. As a result, it is going to reduce its annual
dividend by 20 percent a year for the next three years. After that it will maintain a constant
dividend of $1.60 a share. Last year, the annual dividend was $2.60 a share. What is the market
value of this stock if the required rate of return is 13 percent?

*a/ $12.60
Question 49: Felix Pet Foods plans to pay an annual dividend of $.75 next year, increase the
dividend by 12 percent for the following three years, and then increase the dividend by 2 percent
annually thereafter. The required rate of return is 12.5 percent. What is this stock worth per share
today?
*a/ $9.04
Question 50: The constant dividend growth formula Po = Divi/(r - g) assumes:
I) the dividends are growing at a constant rate g forever.
II) r > g; III) g is never negative.
*a/ I and II only
Question 51: Dividend growth rate for a stable firm can be estimated as:
*a/ Plow back rate * the return on equity (ROE)
Question 52: Doctors-On-Call, a newly formed medical group, just paid a dividend of S.50 a
share. The dividends are expected to increase by 20 percent a year for the next two years and
then increase by 3 percent annually thereafter. What is the current value of a share if the
appropriate discount rate is 12 percent?
*a/$7.68
Question 53: One possible reason that shareholders often insist on higher dividends is:
*a/ They do not trust managers to spend retained earnings wisely
Question 54: The rightist position is that the market will reward firms that:
*a/ Have high dividend yield.
Question 55: According to behavioral finance investors prefer dividends because:
*a/ investors prefer the discipline that comes from spending only the dividends
Question 56: If investors do not like dividends because of the additional taxes that they have to
pay, how would you expect stock prices to behave on the ex-dividend date?
* a/ Fall by more than the amount of the dividend
Question 57: If both dividends and capital gains are taxed at the same ordinary income tax rate,
the effect of tax is different because:
*a/ Dividends are taxed when distributed while capital gains are deferred until the stock is
sold

Question 58: If dividends are taxed more heavily than capital gains, the investors:
*a/ Should be willing to pay more for stocks with low dividend yields
Question 59: If investors have a marginal tax rate of 20% and a firm has announced a dividend of
$5;
*a/ The price of stock should decrease by $4 on the ex-dividend date
Question 60: Two corporations A and B have exactly the same risk and both have a current stock
price of $100. Corporation A pays no dividend and will have a price of $120 one year from now.
Corporation B pays dividends and will have price of $113 one year from now after paying the
dividend. The corporations pay no taxes and investors pay no taxes on capital gains but pay a tax
of 30% income tax on dividends. What is the value of the dividend that investors expect
corporation B to pay one vear from today?
*a/ $10
Question 61: A firm in Australia earns a pretax profit of SA10 per share. It pays a corporate tax
of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a
shareholder in 30% tax bracket. What is the amount of tax paid by the shareholder under the
imputation tax system?
*a/ Zero

CHAPTER 08: FINANCIAL ANALYSIS

Easy
Question 1: The following groups are stakeholders of a public company:
I) Shareholders; II) The government
III) Suppliers; IV) Employees
V) Bondholders; VI) Management
*a/ I, II, III, IV, V, and VI
Question 2: Assets are listed on the balance sheet in order of:
I) Decreasing liquidity; II) Decreasing size
III) Increasing size; IV) Relative life
*a/ I only
Question 3: The following are known as current assets:
I) Cash; II) Marketable securities
III) Receivables; IV) Inventories; V) Payables
*a/ 1, II, IlI and IV only
Question 4: The difference between Total Assets of a firm and its Total Liabilities is called.
*a/ Net worth
Question 5: Inventory consists of:
*a/ raw material, work in process, and finished goods
Question 6: The difference between Current Assets of a firm and its Current Liabilities is called.
*a/ Net working capital
Question 7: Net working capital (NWC) is calculated as:
*a/ Current assets-current liabilities
Question 8: If the debt ratio is 0.5 what is the debt-equity ratio? (assume no leases)
*a/ 1.0
Question 9: Efficiency ratios indicate:
I) How productively is the firm utilizing its assets.; II) How liquid is the firm.
III) How profitable is the firm ; IV) How highly is the firm valued by investors.
*a/lonly
Question 10: Profitability ratios indicate:
I) How productively is the firm utilizing its assets; II) How liquid is the firm.
III) How profitable is the firm.IV) How highly is the firm valued by the investors.
*a/ Ill only
Question 11:
Market value ratios indicate:
1) How productively is the firm utilizing its assets. ;II) How liquid is the firm.
III) How profitable is the firm.; IV) How highly is the firm valued by the investors.
*a/ IV only
Question 12:
Given a book value per share of $10 and a market value of S24, what is the market capitalization
of a firm with 2,000,000 outstanding shares?
*a/ $48.000.000
Question 13:
Given a book value per share of $5 and a market value of $12, what is the market value added of
a firm with 2,000,000 outstanding shares?
*a/ $14.000.000
Ouestion 14:
Which of the following is an example of liquidity ratios?
*a/ Quick ratio
Question 15: When a firm improves (lowers) its days in inventories it generally:

