CHAPTER 1: Introduction to Corporate Finance (exclude 1.
6)
1 A business created as a distinct entity is
called a:
2 A business form by two or more
individuals who each have unlimited
personal liability for all the firm’s debt is
called a:
3 A business owned by a single individual
is called a:
4 A conflict of interest between the
stockholders and management of a firm
is referred to as the:
5 A firm’s capital structure refers to the
firm’s
6 A general partner
7 A proxy fight occurs when
8 Agency costs refer to
9 Corporate bylaws
10 Financial managers should primarily
strive to:
11 For a firm to create value it must:
12 One advantage of a partnership is the:
13 The articles of incorporation:
14 The secision made by financial
managers should all be ones which
increaes the:
15 The owner of a limited liability company
generally prefer:
16 The primary goal of financial
management is to:
17 The process of planning and managing
a firm’s long-term assets is called:
18 The Sarbanes-Oxley Act requires public
corporation to
19 The treasurer and the controller of a
corporation generally report to the
20 The ultimate control of a corporation lies
in the hand of the corporate:
21 Which one of the following actions by a
financial manager creates an agency
problem?
22 Which one of the following best
describes the primary advantage of
being a limited partnr rather than a
general partner?
Corporation
General partnership
Sole proprietorship
Agency problem
Proportions of financing from current and long-
term debt and equity
Can end the partnership by withdrawing
A group solicits voting rights to replace the
board of directors
The cost of any conflicts of interest between
stockholders and management
Establish the rules by which the firm regulate its
existence
Maximize the current value per share of existing
stock
Create more cash flow than it uses
Relatively low formation cost
Set forth the number of shares of stock than can
be issued
Market value of the existing owner’s equity
Being taxed personally on all business income
Maximize the current value per share of the
existing stock
Capital budgeting
List any deficiencies in internal controls
Chief financial officer
Stockholders
Ageeing to expand the company company at
the expense of stockholder’ value
Liability for firm debts is limited to the capital
invested
23 Which one of the following business
types is best suited to raising large
amkunt os capital
24 Which one of the following is a capital
budgeting decision?
25 Which one of the following is least apt to
help convince managers to work in the
best interest of the stockholders?
26 Which one of the following statements
concerning a sole proprietorship is
correct?
27 Which one of the following statements is
correct?
28 Which one of these accounts is included
in net working capital?
29 Which one of these best fits the
description of an agency cost?
30 Which one of these statements is
correct?
Corporation
Deciding whether or not a new production
facility should be built
Pay raises based on length of service
The life time of the firm is limited to the life span
of the owner
Sole proprietorships and partnership are taxed
in a similar fashion
Inventory
The payment required for an outside audit of the
firm
The value of an investment by a firm deoends
on the size, the timing, and the risk of the
investment’ cash flows.

CHAPTER 2: Financial Statements and cash flow (exclude 2.7)

1 A firm has $820 in inventory, $3,200 in fixed $1,500

assets, $1,210 in account receivable, $890 Net working capital = $360 + 1,210 + 820 –
in accounts payable, and $360 in cash. 890 = $1,500
What is the amount of the net working
capital?
2 According to the Generally Accepted Matched with revenues
Accounting Principles, costs are:
3 As seen on an income statement: Depreciation reduces both the pretax
income and the net income
4 Assuming the number of shares outstanding Addition to retained earnings
remains constant, an increase in dividends
per share will reduce the:
5 At the beginning of the year, a firm has - $2,330
current assets of $16,200 and current Change in net working capital = ($14,800 –
liabilities of $13,280. At the end of the year, 14,210) – ($16,200 – 13,280) = - $2,330
the current assets are $14,800 and the
current liabilities are $14,210. What is the
change in net working capital?
6 At the beginning of the year, long-term debt - $360
of a firm is $2,400 and total debt is $3,150. Cash flow to creditors = $40 – ($8,200 –
At the end of the year, long-term debt is 2,400) = - $360
$2,800 and total debt is $4,370. The interest
paid is $40. What is the amount of the cash
flow to creditors?
7 Awnings incorporated has beginning net $72,000
fixed assets of $234,100 and ending net Net capital spending = $234,600 – 243,100
 fixed assets of $234,600. Assets valued ate + 62,500 = $72,000
$42,500 were sold during the year.
Depreciation was $62,500. What is the
amount of net capital spending?
8 Book value: Is based on historical cost
9 Cash flow to stockholders is defined as: Cash dividends paid plus repurchases of
equity minus new equity financing
10 Depreciation for a profitable firm: Decreases net income by less than $1 for
every $1 of depreciation expense
11 Earnings per share will increase when: Depreciation decreases
12 Free cash flow is: Cash that the firm can distribute to creditors
and stockholders
13 Given the tax rates as shown, what is the 31.34%
average tax rate for a firm with taxable Tax = 0.15($50,000) + 0.25($25,000) +
income of $218,700? 0.34($25,000) + 0.39($218,700 – 100,000) =
Taxable income Tax Rate (%) $68,543
$0 – 50,000 15
50,001 – 75,000 25 Average tax rate = $68,543 / $218,700 =
75,001 – 100,000 34 0.3134 or 31.34%
100,001 – 335,000 39
14 Martha’s Enterprises spent $4,100 to $800
purchase equipment three years ago. This Book vakye of shareholde’s equity = $400 +
equipment is currently valued at $2,700 on 2,700 – 2,300 = $800
today;s balance sheet but could actually be
sold for $3,200. Assuming the equipment is
the firm’s only fixed asset, what is the book
valye of shareholder’s equity?
15 New Town Industries (15 – 16) $4,030
Net income = ($42,629 – 23,704 – 7,040 –
2,609 – 1,230) x (1 – 0.35) = $5,230

Addition to retained earnings = $5,230 –

1,200 = $4,030

What is the addition to retained earnings for

2015?
16 What is the cash flow of the firm for 2015? $6,425
Pretax income = $42,629 – 23,704 – 2,609 –
1,230 = $8,046
 Tax = 0.35($8,046) = $2,816
Operating cash flow = ($42,629 – 23,704 –
7,040 – 2,609) + $2,609 – 2,816 = $9,069

