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# 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?
C. \$13.2
Given the following data:
FCF1 = \$20 million; FCF2 = \$20 million; FCF3 = \$20 million; free cash flow grows at a rate of 5% for year 4
and beyond. If the weighted average cost of capital is 12%, calculate the value of the firm.
B. \$261.57 million
The real rate of interest is 3% and the inflation is 4%.What is the nominal rate of interest?
C. 7.12%
Which of the following statements regarding the discounted payback period rule is true?
A. The discounted payback rule uses the time value of money concept.
If the NPV of project A is +\$100, and that of project B is -\$60 and that of project C is +\$30, what is the
NPV of the combined project?
C. \$70
Net working capital (NWC) is calculated as:
C. Current assets current liabilities
Proper treatment of inflation in the NPV calculation involves:
(I) Discounting nominal cash flows using the nominal discount rate
(II) Discounting real cash flows using the real discount rate
D. I and II only
Generally, banks lend up to the following amount when a firm provides receivables as collateral:
C. 80% of the value of the receivables
NetWorking Capital is the:
(I) short-term assets
(II) short term liabilities
B. (I - II)
When banks have to make large loans, they form a group of banks for the purpose of making the loan. The
group is called
B. Syndicate
Given the following cash flows for Project M: C0= -2,000, C1= +500, C2= +1,500, C3= +1455, calculate the
IRR for the project.
A. 28%
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?
D. \$50.83

## The following groups are stakeholders of a public company:

(I) Shareholders
(II) The government
(III) Suppliers
(IV) Employees
(V) Bondholders
(VI) Management
D. I, II, III, IV, V, and VI
Given the following data: Earnings per share = \$5; Dividends per share = \$3; Price per share = \$50.
Calculate the payout ratio:
C. 60%
Inventory may consist of:
D. All of the above
Negotiable CDs are issued by:
C. Banks
The firm's internal growth rate is defined as:
B. Return on equity times the ratio of equity to total assets
Which of the following trade credit terms is not valid?
a. 3/10, net 50
b. 8/10 EOM, net 60
c. 2/10, net 30
D. All of the above are valid credit terms
For project A in year - 2, inventories increase by \$14,000 and accounts payable by \$4,000. Calculate the
increase or decrease in net working capital for year-2.
D. Increases by \$10,000
Which of the following investment rules has value additivity property?
B. Net present value method
Free cash flow (FCF) is calculated as:
(I) Profit after tax
(II) Depreciation
(III) Investment in fixed assets
(IV) Investment in working capital
C. FCF = I + II + III + IV

A reduction in the sales of existing products caused by the introduction of a new product is an example of:
A. incidental effects
If the depreciation amount is \$100,000 and the marginal tax rate is 28%, then the tax shield due to
depreciation is:
A. \$28,000
If the NPV of project A is +\$40 and that of project B is -\$50, then the NPV of the combined project is:
C. -\$10
The cash cycle is represented by the following sequence:
A. Cash, raw materials, finished goods, and receivables, cash

## Accounts receivables include:

(II) Consumer credit
D. I and II only
Preferably, cash flows for a project are estimated as:
A. Cash flows after taxes
Given the following data: EBIT = 400; NI = 100; Average Equity = 1000, calculate the ROE (Return on
Equity):
A. 10%
The most common way to finance a temporary cash deficit is the use of:
D. Unsecured bank loans

## The profitability index can be used for ranking projects under:

C. Capital rationing at t = 0
A project requires an initial investment of \$200,000 and is expected to produce a cash flow before taxes of
120,000 peryear for two years. [i.e. cash flows will occur at t = 1 and t = 2]. The corporate tax rate is 30%. The
assets will be depreciatedusing MACRS 3 year schedule : (t=1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%).
The company's tax situation is such that it can make use of all applicable tax shields. The opportunity cost of
capital is 11%. Assume that the asset can be sold for book value.
Calculate the NPV of the project at the end of two years. (Approximately)
B. \$19,315
Investment in inventories includes investment in:
(I) Raw material
(II) Work-in-progress
(III) Finished goods
C. I, II, and III
Important points to remember while estimating cash flows of projects are:
(I) only cash flow is relevant
(II) always estimate cash flows on an incremental basis
(III) be consistent in the treatment of inflation
C. I,II, and III

