Financial Management Final Exam

Multiple choice. Choose the one alternative that best completes the statement or answers the question.

1) The primary emphasis of the financial manager is the use of:

1. cash flow.
2. profit incentives.
3. organization charts.
4. accrued earnings.

2) All of the following are key strengths of a corporation (except):

1. low organization costs.
2. readily transferable ownership.
3. limited liability.
4. access to capital markets.

3) The ________ is a measure of liquidity which excludes ________, generally the least liquid asset:

1. quick ratio; accounts receivable
2. current ratio; accounts receivable
3. current ratio; inventory
4. quick ratio; inventory

4) FASB Standard No. 52 mandates that U.S. based companies must translate their foreign-currency-denominated assets and liabilities into dollars using the:

1. average rate.
2. historical rate.
3. current rate.
4. none of the above.

Table 3.5

A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet for cash and profit planning purposes for the coming year ended December 31, 2004. Using the percent-of-sales method and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple-choice questions.

1. The firm estimates sales of $1,000,000.
2. The firm maintains a cash balance of $25,000.
3. Accounts receivable represent 15 percent of sales.
4. Inventory represents 35 percent of sales.
5. A new piece of mining equipment costing $150,000 will be purchased in 2004. Total depreciation for 2004 will be $75,000.
6. Accounts payable represents 10 percent of sales.
7. There will be no change in notes payable, accruals, and common stock.
8. The firm plans to retire a long term note of $100,000.
9. Dividends of $45,000 will be paid in 2004.
10. The firm predicts a 4 percent net profit margin.

Balance SheetGeneral Talc MinesDecember 31, 2003

5) The pro forma total liabilities amount is (See Table 3.5):

1. $650,000.
2. $700,000.
3. $500,000.
4. $550,000.

6) If a United States Savings bond can be purchased for $29.50 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond?

1. 6 percent
2. 5 percent
3. 7 percent
4. 8 percent

7) If a person’s required return decreases for an increase in risk, that person is said to be:

1. risk-indifferent.
2. risk-seeking.
3. risk-averse.
4. risk-aware.

Table 8.5

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 a 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.

8) The initial outlay equals ________(See Table 8.5):

1. $44,100
2. $41,100
3. $38,800
4. $38,960

Table 9.6

Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The gluing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated under MACRS using a five-year recovery schedule and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine’s market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by $17,000 per year. Training costs of employees who will operate the new machine will be a one-time cost of $5,000 which should be included in the initial outlay. The new machine will be depreciated under MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and a 40 percent tax on ordinary income and capital gains.

9) The payback period for the project is (See Table 9.6):

1. between 4 and 5 years.
2. 2 years.
3. 3 years.
4. between 3 and 4 years.

Table 10.1

A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table. The firm’s cost of capital is 10 percent.

10) If the projects have five-year lives, the range of the net present value for Project B is approximately ________ (See Table 10.1.):

1. $201,000.
2. $255,410.
3. $303,280.
4. $80,560.

11) The ________ is the firm’s desired optimal mix of debt and equity financing:

1. target capital structure
2. book value
3. cost of capital
4. market value

11) ______

Table 14.5

Caren’s Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm’s required return on investment is 20 percent.

12) What is the cost of marginal bad debts under the proposed plan? (See Table 14.5):

1. $765
2. $5,100
3. $383
4. $3,315

13) Much of the commercial paper is issued by:

1. venture capitalists.
2. small businesses.
3. commercial finance companies.
4. small manufacturing firms.

14) The part of finance concerned with design and delivery of advice and financial products to individuals, business, and the government is called:

1. Financial Manager.
2. Financial Services.
3. Managerial Finance.
4. none of the above.

Table 2.1

Information (2005 values):

1.  Sales totaled $110,000
2.  The gross profit margin was 25 percent.
3.  The inventory turnover was 3.0.
4.  There are 360 days in the year.
5.  The average collection period was 65 days.
6.  The current ratio was 2.40.
7.  The total asset turnover was 1.13.
8.  The debt ratio was 53.8 percent.

15) Inventory for CEE in 2005 was ________ (See Table 2.1):

1. $32,448
2. $ 9,167
3. $36,667
4. $27,500

Table 3.3

The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for the coming months of January through May. Historically, 75 percent of sales are for cash with the remaining 25 percent collected in the following month. The ending cash balance in January is $3,000. Prepare a cash budget for the months of February through May to answer the following multiple-choice questions.

16) The total cash receipts for April are (See Table 3.3):

1. $7,500.
2. $5,000.
3. $10,000.
4. $9,250.

17) A generous philanthropist plans to make a one-time endowment to a renowned heart research center that would provide the facility with $250,000 per year into perpetuity. The rate of interest is expected to be 8 percent for all future time periods. How large must the endowment be?

1. $2,314,814
2. $3,000,000
3. $3,125,000
4. $2,000,000

18) Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that:

1. remains unchanged.
2. increases to a level above that of either asset.
3. stabilizes to a level between the asset with the higher risk and the asset with the lower risk.
4. decreases to a level below that of either asset.

19) A firm with unlimited funds must evaluate five projects. Projects 1 and 2 are independent and project 3, 4, and 5 are mutually exclusive. The projects are listed with their returns. A ranking of the projects on the basis of their returns from the best to the worst according to their acceptability to the firm would be:

1. 3, 2, or 5, 1, and 4.
2. 4, 1, 2 or 5, and 3.
3. 4, 1, 5, and 3.
4. 4, 1, and 2.

20) What is the IRR for the following project if it’s initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000in year 3 and $1,300,000 in year 4?

1. 13.57%.
2. 0.00%.
3. 15.57%.
4. None of the above.

21) Important types of risk in an international capital budgeting context include all of the following (except):

1. appropriation risk.
2. exchange rate risk.
3. political risk.
4. all of the above are correct.

22) When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts by considering:

1. the risk.
2. the approximate returns.
3. the flotation costs.
4. the taxes.

23) When managing accounts receivable, a good strategy to employ without losing future sales is to:

1. tighten the credit terms.
2. make frequent personal visits to the customer.
3. send the accounts to a collection agency.
4. offer a cash discount.

24) A ________ is an agreement between a commercial bank and a business that states the maximum amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time, provided sufficient funds are available:

1. short-term self-liquidating loan
2. single payment note
3. line of credit
4. revolving credit agreement

25) The major securities traded in the capital markets are:

1. commercial paper and Treasury bills.
2. stocks and bonds.
3. bonds and commercial paper.
4. Treasury bills and certificates of deposit.