Net capital spending = $41,260 – 42,110 +

2,609 = $1,759

Change in net working capital = ($3,671 +

4.601 + 3,968 – 2,325) – ($2,969 – 5,318 +
4,503 – 3,760) = $885

Cash flow of the firm = $9,069 – 1,759 – 885

= $6,425
17 Noncash items refer to: Expenses charged against revenes that do
not directly affect cash flow
18 Peggy Grey’s Cookies had net income of $2,933
$8,110. The firm paid out 30 percent of the Cash flow to stockholders = (0.30 x $8,110)
net income to its shareholders as dividends. – (- $500) = $2,933
During the year, the company repurchased
$500 worth of common stock. What is the
cash flow to stockholders?
19 The income statement Includes noncash
expenses
20 The tax rates are as shown. Your firm $8,754
currently has taxable income of $83,200. Additional tax = .34($100,000 - 83,200) +
How much additional .39($83,200 + 24,600 -100,000) = $8,754
tax will you owe if you increase your taxable
income by $24,600?
Taxable Income Tax Rate (%)
$0 - 50,000 15
50,001 -75,000 25
75,001 -100,000 34
100,001 -335,000 39
21 Thompson's Jet Skis has operating cash $5,858
flow of $11,618. Depreciation is $2,345 and Cash flow of the firm = $11,618 - 6,180 - (-
interest paid is $395. A net total of $485 $420) = $5,858
was paid on long-term debt. The firm spent
$6,180 on fixed assets and decreased net
working capital by $420. What is the
cash flow of the firm?
22 Under generally accepted accounting Historical cost less accumulated
principles (GAAP), a firm's assets are depreciation.
reported at:
23 When you are making a financial decision, Marginal
the most relevant tax rate is the ….. rate.
24 Which one of these statement is correct? Earnings per share can be negative but
dividends per share cannot
25 Which term defines the tax rate that applies Marginal
to the nest dollar of taxable income earned?
26 Woodlands Inc.(26 – 29)
What is the net capital spending for 2015?
27 What is the operating cash flow for 2015?
28 What is the cash flow of the firm for 2015
29 What is the cash flow to creditors for 2015?
30 Your firm has total assets of $22,980, cost
of $14,715, and depreciation of $6,045. The
tax rate is 34 percent. There are no interset
expenses of other income. What is the
operating cash flow?
CHAPTER 3: Financial Statement Analysis and Financial Models (exclude 3.6)
1 A banker considering loaning money to a
firm for ten years would most likely prefer
the firm have a debt ratio of _______ and a
$337 million
Net capital spending = $2,290 – 2,264 + 311
= $337 (in millions)
$783 million
Operating cash flow = $634 + 311 – 162 =
$783 (in millions)
$295 million
Operating cash flow = $634 + 311 – 162 =
$783 (in millions)
Net capital spending = $2,290 – 2,264 + 311
= $337 (in millions)
Change in net working capital = ($503 = 418
+ 1,239 – 686) – ($227 + 522 + 1,187 – 613)
= $151 ( in millions)
Cash flow of the firm = $783 – 337 – 151 =
295 ( in millions)
$220 million
Cash flow to creditors = $170 – ($1,300 –
1,350) = $220 ( in millions)
$7,510,20
Earnings before interest and taxes =
$22,980 – 14,715 – 6,045 = $2,220
Tax = $2,220 x 0.34 = $754.80
Operating cash flow = $2,220 + 6,045 –
754.80 = $7,510.20
0.40; 1.75
 times interest earned ratio of _______.
2 A firm has a total debt ratio of 0.47. This $0.53 in total equity.
means the firm has 47 cents in debt for
every:
3 A firm has sales of $22,400, net income of 11.20%
$3,600, net fixed assets of $18,700, Common-size inventory = $2,800 / ($6,300
inventory of $2,800, and total current assets + 18,700) = .1120, or 11.20%
of $6,300. What is the common-size
statement value of inventory?
4 A public !rm's market capitalization is equal price per share multiplied by number of
to the: shares outstanding
5 A supplier, who requires payment within ten cash
days, should be most concerned with which
one of the following ratios when granting
credit?
6 An increase in which one of the following inventory
accounts increases a !rm's current ratio
without a"ecting its quick ratio?
7 Assume BGL Enterprises increases its Return on equity will increase
operating efficiency by lowering its costs
while holding its sales constant. As a result,
given all else constant, the:
8 Deep Falls Timber (8 – 9) 3.22
Market-to-book ratio = $6.50 / [($220,000 +
224,400) / ($220,000 / $1)] = 3.22