## Which of the following statements is true?

(I) New companies must be prepared to incur more bad debts than established businesses as part of the
cost of building up a good customers list
(II) Generally, repeat orders are profitable
D. I and II only
A large firm may hold substantial cash balances because:
a. These balances are required by the bank in the form of compensating balances
b. The company may have accounts in many different banks
c. The company may have a very decentralized organization
D. All of the above
A project will have only one internal rate of return if:
D. There is a one sign change in the cash flows
Which of the following investment rules may not use all possible cash flows in its calculations?
B. Payback period

The cash budget is the primary short-term financial planning tool. The key reasons a cash budget is created are:
(II) To estimate the size and timing of your new cash flows
(III) To prepare for potential financing needs
B. II and III only
The NPV value obtained by discounting nominal cash flows using the nominal discount rate is:
(I) The same as the NPV value obtained by discounting real cash flows using the real discount rate
A. I only
Y ou are given a job to make a decision on project X, which is composed of three independent projects A, B,
and C which have NPVs of +\$60, -\$30 and +\$120, respectively. How would you go about making the decision
about whether to accept or reject the project?
C. Break up the project into its components: accept A and C and reject B
Which of the following cash flows should be treated as incremental flows when deciding whether to go
ahead with an electric car project?
C. The reduction in taxes resulting from the depreciation charges
If a firm grants credit with terms of 3/10 net 30, the creditor:
C. Receives a discount of 3% when payment is made in less than 10 days after the sale
Short-term financial decisions:
(I) Involve short lived assets
(II) Involve short lived liabilities
(III) Are easily reversed
C. I, II, and III
Which of the following investment rules does not use the time value of the money concept?
C. The payback period
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?
C. If the probability of payment exceeds 0.75

Last year Axle Inc. reported total assets of \$400, equity of \$200, net income of \$50, dividends of \$10 and
earnings retained in the period of \$40.What is Axle Inc.'s sustainable growth rate?
C. 20.0%
Negotiable CDs are issued by:
C. Banks
A cash flow received in two years is expected to be \$10,816. If the real rate of interest is 4% and the
inflation rate is 4%, what is the real cash flow for year-2?
C. \$10,000
A capital equipment costing \$300,000 today has no (zero) salvage value at the end of 5 years. If straightline
depreciation is used, what is the book value of the equipment at the end of three years?
A. \$120,000
MConstruction Company must choose between two types of cranes. Crane A costs \$600,000, will last for 5
years, and will require \$60,000 in maintenance each year. Crane B costs \$750,000 and will last for seven years
and will require \$30,000 in maintenance each year.Maintenance costs for cranes A and B are incurred at the end
of each year. The appropriate discount rate is 12%per year. Which machine should OM Construction purchase?
B. Crane B as EAC is \$194,336

Given the following cash flows for project Z: C0= -2,000, C1= 1,200, C2= 1,440 and C3= 6000, calculate
the discounted payback period for the project at a discount rate of 20%.
B. 2 years
If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is:
D. Zero
In the United States large-value electronic payments are made by:
(I) Fedwire
(III) CHIPS
D. I and III only
Earnings before interest and taxes is calculated as:
B. Total revenues - costs - depreciation
Muscle Company is investing in a giant crane. It is expected to cost 6.0 million in initial investment and it is
expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the NPV at 12%
(approximately).
B. 1.2. million
The main difference between short-term and long-term finance is:
C. The timing of short-term cash flow being within a year or less
Internal growth rate is calculated as:
C. Internal growth rate = plowback ratio return on equity [equity/net assets]
A commercial draft can be
(I) Sight draft
(II) Time draft
D. I and II only
A repurchase agreement occurs when:
C. An investor buys part of a government security dealer's inventory and simultaneously agrees to sell it
back
Given the following data:
FCF1 = \$7 million; FCF2 = \$45 million; FCF3 = \$55 million; free cash flow grows at a rate of 4% for year 4 and
beyond. If the weighted average cost of capital is 10%, calculate the value of the firm.
B. \$801.12 million
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 \$100
million.What are the forecasted collections on accounts receivable in March?
A. \$132 million
The interest rate on a loan is set at "1% over LIBOR." If the LIBOR rate is 5% then the interest rate on the
loan is:
C. 6%
The principal short-term assets are:
(I) Cash
(II) Accounts receivable
(III) Inventories
C. I, II, and III
Generally, a line of credit is:
(I) Less costly than stretching accounts payable
(II) Provided by a bank

