FIN3320
Exam Four; Chapters 14-17

1.  Nistelroy Communications recently completed a 3-for-1 stock split.  Prior to the split, its stock price was $120 per share.  The firm's total market value increased by 5% as a result of the split.  What was the price of the stock following the stock split?

a. $33.00

b. $40.00

C. $42.00

d. $46.00

e. $50.00

            (120 * 1.05)/ 3 = 42.00


2.  Ronaldo Inc. has a capital budget of $1,000,000, but it wants to maintain a target capital structure of 60% debt and 40% equity.  The company forecasts this year's net income to be $600,000.  If the company follows a residual dividend policy, what will be its dividend payout ratio?

a. 16.67%

b. 20.00%

c. 25.00%

D. 33.33%

e. 35.00%

            $1,000,000 * 40% = 400,000 must be retained

            (600,000  - 400,000)= 200,000/600,000 = 33.33% paid out


3.  You currently own 100 shares of Troll Brothers stock, which currently sells for $120 a share.  The company is contemplating a 2-for-1 stock split.  Which of the following best describes what your position will be after such a split takes place?

a. You will have 200 shares of stock, and the stock will trade at or near $120 a share.

B. You will have 200 shares of stock, and the stock will trade at or near $60 a share.

c. You will have 100 shares of stock, and the stock will trade at or near $60 a share.

d. You will have 50 shares of stock, and the stock will trade at or near $120 a share.

e. You will have 50 shares of stock, and the stock will trade at or near $60 a share.


4.  Which of the following would be most likely to lead to a decrease in a firm's willingness to pay dividends?

a. Its earnings become less stable.

b. Its access to the capital markets increases.

C.Its R&D efforts pay off, and it now has more high-return investment opportunities.

d. Its accounts receivable decreases due to a change in its credit policy.

e. Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.


5.  Which of the following SHould not influence a firm's dividend policy decision?

a. The firm's ability to accelerate or delay investment projects.

b. A strong preference by most shareholders in the economy for current cash income versus capital gains.

c. Constraints imposed by the firm's bond indenture.

D. The fact that much of the firm's equipment has been leased rather than bought and owned.

e. The fact that Congress is considering tax law changes regarding the taxation of dividends versus capital gains.


6.  If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay

a. No dividends except out of past retained earnings.

B. No dividends to common stockholders.

c. Dividends out of funds raised by the sale of new common stock.

d. Dividends out of funds raised by borrowing money (i.e., issue debt).

e. Dividends out of funds raised by selling off fixed assets.


7.  Kleck Corporation has $500,000 of inventory, and its annual sales are $3,000,000.  Based on a 365 day year, what is Kleck's inventory conversion period?

a. 56.49 days

b. 57.04 days

C. 60.83 days

d. 62.81 days

e. 65.27 days

            3,000,000/365 = 8,219.17808 per day

            500,000/8,219.17808 = 60.83333 days


8.  Carroll Construction has annual sales of $730,000, and it has $100,000 of accounts receivable.  Based on a 365-day year, what is Carroll's average collection period (or DSO)?

A. 50 days

b. 52 days

c. 54 days

d. 56 days

e. 58 days

            100,000/730,000 = 13.699% * 365 = 50 days


9.  A firm has decided to borrow $500,000 on a 10% add-on basis, payable in 12 end-of-month installments.  What would the effective annual rate on the loan be? 

a. 18.82%

B. 19.53%

c. 20.14%

d. 21.25%

e. 22.36%

            500,000 * 1.10 = 550,000/12 = 45,833.33333 per month

            N = 12; PV = -500000; PMT = 45,833.33333; FV = 0

            Solve for I = (1 +1.49767) ^ 12 = 19.529%


10.  Miller Technologies buys $800,000 of materials (net of discounts) on terms of 3/5, net 60, and it currently pays after 5 days and takes discounts.  Miller plans to expand, and this will require additional financing.  If Miller decides to forego discounts and thus to obtain additional credit from its suppliers, what would the nominal cost of that credit be? 

a. 19.45%

b. 20.06%

C. 20.52%

d. 20.98%

e. 21.44%

            3/97 = .03093 * 6.63636 = 20.52%


11.  Which of the following statements is CORRECT?

A. Other things held constant, it is better to have a relatively short than a relatively long cash conversion cycle.

b. Other things held constant, it is better to have a relatively long than a relatively short cash conversion cycle.

c. Other things held constant, the length of the cash conversion cycle has no effect on a firm’s profitability.

d. Other things held constant, the length of the cash conversion cycle might have an effect on a firm’s profitability, but it is impossible to state if that effect is positive or negative.

e. Since firms have no control over their cash conversion cycles, there is little point in studying these cycles.