Deep Falls Timber stock sold for $6.50 a

share as of 2015. What was the market-to-
book ratio at that time?
9 Deep Falls Timber stock sold for $6.50 a
share as of 2015. What was the price-
earnings ratio at that time?
10 Enterprise value is based on the:
11 If a firm decreases its operating costs, all
else constant, then the:
12 If a firm produces a return on assets of 15
percent and also a return on equity of 15
28.15
Price-earnings ratio = $6.50 / [$50,800 /
($220,000 / $1)] = 28.15
market value of interest bearing debt plus
the market value of equity minus cash.
price-earnings ratio will decrease.
has no debt of any kind.
 percent, then the firm:
13 If stockholders want to know how much pro!t return on equity.
the firm is making on their entire investment
in that firm, the stockholders should refer to
the:
14 Joe's has old, fully depreciated equipment. Moe's and Joe's will have the same EV
Moe's just purchased all new equipment multiple.
which will be depreciated over eight years. If
Joe's and Moe's have the same sales, costs,
tax rate, and enterprise value, then:
15 Last year, Alfred's Automotive had a price- the investors' outlook for the !rm has
earnings ratio of 15 and earnings per share improved.
of $1.20. This year, the price earnings ratio
is 18 and the earnings per share is $1.20.
Based on this information, it can be stated
with certainty that:
16 New Metals has depreciation of $28,300, $7.76
interest expense of $11,400, EBIT of Market price per share = 8.6 × {[($62,700 -
$62,700, a priceearnings ratio of 8.6, a profit 11,400)(1 −.34)] / 37,500} = $7.76
margin of 7.2 percent, a tax rate of 34
percent, and 37,500 shares of stock
outstanding. What is the market price per
share?
17 Northern Industries has accounts receivable 56.77
of $42,300, inventory of $61,200, sales of Days' sales in inventory = 365 / ($393,500 /
$544,200, and cost of goods sold of $61,200) = 56.77
$393,500. How many days, on average,
does it take the firm to sell its inventory?
18 Preston Woods has 17,500 shares of stock $926,073
outstanding along with $408,000 of interest EV multiple = [11.8 × ($697,000 × .068)] +
bearing debt. The market and book values of $408,000 - 41,200 = $926,073
the debt are the same. The firm has sales of
$697,000 and a profit margin of 6.8 percent.
The tax rate is 35 percent, the debt-equity
ratio is 40 percent, and the price-earnings
ratio is 11.8. The firm has $130,000 of
current assets of which $41,200 is cash.
What is the enterprise value multiple?
19 Rosita's Resources paid $11,310 in interest 3.60
and $16,500 in dividends last year. The EBIT = 2.9 ×$11,310 = $32,799
times interest earned ratio is 2.9, the Cash coverage ratio = ($32,799 + 7,900) /
depreciation expense is $7,900, and the tax $11,310 = 3.60
rate is 35 percent. What is the value of the
cash coverage ratio?
20 The DuPont identity can be computed as: Profit margin × (1 / Capital intensity) × (1 +
Debtequity ratio).
21 The higher the inventory turnover, the: less time inventory items remain on the
shelf.
22 The long-term debt ratio is probably of most mortgage holder
interest to a firm's:
23 The return on equity can be calculated as:
24 Uptowne Restaurant has sales of $418,000,
total equity of $224,400, a tax rate of 34
percent, a debtequity ratio of .37, and a
profit margin of 5.1 percent. What is the
return on assets?
25 Vinnie's Motors has a market-to-book ratio of
3.4. The book value per share is $34 and
earnings per share are $1.36. Holding the
market-to-book ratio and earnings per share
constant, a $1 increase in the book value
per share will:
26 Deep Falls Timber (26 – 28)
What are the day’ sales in inventory for
2015? (Use ending inventory)
27 What are the values of the three
components of the DuPont identity for 2015?
28 What is the current ratio for 2015?
29 Which one of the following statements is
correct if a firm has a receivables turnover of
10?
30 Wybro’s Markets has sales of $684,000,
costs of $437,000, interest paid of $13,800,
total assets of $712,000, and depreciation of
ROA × Equity multiplier
6.93%
ROA = (.051 × $418,000) / [(1 + .37)
($224,400)] = .0693, or 6.93%
increase the priceearnings ratio.
$62.79 days
Days’ sales in inventory 2015 = 365 /
($409,800 / $70,500) = 62.79 days
7.91%; 0.9758; 1.4806
Profit margin = $50,800 / $642,100 = 0.0791
or 7.91%
Total asset turnover = $642,100 / $658,00 =
0.9758
Equity multiplier = $658,000 / ($220,000 +
224,400) = 1.4806
1.95
Current ratio 2015 = ($32,300 + 50,700 +
70,500) / ($58,900 + 20,000) = 1.95
The firm collects in its sales in an average
of 36.5 days
11.30%
Net income = ($684,000 – 437,000 –
109,400 - 13,800) x (1-0.35) = $80.470
 $109,400. The tax rate is 35 percent anf the
equity multiplier is 1.6. What is the return on
equity
CHAPTER 4 : Discounted Cash Flow Valuation (exclude 4.5 and 4.6)
1 A car dealer is willing to lease you a car for
$319 a month for 60 months. Payments are
due on the first day of each month starting
with the day you sign the lease contract. If
your cost of money is 4.9 percent,
compounded monthly, what is the current
value of the lease?
2 A credit card compounds interest monthly
and has an effective annual rate of 12.67
percent. What is the annual percentage rate?
3 A trust has been established to fund
scholarships in perpetuity. The next annual
distribution will be $1,200 and future
payments will increase by 3 percent per
year. What is the value of this trust at a
discount rate of 7.4 percent?
4 An annuity stream of cash flow payments is
a set of:
5 Annuities where the payments occur at the
end of each time period are called _____,
whereas _____ refer to annuity streams with
payments occurring at the beginning of each
time period.
6 Denise will receive annual payments of
$10,000 for the next 25 years. The discount
rate is 6.8 percent. What is the difference in
the present value of these payments if they
are paid at the beginning of each year rather
than at the end of each year?
7 Donaldson's purchased some property for
$1.2 million, paid 25 percent down in cash,
and financed the balance for 12 years at 7.2