## (III) Unsecured bank borrowing

D. I, II, and III
The present value of free cash flow is \$5 million and the present value of the horizon value is \$10 million.
Calculate the present value of the business.
C. \$15 million
The following are disadvantages of using the payback rule except:
C. The payback period is easy to calculate and use
Which of the following statements regarding "bankers' acceptances" is true?
(I) Bankers' acceptances are used in overseas trading
(II) Bankers' acceptances are bought and sold on a discount basis
(III) Bankers' acceptances are guaranteed by the bank
D. I, II, and III
The net present value of a project depends upon:
C. forecasted cash flows and opportunity cost of capital
A tax-paying corporation would prefer to invest short-term money in:
B. Floating-rate preferred stock

## The profitability index can be used for ranking projects under:

C. Capital rationing at t = 0
Given the following data:
FCF1 = \$7 million; FCF2 = \$45 million; FCF3 = \$55 million; free cash flow grows at a rate of 4% for year 4 and
beyond. If the weighted average cost of capital is 10%, calculate the value of the firm.
B. \$801.12 million
If a firm grants credit with terms of 3/10 net 30, the creditor:
C. Receives a discount of 3% when payment is made in less than 10 days after the sale
The payback period rule accepts all projects for which the payback period is:
C. Less than the cut-off value
If the depreciable investment is \$1,000,000 and the MACRS 5-Year class schedule is:
Year-1: 20% ; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6: 5.8%
Calculate the depreciation tax shield for Year-2 using a tax rate of 30%:
C. \$96,000
The most common way to finance a temporary cash deficit is the use of:
D. Unsecured bank loans
The following are electronic funds transfer systems available in the USA except:
D. SWIFT
When credit is granted to another firm this gives rise to a(n):
(I) Accounts receivable
A. I only
The value of a previously purchased machine to be used by a proposed project is an example of:
B. Opportunity cost
Which of the following trade credit terms is not valid?

## D. All of the above are valid credit terms

MConstruction Company must choose between two types of cranes. Crane A costs \$600,000, will last for
5 years, and will require \$60,000 in maintenance each year. Crane B costs \$750,000 and will last for seven years
andwill require \$30,000 in maintenance each year.Maintenance costs for cranes A and B are incurred at the end
of each year. The appropriate discount rate is 12%per year. Which machine should OM Construction purchase?
B. Crane B as EAC is \$194,336
A firm has a general-purpose machine, which has a book value of \$400,000 and is sold for \$600,000 in the
market. If the tax rate is 30%, what is the opportunity cost of using the machine in a project?
B. \$540,000

## The following groups are stakeholders of a public company:

(I) Shareholders
(II) The government
(III) Suppliers
(IV) Employees
(V) Bondholders
(VI) Management
D. I, II, III, IV, V, and VI
Market value ratios indicate:
(IV) How highly is the firm valued by investors
D. IV only
If a firm grants credit with terms of 3/10 net 30, the creditor:
C. Receives a discount of 3% when payment is made in less than 10 days after the sale
When banks have to make large loans, they form a group of banks for the purpose ofmaking the loan. The
group is called a:
B. Syndicate
When a firm improves (lowers) its days in inventories it generally:
B. Releases cash locked up in inventory
Proper treatment of inflation in the NPV calculation involves:
(I) Discounting nominal cash flows using the nominal discount rate
(II) Discounting real cash flows using the real discount rate
D. I and II only
When credit is offered with only the invoice as a formal instrument of credit, the credit procedure is called an:
B. Open account
The payback period rule:
C. Requires an arbitrary choice of a cut-off point