*a/ Releases cash locked up in inventory

Question 16: When a firm improves (lowers) its average collection period it generally:
*a/ Releases cash locked up in accounts receivables
Question 17: Which of the following is an example of leverage ratios?
*a/ Debt-Equity ratio
Medium
Question 18: Given the following data: Long term debt = 100; Value of leases = 20; Book value
of equity = 80; Market value of equity = 100, calculate the debt ratio.
*a/ 0.60
Question 19: Given the following data: Long term debt = 100; Value of leases = 20; Book value
of equity = 80; Market value of equity = 100, calculate the debt-equity ratio.

*a/ 1.50
Question 20: Given the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends
= 10; calculate the Times Interest Earned (TIE) ratio.
*a/ 7.0
Question 21:Given the following data: Current assets = 500; Current liabilities = 250; Inventory
= 200; Account receivables = 200; calculate the current ratio:
*a/ 2.0

Question 22: Given the following data: Current assets = 500; Current liabilities = 250; Inventory
= 200; Account receivables = 200; calculate the quick ratio:
*a/ 1.2
Question 23: Given the following data: Current assets = 500; Current liabilities = 250; Inventory
= 200; Account receivables = 200; calculate the cash ratio: (assume that the firm has no
marketable securities)
*a/ 0.4 = (500 - 200 - 200) / 250
Question 24: Given the following data: Sales = 3200; Cost of goods sold = 1600; Average total
assets = 1600; Average inventory = 200, calculate the asset turnover ratio:
*a/ 2.0 = 3200 / 1600
Question 25: Given the following data: Sales = 3200; Cost of goods sold = 1600; Average total
assets = 1600; Average inventory = 200, calculate the days in inventory:
*a/ 45.6 = 365 / Inventory turnover = 365 / (1600 / 200)
Question 26: Given the following data: Sales = 3200; Cost of good sold = 1600; Average
receivables = 200, calculate the average collection period:
*a/ 22.8
Question 27: Given the following data: EBIT = 400; Tax = 100; Sales = 3000; Average Total
Assets = 1500, calculate net profit margin:
*a/ 10%
Question 28: Given the following data: EBIT = 400; Tax = 100; Sales = 3000; Average Total
Assets = 1500, calculate the ROA (Return on Assets):
*a/ 20%
Question 29: Given the following data: EBIT = 400; NI = 100; Average Equity = 1000, calculate
the ROE (Return on Equity):

*a/ 10%
Question 30: Given the following data: Earnings per share = S6; Dividends per share = $3; Price
per share = $60, calculate the P/E ratio:
*a/ 10
Difficult
Question 31: Given the following data: Earnings per share = $5; Dividends per share = $3; Price
per share = $50. calculate the dividend yield:

*a/ 5%
Question 32: Given the following data: Earnings per share = $5; Dividends per share = $3; Price
per share = $50. Calculate the payout ratio:
*a/ 60%
Question 33: Which measure would be most useful in comparing the operating profitability of
two firms in different industries?
*a/ Return on assets