percent, compounded monthly. What is the
amount of each monthly mortgage payment?
Equity = $712,000 / 1.6 = $445,000
ROE = $80,470 / $445,000 = 0.1808 or
18.08%
$17,014.34
APV = {$319 × [(1 - {1 / [1 + (.049 / 12)] 60
}) / (.049/ 12)] × [1 + (.049 / 12)] =
$17,014.34
11.99%
APR = [(1 + .1267)1/12 - 1] ×12 = .1199, or
11.99%
$27,272.73
PV Growing perpetuity = $1,200 / (.074 −
.03) = $27,272.73
equal cash flows occurring each time period
over a fixed length of time.
ordinary annuities; annuities due
$8,069.28
APVADue = [$10,000 × ({1 - [1 / (1 +0
.068)25 ]} /0 .068)] × (1 + 0.068) =
$126,735.21
APV = [$10,000 × ({1 - [1 / (1 + .068)25 ]} /
0.068)] = $118,665.92
Difference = $126,735.21 - 118,665.92 =
$8,069.29
Difference = 0.068 × $118,665.92 =
$8,069.28
$9,351.66
Amount financed = $1,200,000 ×(1 −.25) =
$900,000 $900,000 = C × [(1 - {1 / [1 +
(.072 / 12)] 12 × 12 }) / (.072 / 12)]; C =
$9,351.66
8 Lucas invested $4,500 at 6.2 percent, $11,405.29
compounded continuously. What will his FV = $4,500 × e.062 × 15 = $11,405.29
investment be worth after 15 years?
9 Luis has a management contract which $3,655,832.79
grants him a lump sum payment of $20 $20,000,000 = C ×{[(1 + .045)5 - 1] /
million be paid upon the completion of his .045}; C = $3,655,832.79
first five years of service. The company
wants to set aside an equal amount of funds
each year to cover this anticipated cash
outflow. The company can earn 4.5 percent
on these funds. How much must the
company set aside each year for this
purpose?
10 Olivia is willing to pay $185 a month for four $10,549.07
years for a car payment. If the interest rate is PV = $2,500 + {$185 × [(1 - {1 / [1 + (.049 /
4.9 percent, compounded monthly, and she 12)]4 ×12 }) / (.049 / 12)]} = $10,549.07
has a cash down payment of $2,500, what
price car can she afford to purchase?
11 On the day you retire, you have $389,900 in $2,216.29
your retirement savings. You expect to earn $389,900 = C × [(1 - {1 / [1 + (.045 / 12)] 24
4.5 percent, compounded monthly, and live × 12 }) / (.045 / 12)]; C = $2,216.29
24 more years. How much can you withdraw
from your savings each month during your
retirement if you plan to die on the day you
spend your last penny?
12 Shawn has $2,500 invested at a guaranteed $3,093.16
rate of 4.35 percent, compounded annually. FV5 = $2,500 × 1.04355 = $3,093.16
What will his investment be worth after five
years?
13 Ted purchased an annuity today that will pay Ted's annuity has a higher present value
$1,000 a month for five years. He received than Allison's.
his first monthly payment today. Allison
purchased an annuity today that will pay
$1,000 a month for five years. She will
receive her first payment one month from
today. Which one of the following statements
is correct concerning these two annuities?
14 The annual percentage rate: equals the effective annual rate when the
interest on an account is designated as
simple interest.
15 The highest effective annual rate that can be e.09 −1.
derived from an annual percentage rate of
9% is computed as:
16 The interest rate charged per period annual percentage
multiplied by the number of periods per year
is called the _____ rate.
17 Theo is depositing $1,300 today in an $15,699.54
account with an expected rate of return of FV = $1,300 ×1.08110 + $3,200 ×1.0818 +
8.1 percent. If he deposits an additional $4,000 ×1.0817 = $15,699.54
$3,200 two years from today, and $4,000
 three years from today, what will his account
balance be ten years from today?
18 Uptown Industries just decided to save
$3,000 a quarter for the next three years.
The money will earn 2.75 percent,
compounded quarterly, and the first deposit
will be made today. If the company had
wanted to deposit one lump sum today,
rather than make quarterly deposits, how
much would it have had to deposit today to
have the same amount saved at the end of
the three years?
19 What is the effective annual rate if your credit
card charges you 10.64 percent
compounded daily? (Assume a 365-day
year.)
20 What is the effective annual rate of 10.25%
compounded continuously?
21 You are borrowing $5,200 at 7.8 percent,
compounded monthly. The monthly loan
payment is $141.88. How many loan
payments must you make before the loan is
paid in full?
22 You are the beneficiary of a life insurance
policy. The insurance company offers two
options for receiving the proceeds: a lump
sum of $50,000 today or payments of $550 a
month for ten years. If you can earn 6
percent, compounded monthly, which option
should you take and why?
23 You borrow $12,600 to buy a car. The terms
of the loan call for monthly payments for five
years at an interest rate of 4.65 percent,
compounded monthly. What is the amount of
each payment?
24 You borrow $199,000 to buy a house. The
mortgage rate is 5.5 percent, compounded
monthly. The loan period is 30 years, and
payments are made monthly. If you pay for
the house according to the loan agreement,
how much total interest will you pay?
25 You have $2,500 to deposit into a savings
account. The five banks in your area offer
the following rates. In which bank should you
deposit your savings?
$34,678.35
APVADue = {$3,000 × [(1 - {1 / [1 + (.0275 /
4)]3 × 4 }) / (.0275 / 4)]} × [1 + (.0275 / 4)] =
$34,678.35
11.22%
EAR = [1 + (.1064 / 365)]365 - 1 = 11.22%
10.79%
EAR = e.1025 - 1 = .1079, or 10.79%
42
$5,200 = $141.88 ×[(1 - {1 / [1 + (.078 /
12)]T }) / (.078 / 12)] ln1.3127 = T ×
ln1.0065 T = 42
You should accept the lump sum because
the payments are only worth $49,540.40
today.
APV = $550 × [(1 - {1 / [1 + (.06 / 12)]10 ×
12 }) / (.06 / 12)] = $49,540.40
$235.76
$12,600 = C × [(1 - {1 / [1 + (.0465 / 12)] 5 ×
12 }) / (.0465 / 12)]; C = $235.76
$207,764
$199,000 = C × [(1 - {1 / [1 + (.055 / 12)] 30
× 12 }) / (.055 / 12)]; C = $1,129.90
Total interest = (30 × 12 × $1,129.90) −
$199,000 = $207,764
Bank B: 3.69%, compounded monthly
EAR Bank A = [1 + (.0375 / 1)]1 - 1 =
.03750, or 3.750%
EAR Bank B = [1 + (.0369 / 12)]12 - 1 =
.03753, or 3.753%
EAR Bank C = [1 + (.0370 / 2)]2 - 1 =
.03734, or 3.734%