12.  Other things held constant, which of the following would lead to an increase in working capital?

a. Cash is used to buy marketable securities.

b. A cash dividend is declared and paid.

c. Missing inventory is written off against retained earnings.

d. Long-term bonds are retired from the proceeds of a preferred stock issue.

E. Merchandise is sold on credit, but at a profit.

 

13.  Which of the following is generally true of firms that manage their inventories efficiently?

a. They have a relatively low inventory turnover ratio.

b. They have a relatively large number of production disruptions.

c. They have a relatively low total assets turnover ratio.

d. They have a relatively high cash conversion cycle.

E. They have a relatively high inventory turnover ratio.

 

14.  Other things held constant, which of the following would tend to reduce the length of the cash conversion cycle?

a. Maintain a constant level of receivables even as sales fall.

b. Buy larger quantities of raw materials and hold them as inventories in order to take advantage of quantity discounts.

c. Switch from paying for purchased materials in 60 days to paying in 10 days in order to obtain discounts.

D.Switch from paying for purchased materials in 10 days in order to obtain discounts to paying in 60 days.

e. Change the credit policy from cash only to offering 60 days of credit.

 

15.  Last year Murphy Transportation had $5 million of sales, and it had $1.7 million of fixed assets that were being operated at 80% of capacity.  What sales level could Murphy have achieved if it had operated at full capacity?

A. $6,250,000

b. $6,500,000

c. $6,750,000

d. $7,000,000

e. $7,250,000

            5,000,000/.80 = 6,250,000


16.  Which of the following is NOT a key aspect of strategic planning as it is described in the text?

a. The mission statement.

b. The statement of the corporation’s scope.

C. The statement of cash flows.

d. The statement of corporate objectives.

e. The operating plan.


17.  T   17.  The term additional funds needed (AFN) is generally defined as:


              a. Funds that are obtained automatically from routine business transactions.

B. Funds that a firm must raise externally from non-spontaneous sources, i.e., through borrowing or by selling new stock, to support operations.

c. The amount of assets required per dollar of sales.

d. The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.

e. A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.


18.  Spontaneously generated funds are best defined as:

a. Assets required per dollar of sales.

b. A forecasting approach in which the forecasted percentage of sales for each item is held constant.

c. Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.

D. Funds that are obtained automatically from normal operations, and they include increases in accounts payable and accruals.

e. The amount of cash generated in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm’s growth.

 

19.  If one Canadian dollar can purchase $0.75 U.S. dollar, how many Canadian dollars can one U.S. dollar buy?

A. 1.33 Canadian dollars/US dollar

b. 1.44 Canadian dollars/US dollar

c. 1.55 Canadian dollars/US dollar

d. 1.66 Canadian dollars/US dollar

e. 1.77 Canadian dollars/US dollar

            1/.75 = 1.33 CDN

 

20.  If U.S. dollars sell for £0.60 (British pounds) per dollar, what should pounds sell for in dollars per pound?

a. $1.62/pound

B. $1.67/pound

c. $1.72/pound

d. $1.77/pound

e. $1.82/pound

            1/.60 = $1.66666


21.  What is the currency of the European Monetary Union?

a. U.S. dollar.

b. British pound.

C. Euro.

d. French franc.

e. German deutsche mark.

 

22.  Which of the following is NOT a reason why companies move into international operations?

a. To take advantage of lower production costs in regions of inexpensive labor.

b. To develop new markets for their finished products.

c. To better serve their primary customers.

d. Because important raw materials are located abroad.

E. Taxes are lower for companies that do business outside of their home country.

 

23.  If the inflation rate in the United States is greater than the inflation rate in Sweden, other things held constant, the Swedish currency will

A. Appreciate against the U.S. dollar.

b. Depreciate against the U.S. dollar.

c. Remain unchanged against the U.S. dollar.

d. Appreciate against other major currencies.

e. Appreciate against the dollar and other major currencies.


24. A telephone costs $150 in the United States.  The same telephone costs 100 Canadian dollars.  Assume that purchasing power parity holds.  What is the exchange rate between U.S. and Canadian dollars?

a. $1 Canadian = $0.75 U.S.

b. $1 Canadian = $0.15 U.S.

c. $1 Canadian = $0.33 U.S.

D.$1 Canadian = $1.50 U.S.

e.$1 Canadian = $0.67 U.S.

            150/100 = 1.50