CHAPTER 09: WORKING CAPITAL MANAGEMENT

Easy
Question 1: The following are the types of inventories firms keep:
*a/ all of the above
Question 2: The costs of holding inventory are:
I) carrying cost; II) order cost
III) pilferage cost
*a/ I and II only
Question 3: The economic order quantity (EOQ) is calculated using:
*a/ Q = VI(2 × sales × cost per order)/(carrying cost)]
Question 4: In the EQQ inventory model, the optimal order size is achieved when:
*a/ carrying costs = order costs
Question 5: When credit is granted to another firm this gives rise to a(n):
I) Accounts receivable; II) COD; III) CBD
*a/ I only
Question 6: Accounts receivables include:
I) Trade credit; II) Consumer credit; III) Inventories
*a/ I and II only
Question 7: Which of the following transactions involve credit?
I) COD; II) 2/30, net 60; III) 2/10 EOM, net 60; IV) CBD
*a/ II and III only
Question 8: If a firm grants credit with terms of 3/10 net 30, the creditor:
*a/ Receives a discount of 3% when payment is made in less than 10 days after the sale
Question 9: The net credit period for a company with terms of 3/10 net 60 is:
*a/ 50 days
Question 10: The most important source of short-term financing is:
*a/ Bank loan
Medium
Question 11: Supposing you purchase goods on terms of 1/10, net 30. Taking compounding into
account, what annual rate of interest is implied by the cash discount? (Assume a year has 365
days.)
*a/ 20.1%
Question 12: Suppose you purchase goods on terms of 3/10, net 60. Taking compounding into
account, what annual rate of interest is implied by the cash discount? (Assume a year has 365
days.)
*a/ 24.9%
Question 13: Suppose you purchase goods on terms of 2/10, net 50. Taking compounding into
account, what annual rate of interest is implied by the cash discount? (Assume a year has 365
days.)
*a/ 20.2%
Question 14: High-Rise Building Company uses 400,000 tons of stone per year. The carrying
costs are $100/ton. The cost per order is $500. Calculate the economic order quantity per order.

*a/ 2.000 tons

Question 15: High-Rise Building Company uses 400,000 tons of stone per year. The carrying
costs are $100/ton. The cost per order is $500. Calculate the optimal number of orders per year.
*a/ 200
Question 16: High-Rise Building Company uses 400,000 tons of stone per year. The carrying
costs are $100/ton. The cost per order is $500. Calculate the optimal annual order costs.
*a/. $100.000

Question 17: High-Rise Building Company uses 400,000 tons of stone per year. The carrying
costs are $100/ton. The cost per order is $500. Calculate the optimal carrying costs.
*a/ $100,000
Question 18: High-Rise Building Company uses 400,000 tons of stone per year. The carrying
costs are $100/ton. The cost per order is $500. Calculate the total costs of optimal inventory.
*a/ S200,000
Question 19: A customer has ordered goods with a value of $800. The production cost is $600.
Under what conditions should you extend credit if there is no possibility of repeat orders?
*a/ If the probability of payment exceeds 0.75
Question 20: A customer has ordered goods with a value of $2000. The production cost is $1800.
Under what conditions should you extend credit if there is no possibility of repeat orders?
*a/ If the probability of payment exceeds 0.90

Question 21: A customer has ordered goods with a value of $1200. The production cost is $800.
Under what conditions should you extend credit if there is no possibility of repeat orders?
*a/ If the probability of payment exceeds 0.67
Question 22: Brooke Industries has sales of $860,000 and cost of goods sold of $490.000. The
firm had a beginning inventory of $98,000 and an ending inventory of $112,000. What is the
length of the inventory period?
*a/ 78.21 days
Question 23: Pat's Place has sales of $498,000 and cost of goods sold of $221,000. At the
beginning of the year, inventory was $36,400. At the end of the year, the inventory balance was
$31,800. What is the inventory turnover rate?
*a/ 6.48 times
Question 24: A firm has sales of $710,000. The cost of goods sold is equal to 57 percent of sales.
The firm has an average inventory of $23,940. How many days on average does it take the firm
to sell its inventory?
*a/ 21.59 days
Question 25: Super Mart has sales of $626,000. The cost of goods sold is equal to 68 percent of
sales. The beginning accounts receivable balance is $75,534 and the ending accounts receivable
balance is $76,209. How long on average does it take the firm to collect its receivables?