26 You just paid $525,000 for a security that will
pay you and your heirs $25,000 a year
forever. What rate of return will you earn?
27 You plan to invest $6,500 for three years at 4
percent simple interest. What will your
investment be worth at the end of the three
years?
28 You want to save sufficient funds to generate
an annual cash flow of $55,000 a year for 25
years as retirement income. You currently
have no retirement savings but plan to save
an equal amount each year for the next 38
years until your retirement. How much do
you need to save each year if you can earn
7.5 percent on your savings?
29 Your employer contributes $50 a week to
your retirement plan. Assume you work for
your employer for another twenty years and
the applicable discount rate is 5 percent,
compounded weekly. Given these
assumptions, what is this employee benefit
worth to you today?
30 Your parents plan to give you $200 a month
for four years while you are in college. At a
discount rate of 6 percent, compounded
monthly, what are these payments worth to
you when you first start college?
CHAPTER 5: Net Present Value and Other Investment Rules (exclude 5.3 and 5.7)
1 A financing project has an initial cash inflow
of $42,000 and cash flows of −$15,600,
−$22,200, and −$18,000 for Years 1 to 3,
respectively. The required rate of return is 13
percent. What is the internal rate of return?
Should the project be accepted?
2 A financing project is acceptable if its IRR is:
3 A project will have more than one IRR if, any
only if, the:
4 A situation in which accepting one
investment prevents the acceptance of
EAR Bank D = e .0367 - 1 = .03738, or
3.738%
EAR Bank E = [1 + (.0365 / 4)]4 - 1 =
.03700, or 3.700%
 Bank B offers the highest EAR.
4.76%
r = $25,000 / $525,000 = 0.0476, or 4.76%
$7,280.00
Investment value Year 3 = $6,500 + ($6,500
× .04 × 3) = $7,280
$3,146.32
PV = $55,000 × ({1 - [1 / (1 + .075)25 ]} /
.075) = $613,082.02 $613,082.02 = C × {[(1
+ .075)38 −1] / .075}; C = $3,146.32
$32,861.08
APV = $50 × [(1 - {1 / [1 + (.05 / 52)]20 × 52
}) / (.05 / 52)] = $32,861.08
$8,516.06
APV = $200 × [(1 - {1 / [1 + (.06 / 12)]4 × 12
}) / (.06 / 12)] = $8,516.06
15.26%; reject
0 = $42,000 + [−$15,600 / (1 + IRR)] +
[−$22,200 / (1 + IRR)2 ] + [− $18,000 / (1 +
IRR)3 ; IRR = 15.26%
Since this is a financing project, an IRR
greater than the required rate indicates
rejection.
Less than the discount rate
cash flow pattern exhibits more than one
sign change.
mutually exclusive investment decision.
 another investment is called the:
5 An independent investment is acceptable if
the profitability index (PI) of the investment
is:
6 An investment is acceptable if the payback
period:
7 Anne is considering two independent
projects with 2-year lives. Both projects have
been assigned a discount rate of 13 percent.
She has sufficient funds to finance one or
both projects. Project A costs $38,500 and
has cash flows of $19,400 and $28,700 for
Years 1 and 2, respectively. Project B costs
$41,000, and has cash flows of $25,000 and
$22,000 for Years 1 and 2, respectively.
Which project, or projects, if either, should
you accept based on the profitability index
method and what is the correct reason for
that decision?
8 Assume you use all available methods to
evaluate projects. If there is a conflict in the
indicated decision between two mutually
exclusive projects due to the IRR-based
indicator, you should:
9 Bernstein's proposed project has an initial
cost of $128,600 and cash flows of $64,500,
$98,300, and − $15,500 for Years 1 to 3
respectively. If all negative cash flows are
moved to Time 0 at a discount rate of 10
percent, what is the modified internal rate of
return?
10 For investment projects, the internal rate of
return (IRR):
11 How should a profitability index of zero be
interpreted?
12 It will cost $3,000 to acquire a small ice
cream cart. Cart sales are expected to be
$1,400 a year for three years. After the three
years, the cart is expected to be worthless
as that is the expected remaining life of the
cooling system. What is the payback period
of the ice cream cart?
13 Net present value:
14 Project A has an initial cost of $75,000 and
annual cash flows of $33,000 for three years.
Project B costs $60,000 and has cash flows
of $25,000, $30,000, and $25,000 for Years
greater than one
is less than some pre-specified period of
time.
You should only accept project A since it
has the largest PI and the PI exceeds one.
PIA = ($19,400 / 1.13 + $28,700 / 1.132 ) /
$38,500 = 1.03
PIB = ($25,000 / 1.13 + $22,000 / 1.132) /
$41,000 = .96
ignore the IRR and rely on the decision
indicated by the NPV method.
9.82%
0 = [−$128,600 + (−$15,500 / 1.103 )] +
$64,500 / (1 + IRR) + $98,300 / (1 + IRR)2 ;
IRR = 9.82%
is the rate generated solely by the cash
flows of the investment.
the project's cash flows subsequent to the
initial cash flow have a present value of
zero.
2.14 years
Payback = 2 + ($3,000 −1,400 - 1,400) /
$1,400 = 2.14 years
is more useful than the internal rate of
return when comparing different sized
projects.
12.89%; B
0 = (−$75,000 - (−$60,000) + ($33,000 -
25,000) / (1 + IRR) + ($33,000 - 30,000) / (1
+ IRR)2 + ($33,000 −25,000) / (1 + IRR)3 ;
 1 to 3, respectively. Projects A and B are IRR = 12.89%
mutually exclusive. The incremental IRR is
_______ and if the required rate is higher Using a discount rate of 15 percent:
than the crossover rate then Project NPVA = −$75,000 + $33,000 × ({1 - [1 / (1 +
_______ should be accepted. .15)3 ]} / .15) = $346.43
NPVB = −$60,000 + $25,000 / 1.15 +
$30,000 / 1.152 + $25,000 / 1.153 =
$861.35
15 Project A is opening a bakery at 10 Center net present value
Street. Project B is opening a specialty
coffee shop at the same address. Both
projects have unconventional cash flows,
that is, both projects have positive and
negative cash flows that occur following the
initial investment. When trying to decide
which project to accept, given sufficient
funding to accept either, you should rely
most heavily on the _____ method of
analysis.
16 Project X has an initial cost of $20,000 and a X; Y; Y
cash inflow of $25,000 in Year 3. Project Y 0X = −$20,000 + $25,000 / (1 + IRR)3 ; IRR
costs $40,700 and has cash flows of = 7.72%
$12,000, $25,000, and $10,000 in Years 1 to
3, respectively. The discount rate is 6 NPVx = −$20,000 + $25,000 / 1.063 =
percent and the projects are mutually $990.48 0Y = −$40,700 + $12,000 / (1 +
exclusive. Based on the individual project's IRR) + $25,000 / (1 + IRR)2 + $10,000 / (1
IRRs you should accept Project _____; + IRR)3 ; IRR = 7.70%
based on NPV you should accept Project
____; the final decision should be to accept NPVY = −$40,700 + $12,000 / 1.06 +
Project ____. $25,000 / 1.062 + $10,000 / 1.063 =
$1,266.86
17 The internal rate of return is: computed using a project's cash flows as
the only source of inputs.
18 The modified internal rate of return: is computed by combining cash flows until
only one change in sign remains.
19 The possibility that more than one discount multiple rates of return.
rate will make the NPV of an investment
equal to zero presents the problem referred
to as:
20 The present value of an investment's future profitability index.
cash flows divided by the initial cost of the
investment is called the:
21 The profitability index: is useful as a decision tool when investment
funds are limited and all available funds are
allocated.
22 Two mutually exclusive projects have 3-year reject both projects
lives and a required rate of return of 10.5 0 = −$75,000 + $18,500 / (1 + IRR) +
percent. Project A costs $75,000 and has $42,900 / (1 + IRR)2 + $28,600 / (1 + IRR)3
cash flows of $18,500, $42,900, and $28,600 ; IRR = 9.12%
for Years 1 to 3, respectively. Project B costs
 $72,000 and has cash flows of $22,000,
$38,000, and $26,500 for Years 1 to 3,
respectively. Using the IRR, which project, or
projects, if either, should be accepted?
23 Using the internal rate of return method, a
conventional investment project should be
accepted if the internal rate of return is:
24 What is the net present value of a project
with an initial cost of $36,900 and cash
inflows of $13,400, $21,600, and $10,000 for
Years 1 to 3, respectively? The discount rate
is 13 percent.
25 Which one of the following statements is
true?
CHAPTER 15: Long-Term Financing: An Introduction (exclude 15.7)
1 A bank line of credit
2 A classified board is one which has:
3 A grant of authority allowing someone else to a proxy
vote shares of stock that you own is called:
4 Bonds that grant the issuer the right to
extinguish the debt prior to maturity are
referred to as which type of bond?
5 Different classes of stock usually are issued
to:
6 Financial economists prefer to use market
values rather than book values when
measuring debt ratios because market
values are:
7 If a debt is subordinated, it:
8 If a group other than current management
solicits the authority to vote shares as part of
their effort replace the current management
team, a _____ is said to occur.
9 If an issuer retires a debt issue before
maturity, the specific amount paid to do so is
0 = −$72,000 + $22,000 / (1 + IRR) +
$38,000 / (1 + IRR)2 + $26,500 / (1 + IRR)3
; IRR = 9.48%
Both projects should be rejected because
their IRR's are less than the required rate of
return. Thus, both projects also have
negative NPVs. There is no reason to do
incremental analysis as neither project is
acceptable.
greater than the discount rate.
−$1,195.12
NPV = −$36,900 + $13,400 / 1.13 +
$21,600 / 1.132 + $10,000 / 1.133 =
−$1,195.12
You must know the discount rate to
compute the NPV but you can compute the
IRR without having a discount rate.
Generally involves a fee charged to the
borrower on the unused portion of the
revolver.
terms that expire at different times.
callable bond
allow a certain group to maintain ownership
control while reducing that group's equity
position.
a better reflection of current information.
must give preference to the secured
creditors in the event of default.
proxy fight
call price
 called the:
10 Not paying dividends on a cumulative voting rights being granted to preferred
preferred issue may result in: shareholders.1
11 Preferred stock dividends: can be deferred indefinitely.
12 The written agreement between a indenture
corporation and its bondholders is called the:
13 The written agreement between a restrictive covenant
corporation and its bondholders might
contain a prohibition against paying
dividends in excess of current earnings. This
prohibition is an example of a(n):
14 There are 3 directors' seats up for election. If cumulative voting
you own 1,000 shares of stock and have
been granted a total of 3,000 votes, then the
firm uses the voting procedure referred to as:
15 There are 3 directors' seats up for election. If straight voting
you own 1,000 shares of stock and you can
vote 1,000 votes in each of the three
elections, then the firm uses the voting
procedures referred to as:
16 There are seven seats on the board of 123,251
directors of Furniture Unlimited up for Shares needed = (.5 × 246,500) + 1 =
election. The firm has 246,500 shares of 123,251
stock outstanding and uses straight voting.
Each share is granted one vote. How many
shares must you control if you want to
guarantee your election to the board
assuming no one else votes for you?
17 Unsecured corporate debt is called a(n): debenture
18 Which one of the following statements about Preferred stock usually has a stated
preferred stock is true? liquidating value of $100 per share.
19 Which one of the following statements is Debt increases the possibility of financial
true? distress
20 Which one of these applies to floating-rate Coupon payments are variable while the par
bonds? value is fixed.
21 Which one of these is a positive covenant? The firm must maintain a current ratio of 1.2
or better.
22 Which type of bond only pays coupon income bond
payments if it can do so from the income
earned by the firm?

CHAPTER 16: Capital Structure: Basic Concepts, and static trade-off theory

1 A firm has a debt-equity ratio of .64, a pretax 15.22%

cost of debt of 8.5 percent, and a required RS = .126 + .64(.126 - .085) = .1522, or
return on assets of 12.6 percent. What is the 15.22%
cost of equity if you ignore taxes?
2 A firm has zero debt in its capital structure 13%
and has an overall cost of capital of 10 Rs = .10 + .60 / .40(.10 - .08) = .13, or 13%
 percent. The firm is considering a new
capital structure with 60 percent debt at an
interest rate of 8 percent. Assuming there
are no taxes or other imperfections, what
would be the cost of equity with the new
capital structure?
3 A key underlying assumption of MM individuals and corporations borrow at the
Proposition I without taxes is that: same rate.
4 A levered firm is a company that has: some debt in its capital structure.
5 An unlevered firm has a cost of capital of $846,505.88
13.6 percent and earnings before interest VL = {[$138,000 × (1 - .34)] / .136} + (.34
and taxes of $138,000. A levered firm with × $520,000) = $846,505.88
the same operations and assets has both a
book value and a face value of debt of
$520,000 with an annual coupon of 7
percent. The applicable tax rate is 34
percent. What is the value of the levered
firm?
6 Aspen's Distributors has a levered cost of 8.60%
equity of 13.84 percent and an unlevered VE = $14,600 - 5,000 = $9,600 RS = .1384
cost of capital of 12.5 percent. The company = .125 + ($5,000 / $9,600) × (1 - .34) × (.125
has $5,000 in debt that is selling at par. The - RB) ; RB = .0860, or 8.60%
levered value of the firm is $14,600 and the
tax rate is 34 percent. What is the pretax
cost of debt?
7 Bigelow has a levered cost of equity of 14.29 .87
percent and a pretax cost of debt of 7.23 RS = .1429 = .11 + B/S(.11 - .0723); B/S =
percent. The required return on the assets is .87
11 percent. What is the firm's debt-equity
ratio based on MM Proposition II with no
taxes?
8 In the absence of taxes, the capital structure homage leverage
chosen by a firm doesn't really matter
because of:
9 Juanita's Steak House has $12,000 of debt $4,080
outstanding that is selling at par and has a PV Tax shield = .34 × $12,000 = $4,080
coupon rate of 8 percent. The tax rate is 34
percent. What is the present value of the tax
shield?
10 MM Proposition I with taxes states that: increasing the debt-equity ratio increases
firm value.
11 MM Proposition I without taxes proposes : leverage does not affect the value of the
that: firm.
12 Rosita's has a cost of equity of 13.76 percent 12.27%
and a pretax cost of debt of 8.5 percent. The RS = .1376 = RU + .60 × (1 - .34) × (RU -
debt-equity ratio is .60 and the tax rate is 34 .085); RU = .1227, or 12.27%
percent. What is Rosita's unlevered cost of
capital?
13 Salmon Inc. has debt with both a face and a 14.27%
market value of $227,000. This debt has a VL = {[$87,200 × (1 - .35)] / .12} + (.35 ×
 coupon rate of 7 percent and pays interest $227,000) = $551,783.33
annually. The expected earnings before
interest and taxes is $87,200, the tax rate is VS = $551,783.33 - 227,000 = $324,783.33
35 percent, and the unlevered cost of capital
is 12 percent. What is the firm's cost of Rs = .12 + [($227,000 / $324,783.33) × (1 -
equity? .35) × (.12 - .07)] = .1427, or 14.27%
14 The Backwoods Lumber Co. has a debt- 6.05%
equity ratio of .68. The firm's required return RS = .1554 = .117 + .68(.117 - RB); RB =
on assets is 11.7 percent and its levered .0605, or 6.05%
cost of equity is 15.54 percent. What is the
pretax cost of debt based on MM Proposition
II with no taxes?
15 The Dance Studio is currently an all-equity $447,750
firm that has 22,000 shares of stock
outstanding with a market price of $27 a VL = (22,000 × $27) + (.35 × $225,000) =
share. The current cost of equity is 12 $672,750
percent and the tax rate is 35 percent. The VE = $672,750 - 225,000 = $447,750
firm is considering adding $225,000 of debt
with a coupon rate of 6.25 percent to its
capital structure. The debt will sell at par.
What will be the levered value of the equity?
16 The effects of financial leverage depend on Leverage only provides value above the
the operating earnings of the company. break-even point.
Based on this relationship, assume you
graph the EPS and EBI for a firm, while
ignoring taxes. Which one of these
statements correctly states a relationship
illustrated by the graph?
17 The interest tax shield has no value for a firm the firm is unlevered.
when:
18 The Montana Hills Co. has expected $99,516.13
earnings before interest and taxes of VU = [$17,100 × (1 - .34) ] / .124 =
$17,100, an unlevered cost of capital of 12.4 $91,016.13
percent, and debt with both a book and face
value of $25,000. The debt has an annual VL = $91,016.13 + (.34 × $25,000) =
6.2 percent coupon. If the tax rate is 34 $99,516.13
percent, what is the value of the firm?
19 The proposition that the cost of equity is a MM Proposition II (no taxes).
positive linear function of capital structure is
called:
20 The proposition that the value of a levered MM Proposition I with no tax.
firm is equal to the value of an unlevered firm
is known as:
21 The proposition that the value of the firm is MM Proposition I (no taxes).
independent of its capital structure is called:
22 The reason that MM Proposition I does not levered firms pay less taxes compared with
hold in the presence of corporate taxation is identical unlevered firms
because:
23 The tax savings of the firm derived from the interest tax shield.
deductibility of interest expense is called the:
24 The unlevered cost of capital is: the cost of capital for a firm with no debt in
its capital structure.
25 The use of personal borrowing to change the homemade leverage.
overall amount of financial leverage to which
an individual is exposed is called:
26 The Winter Wear Company has expected $16,948.96
earnings before interest and taxes of $3,800, VU = [$3,800 ×(1 - .35)] / .154 =
an unlevered cost of capital of 15.4 percent $16,038.96
and a tax rate of 35 percent. The company
also has $2,600 of debt with a coupon rate of VL = $16,038.96 + (.35 × $2,600) =
5.7 percent. The debt is selling at par value. $16,948.96
What is the value of this firm?
27 Thompson amp; Thomson is an all-equity $8,960,000
firm that has 280,000 shares of stock Firm value = ($2,400,000 / 75,000) ×
outstanding. The company is in the process 280,000 = $8,960,000
of borrowing $2.4 million at 5.5 percent
interest to repurchase 75,000 shares of the
outstanding stock. What is the value of this
firm if you ignore taxes?
28 When comparing levered versus unlevered stay fixed, leaving more income to be
capital structures, leverage works to distributed over fewer shares.
increase EPS for high levels of EBIT
because interest payments on the debt:
29 You own 25 percent of Unique Vacations, $6.0 million
Inc. You have decided to retire and want to Firm value = $1.5 million / .25 = $6.0 million
sell your shares in this closely held, all-equity
firm. The other shareholders have agreed to
have the firm borrow $1.5 million to purchase
your 1,000 shares of stock. What is the total
value of this firm today if you ignore taxes?
30 Your firm has a $250,000 bond issue $6,125
outstanding. These bonds have a coupon Annual interest tax shield = $250,000 ×.07
rate of 7 percent, pay interest semiannually, ×.35 = $6,125
and have a current market price equal to 103
percent of face value. What is the amount of
the annual interest tax shield given a tax rate
of 35 percent?