*a/ 44.24 days

Question 26: Blackwell Co. has sales of $518,300, costs of goods sold of $308,200, and average
accounts receivable of $54,900. How long on average does it take the firm's credit customers to
pay for their purchases?
*a/ 38.66 days
Question 27: The Down Towner has sales of S642,000 and average accounts payable of $56,400.
The cost of goods sold is equivalent to 68 percent of sales. How long does it take Down Towner
to pay its suppliers?
*a/ 47.16 days
Question 28:
True Blue Stores had a beginning accounts payable balance of $56,900 and an ending accounts
payable balance of $62,800. Sales for the period were $675,000 and costs of goods sold were
$448,000. What is the payables turnover rate?
*a/ 7.49 times

Question 28: A firm has an inventory turnover rate of 16, a receivables turnover rate of 21, and a
payables turnover rate of 11. How long is the operating cycle?
*a/ 40.19 days
Question 29: Dallas and More (D&M sells its inventory in 87 days on average. Its average
customer charges their purchases on a credit card and payment is received in 10 days. D&M
takes 56 days on average to pay for its purchases. Given this information, what is the length of
D&M's cash cycle?
*a/ 41 days
Question 30: Candy Corner has an inventory turnover rate of 13, an accounts payable period of
44 days, and an accounts receivable period of 35 days. What is the length of the cash cycle?
*a/ 19.08 days
Question 31:Dywer Metals has an inventory turnover of 16 and an accounts receivable turnover
of 10. The accounts payable period is 51 days. What is the length of the cash cycle?
*a/ 8.31 days
Question 32: A supplier offers you credit terms of 1.5/10, net 30. What is the cost of forgoing the
discount on a $1,200 purchase?
*a/ 31.76%
Question 33: A supplier offers you credit terms of 2/15, net 45. What is the cost of forgoing the
discount on a $218,400 purchase?

*a/ 27.86%
Difficult
Question 34: The default rate of Demurrage Associates' new customers has been running at 10%.
The average sale for each new customer amounts to $800, generating a profit of $100 and a 40%
chance of a repeat order next year. The default rate on repeat orders is only 2%. If the interest
rate is 9%, what is the expected profit from each new customer?
*a/ S50.83
Question 35: The default rate of Don's new customers has been running at 20%. The average sale
for each new customer amounts to $500, generating a profit of $200 and a 30% chance of a
repeat order next year. The default rate on repeat orders is only 5%. If the interest rate is 6%,
what is the expected profit from each new customer?
*a/ $149.53
Question 36: Terry's Place is currently experiencing a bad debt ratio of 4%. Terry is convinced
that, with looser credit controls, this ratio will increase to 8%; however, she expects sales to
increase by 10% as a result. The cost of goods sold is 80% of the selling price. Per $100 of
current sales, what is 'Terry's expected profit under the proposed credit standards?
*/ $13.2 = 92% x (110 - 88) + 8% x (0 - 88)
Question 37: Tom's Toys is currently experiencing a bad debt ratio of 6%. Tom is convinced that,
with tighter credit controls, he can reduce this ratio to 2%; however, he expects sales to drop by
8% as a result. The cost of goods sold is 75% of the selling price. Per $100 of current sales, what
is Tom's expected profit under the proposed credit standards?
*a/ $21.2 (cái nay dáp án chinh xác là 21.16)
Question 38: A large firm may hold substantial cash balances because:
*a/ These balances are required by the bank in the form of compensating balances
Question 39: The market for short-term investments is called:
*a/ Money market
Question 40:Bruceton Farm Markets currently has an operating cycle of 76 days. The firm is
analyzing some operational changes that are expected to decrease the accounts receivable period
by 3 days and decrease the inventory period by 8 days. The accounts payable turnover rate is
expected to increase from 7 to 9 times per year. If all of these changes are adopted, what will the
firm's new operating cycle be?