CHAPTER 26: Short-Term Finance and Planning

1 A cumulative cash deficit indicates a firm: has at least a short-term need for external
funding.
2 A manufacturing firm has a 90-day collection the second quarter.
period. The firm produces seasonal
merchandise and thus has the least sales
during the first quarter of a year and the
highest level of sales during the third quarter
of a year. The firm maintains a relatively
steady level of production which means that
 its cash disbursements are fairly equal in all
quarters. The firm is most apt to face a cash-
out situation in:
3 A prearranged, short-term bank loan made line of credit.
on a formal or informal basis, and typically
reviewed for renewal annually, is called a:
4 A restrictive short-term financial policy tends reduce future sales more so than a flexible
to: policy.
5 A use of cash is associated with: both an increase in an asset and an
increase in retained earnings.
6 ABC Manufacturing historically produced decrease the cash cycle.
products that were held in inventory until
they could be sold to a customer. The firm is
now changing its policy and only producing a
product when it receives an actual order
from a customer. All else equal, this change
will:
7 Baxter's collects 30 percent of its sales in the 30 percent of May
month of sale, 55 percent in the month
following the month of sale, and 13 percent
in the second month following the month of
sale. Given this, the company will collect
_____ sales during the month of May.
8 Bilt Rite has sales of $610,000 and cost of 35.89 days
goods sold equal to 68 percent of sales. The Receivables turnover = $610,000 /
beginning accounts receivable balance is [($58,900 + 61,050) / 2]
$58,900 and the ending accounts receivable
balance is $61,050. How long on average Receivables turnover = 10.17
does it take the firm to collect its
receivables? Receivables period = 365 / 10.17

Receivables period = 35.89 days

9 Brook Side reported sales of $738,000 and 30.31 days
cost of goods sold of $584,000 for the year. Inventory turnover = $584,000 / [($51,000 +
The firm had a beginning inventory of 46,000) / 2]
$51,000 and an ending inventory of $46,000.
What is the length of the inventory period? Inventory turnover = 12.04

Inventory period = 365 / 12.04

Inventory period = 30.31 days

10 Cash decreases when:
11 Cash increases when:
12 Flexible short-term financial policies tend to:
13 Given a flexible financing policy, a growing
firm generally has a permanent requirement
for:
14 Heritage Farms has sales of $1.62 million
with costs of goods sold equal to 78 percent
of sales. The average inventory is $369,000,
current assets other than cash increase
accounts payable increases.
maintain large cash balances.
both current and long-term assets.
13.19 days
Inventory period = 365 / [(.78 × $1,620,000)
/ $369,000]
 accounts payable average $438,000, and Inventory period = 106.59 days
receivables average $147,000. How long is
the cash cycle? Accounts receivable period = 365 /
($1,620,000 / $147,000)

Accounts receivable period = 33.12 days

Accounts payable period = 365 / [(.78 ×

$1,620,000) / $438,000

Accounts payable period = 126.52 days

Cash cycle = 106.59 + 33.12 -126.52

Cash cycle = 13.19 days

15 If your accounts receivable period is 30 March, April and May
days, you will collect payment for your _____
sales during the second quarter of a
calendar year.
16 Last year, Wilson's had credit sales of 104.42 days
$927,000 and cost of goods sold of Inventory turnover = $762,000 / [($138,000
$762,000. The beginning of the year + 154,300) / 2]
inventory was $138,000 and the end of the
year inventory was $154,300. If the accounts Inventory turnover = 5.21 times Inventory
receivables average $87,400, what is the period = 365 / 5.21
operating cycle?
Inventory period = 70.01 days

Accounts receivable turnover = $927,000 /

$87,400

Accounts receivable turnover = 10.61

Accounts receivable period = 365 / 10.61

Accounts receivable period = 34.41

Operating cycle = 70.01 + 34.410

Operating cycle = 104.42 days

17 Miller's Hardware has a flexible short-term invest in marketable securities.
financing policy. Over the course of one
year, the firm should expect to have some
months that allow it to:
18 Modern Sound has sales of $811,000 and 54.63 days
average accounts payable of $87,400. The Payables turnover = (.72 × $811,000) /
cost of goods sold is equivalent to 72 $87,400
percent of sales. How long does it take the
firm to pay its suppliers? Payables turnover = 6.68
 Payables period = 365 / 6.68

Payables period = 54.63 days

19 Net working capital is defined as the: difference between current assets and
current liabilities.
20 The cash cycle is defined as the time cash disbursements and cash collection for
between: an item.
21 The cash cycle will decrease as a result of inventory turnover rate.
increasing the:
22 The forecast of cash receipts and cash budget
disbursements for the next planning period is
called a:
23 The length of time between the acquisition of operating cycle
inventory and the collection of cash from
receivables is called the:
24 The length of time between the acquisition of accounts payable period
inventory by a firm and the payment by the
firm for that inventory is called the:
25 The length of time between the payment for cash cycle
inventory and the collection of cash from
receivables is called the:
26 The length of time between the sale of accounts receivable period
inventory and the collection of cash from
receivables is called the:
27 The most common means of financing a short-term unsecured bank loan
temporary cash deficit is a:
28 The operating cycle can be decreased by: collecting accounts receivable faster.
29 Which one of the following is a source of an increase in accounts payable
cash?
30 Which one of the following is a use of cash? submitting taxes to the government
31 Which one of the following will decrease the paying a payment on a long-term debt
net working capital of a firm? Assume the
current ratio is greater than 1.0.
32 Which one of these statements concerning A negative cash cycle is actually preferable
the cash cycle is correct? to a positive cash cycle.
33 Which one of these statements is correct The longer the cash cycle, the more likely a
concerning the cash cycle? firm will need external financing.
34 Wilco's currently has a 43-day cash cycle. 39 days
Assume the firm changes its operations such Cash cycle = 43 - 2 + 1 - 3 = 39 days
that it decreases its receivables period by 2
days, increases its inventory period by 1 day,
and increases its payables period by 3 days.
What will the length of the cash cycle be
after these changes?
35 You can decrease the cash cycle by: improving the cash discount offered to
customers who pay their accounts early.
CHAPTER 27: Cash management
1 An appropriate cash balance is reached
when the:
2 Determining the appropriate cash balance
involves assessing the trade-off between:
3 Examples of cash disbursements include all
of the following except:
4 Firms hold cash to satisfy the transaction
motive. This means that cash is held to:
5 Firms hold cash, in part, to satisfy
compensating balance requirements.
Compensating balances are cash balances
held at:
6 Firms would need to hold zero cash for
transaction purposes if all outgoing cash
transactions could be:
7 If a firm has seasonal sales, then is highly
likely the firm will:
8 Money market securities are best defined as
securities:
9 Most large firms hold a larger cash balance
than most models imply because:
10 Probably the most sensible cash
management policy would be to maintain:
11 Short-term marketable securities generally
have:
12 The cost of holding cash:
13 U.S. Treasury bills:
14 Which one of the following is a money-
market security that has no active secondary
market?
15 Which one of these money market securities
generally has the shortest life?
CHAPTER 28: Credit and Inventory Management
1 A commercial draft typically:
2 All of the following can provide credit
information about a customer except:
value of cash liquidity equals interest
foregone on an equivalent amount of
Treasury bills
the benefits and costs of liquidity.
sales of assets.
meet disbursements for normal operations
and to balance the flow between cash
inflows and outflows.
commercial banks to pay implicitly for bank
services.
perfectly synchronized with cash inflows.
borrow short term for part of the year and
invest in marketable securities the rest of
the year.
with maturities of one year or less
banks are compensated by account
balances for payment of services.
sufficient cash on hand to meet all ordinary
business needs plus some excess cash to
invest in marketable securities as a
precautionary measure.
a high level of liquidity.
is the opportunity cost of the lost investment
income.
are sold at weekly auctions
commercial paper
repurchase agreements
specifies the payment amount and payment
date.
a. the customer's current payment history
with the seller.
b. banks.
c. the amount of goods the customer

3 Baked Potatoes has total annual sales of
846,000 units, a carrying cost per unit of
$1.64 per year, and restocking costs of $31
per order. Each inventory item has an
average cost of $2.39. What is the average
dollar value of the firm's inventory if it always
orders the most economical quantity?
4 Cash discounts:
5 Credit terms of 1/5, net 15 should be
interpreted as granting:
6 Determining the optimal credit policy is
based on a trade-off between the carrying
costs of granting credit and the:
7 Fried Onions has total annual sales of
438,000 units, a carrying cost per unit of
$2.67 per year, and restocking costs of $48
per order. What is the EOQ?
8 Jensen's Boat Works total costs of holding
inventory is $8,400 when its order sizes are
optimized. If the firm places 46 orders a
year, what is the fixed cost per order?
9 Lengthening the credit period effectively
_____ the price paid by the customer.
Generally, this acts to _____ sales.
10 On September 1, a firm grants credit with
terms of 2/10 net 30. The creditor:
11 One characteristic of a conditional sales
contract is that the:
12 Selling goods and services on credit is:
13 Since the credit decision usually includes
riskier customers, the decision should adjust
for this by:
14 Sisler's sells 382,000 units a year and orders
10,000 units at a time. The cost of placing an
desires to purchase.
d. the customer's financial statements.
e. credit reports.
$6,758
Q* = [(2T × F) / CC].5
Q* = [(2 × 846,000 × $31) / $1.64].5
Q* = 5,655 units
Average inventory value = Q* / 2 × Cost per
unit
Average inventory value = 5,655 / 2 ×
$2.39
Average inventory value = $6,758
speed up the collection of receivables.
a one percent discount for payments
received within five days.
lost sales from refusing credit.
3,968 units
Q* = [(2T × F) / CC].5
Q* = [(2 × 438,000 × $48) / $2.67].5
Q* = 3,968 units
$91.30
At the optimal order size, carrying costs
equal restocking costs. Thus, restocking
costs equal 50 percent of the total costs of
holding inventory.
Total restocking cost = .50(Total costs) =
Fixed cost per order ×Number of orders
Fixed cost per order = .50($8,400) / 46
Fixed cost per order = $91.30
decreases; increase
receives a discount of 2 percent when
payment is made within 10 days.
seller retains legal ownership of the goods
until they are completely paid for
an investment in a customer.
determining the probability that customers
will not pay and reducing the expected cash
flow.
$951.18
Total restocking cost = Fixed cost per order
 order is $24.90. What is the firm's annual
total restocking cost?
15 The average collection period measures the
average:
16 The credit period begins on the:
17 The decision to grant credit should consider
all of the following except the:
18 The three components of credit policy are
19 When analyzing the decision to change the
cash discount policy, the firm should select
the policy that has the:
20 When analyzing the NPV of a decision to
switch from a cash only sales policy to a
credit policy with an early payment discount,
the firm is least apt to consider the:
21 When credit is granted to another firm this
gives rise to a(n):
22 Which one of the following statements is
false as it relates to considerations firms use
when establishing a credit policy?
23 Which one of the follwing statements is
false?
24 Which one of these statements is true
regarding promissory notes?
25 Yesterday, Smiley Company sold $22,500 of
merchandise on credit. The invoice was sent
today with the terms, 3/10 net 40. This
customer normally pays on the net date.
What is the effective rate of interest the
customer is paying by not taking the
discount? Assume a 365-day year.
× Number of orders
Total restocking cost = $24.90 × (382,000 /
10,000)
Total restocking cost = $951.18
time necessary to collect a credit sale.
invoice date.
fixed costs incurred during the credit period.
collection policy, credit analysis, and terms
of the sale.
highest NPV
firm's fixed costs
accounts receivable and is called trade
credit.
Small accounts, associated with firms that
find it difficult to acquire a line of credit, tend
to receive longer credit periods.
a. When a banker's acceptance is
discounted in the secondary market it
becomes a commercial note.
b. A commercial draft becomes a trade
acceptance once the buyer accepts the
draft and promises to pay.
c. Banker's acceptances arise when a bank
guarantees payment on a commercial draft.
d. Sight drafts require immediate payment.
e. Commercial drafts represent a way to
obtain a credit commitment from a customer
before the goods are delivered.
Promissory notes usually involve no cash
discount.
44.86%
Rate for 30 days = (.03 × $22,500) / [(1 -
.03) × $22,500] = .030928
EAR = 1.030928(365/30) - 1
EAR = .4486, or 44.86%