*a/ 65 days
Question 41: Smiley and Sons has an inventory period of 33 days, an accounts payable period of
41 days and an accounts receivable period of 27 days. Management is considering offering a 5
percent discount if its credit customers pay for their purchases within 10 days. If the new
discount is offered the accounts receivable period is expected to decline by 13 days. If the new
discount is offered, the cash cycle will change from days to days.
*a/ 19; 6
Question 42: A firm currently has a 36 day cash cycle. Assume the firm changes its operations
such that it decreases its receivables period by 3 days, increases its inventory period by 2 days,
and decreases its payables period by 3 days. What will the length of the cash cycle be after these
changes?
*a/ 38 days
Question 43: As of the beginning of the quarter, a firm has a cash balance of $250. During the
quarter the firm pays its suppliers $310 and collects $420 from customers. It also pays an interest
payment of $30 and a tax bill of $170. In addition, the firm borrows $135. What is the cash
balance at the end of the quarter?
*з/ $295
Question 44: On April 1st, a firm had a beginning cash balance of $200. March sales were $460
and April sales were $510. During April the firm had cash expenses of $150 and payments on
accounts payable of $210. The accounts receivable period is 30 days. What is the firm's
beginning cash balance on May 1st?
*a/ $300
Question 45: Jupiter stores had a Quarter 2 beginning cash balance of $430. Sales for Quarters 1
through 3 are estimated at $600, $800, and $900, respectively. The cost of goods sold is equal to
70 percent of sales. Goods are purchased one quarter prior to the month of sale. The accounts
payable period is 30 days and the accounts receivable period is 15 days. The firm had quarterly
cash expenses of $180. What was the cash balance at the end of Quarter 2? Assume a 360 day
year.

*a/ $410.00

CHAPTER 10: FINANCIAL PLANNING

Easy:
Question 1: Short-term financial decisions:
I) involve short lived assets; II) involve short lived liabilities: III) are easily reversed
*a/ I, Il, and III
Question 2: The main difference between short-term and long-term finance is:
*a/ The timing of short-term cash flow being within a year or less

Question 3: Cumulative capital requirement can be met by:

I) long-term financing; II) short-term financing
*a/ I and II
Question 4: The sustainable growth rate is equal to:
*a/ plowback ratio × return on equity
Question 5: Given the following assets;
I) Long-term assets: II) Inventories

III) Receivables: IV) Marketable securities. Which is the least liquid of these assets?
*a/I
Question 6:VGiven the following assets;
I) Long-term assets; II) Inventories; III) Receivables; IV) Marketable securities
Arrange the above assets in the order of liquidity. (The most liquid being first)
*a/ IV, III, Il and I
Question 7:VGiven the following data: Total current assets = $852; Total current liabilities =
$406; Long-termVdebt = $442, calculate the net working capital.
*a $446
Question 8: Net working capital is defined as:
*a/ The difference between current assets and current liabilities
Medium
Question 9: The following is the general formula for calculating the "Ending accounts receivable
(AR):"
*a/ Ending (AR) = beginning (AR) + sales - collections
Question 10: The cash cycle is represented by the following sequence:
*a/ Cash, raw materials, finished goods, and receivables, cash

Question 11: The first step in the preparation of cash budget is:
*a/ sales forecast
Question 12: Cash inflow in cash budgeting comes mainly from:
*a/ Collection on accounts receivable
Question 13: A large part of cash outflow in cash budgeting is due to:
*a/ Payments on accounts payable
Difficult
Question 14: A company has forecast sales in the first 3 months of the year as follows (figures in
millions): January, $60; February, $80; March, $100. 60% of sales are usually paid for in the
month that they take place and 40% in the following month. Receivables at the end of December
were $24 million. What are the forecasted collections on accounts receivable in March
*a/ $92 million
Question 15: A company has forecast sales in the first 3 months of the year as follows (figures in
millions): January, S90; February, $20; March, S30. 70% of sales are usually paid for in the
month that they take place and 30% in the following month. Receivables at the end of December
were $20 million. What are the forecasted collections on accounts receivable in March?
*a/ S27 million
Question 16: A company has forecast sales in the first 3 months of the year as follows (figures in
millions): January, $80; February, $60; March, $40. 70% of sales are usually paid for in the
month that they take place, 20% in the following month, and the final 10% in the next month.
Receivables at the end of December were $23 million. What are the forecasted collections on
accounts receivable in March?
*a/ $48 million
Question 17: A company has forecast sales in the first 3 months of the year as follows (figures in
millions): January, $200; February, $140; March, $100. 50% of sales are usually paid for in the
month that they take place, 30% in the following month, and the final 20% in the next month.
Receivables at the end of December were S100 million. What are the forecasted collections on
accounts receivable in March?
*a/ S132 million