Q. A share repurchase is financially equivalent to a dividend.

Ans: True

Q. Which of the following is commonly forecasted as a percent of sales?

Ans: (b) Gross Profit

Q. "Real"
”Real" activities create cash for a business, while "financial"
”financial" activities distribute cash within the
company.

Ans:
Ans: True
True

Q. GoodTimes, Inc. has asset turnover of 0.5 times, a net profit margin of 10% and average total assets
of $100, what is its net income (assuming no unusal items)?

Ans: (c) $5

Q. An increase in financial leverage generally results in a higher return on equity (ROE).

Ans: True

Q. Which is a commonly used proxy for the "risk-free rate"?

Ans: (c) The current yield to maturity on a long-term government bond

Q. In the CAPM, what does the parameter beta measure?

Ans: (b) Systematic (non-diversifiable)

(non—diversifiable) risk

Q. Which of the following expresses the value of a levered firm (VL) in the Static Tradeoff model of
(VL)
optimal capital structure? [Note: VU denotes the value of the unlevered firm, CFD denotes expected
costs of financial distress; and PV denotes present value.]

VLL = V
Ans: (c) V VUU + PV(Tax Shield) - PV(CFD)
Q. A company has net working capital of $0, current liabilities of $25 and total assets equal to $100.
What is its current ratio?

Ans: (b) 1.0

Q. What is the expected return on a risky investment where

•0 the risk free rate is 5.1%;

•0 the investment's beta is 1.4;
•0 the equity market risk premium is 5.0%; and
•0 the cost of debt is 4.5%.

Ans: (c) 12.1%

Q. Which of the following are equivalent under M&M proposition I?

Ans: (b) Maximizing firm value and minimizing the cost of capital

Q. A company's beta (from the CAPM) is affected by its capital structure.

Ans: True

Q. Share repurchases and dividend payouts are most likely to differ in their

Ans: (d) effects on shareholders' personal taxes

Q. A perpetuity is a stream of cash flows that lasts forever.

Ans: True

Q. A firm is all equity financed, with 10,000 outstanding shares with a market value of $20 each. Its net
income was $30,000, and it decides to pay a cash dividend of $2,000. Calculate the value of each share
after the dividend payout.

Ans: (c) $19.8

Q. The owners of a firm facing a high probability of bankruptcy prefer to invest in ______ projects,
because ___________

Ans: (c) risky; the shareholders have little to lose and might win if successful

Q. The Static Tradeoff Theory of capital structure implies that firms with higher business risk should have
lower leverage.

Ans: True

Q. The sustainable growth rate is the maximum growth rate achievable over an extended period of time.

Ans: False

Q. The cash conversion cycle is calculated as:

Ans: (c) Days in inventory + Collection Period - Payables Period

Q. Common-size financial statements are constructed in order to

Ans: (b) Facilitate comparisons of different-sized companies

Q. The cost of debt is generally lower than the cost of equity.

Ans: True

Q. A company's return on assets should be greater than its return on equity.

Ans: False

Q. What is the present value of a growing perpetuity that makes a payment of $100 in the first year,
which thereafter grows at 3% per year? Apply a discount rate of 7%.

Ans: (c) $2,500

Q. You are saving money for a down payment on a house. Suppose you want to have total savings of
$20,000 in 10 years time and you currently have $5,000. What annual interest rate do you need to earn
on your initial investment, assuming you contribute no additional savings?

Ans: (d) 15.0%

Q. You are trying to decide whether to accept or reject a one-year project. The project is estimated to
generate $5,000 in incremental gross profit, which includes $200 in depreciation. Incremental SG&A
expense is $400. At a 35% tax rate, the after-tax incremental cash flow is:

Ans: (b) $3,190

Q. The higher the opportunity cost of capital the higher the NPV.

Ans: False

Q. If you invest $2,000 today for three years at 5% interest paid annually, you will earn a total of
$_______
$ in interest. Assume you re-invest all interest.

Ans: (c) 315.25

Q. Biases can and should always be eliminated in financial forecasts.

Ans: False

Q. In general, an increase in a liability is a source of funds.

Ans: True

Q. Which of the following are sources of funds in a statement of sources and uses?

I. Collection of accounts receivables

II.
||. Reduction of long term debt
III.
|||. Payment of dividends
IV. Reduction in the cash account
Ans: I| and IV
Q. The Pecking Order Theory of capital structure implies a unique optimum capital structure.

Ans: False

Q. The phenomenon of compounding connotes which of the following?

Ans: (c) Earning income on previously earned income

Q. The cost of capital for an all-equity-financed company that pays no dividends is zero.

Ans: False

Q. External funding needs are computed as:

Ans: (a) Projected total assets - (projected liabilities + projected net worth)

Q. The beta for the market as a whole equals 1.0.

Ans: True

Q. A company has net income of $20,000 and a tax rate of 35 percent, its totall debt is $25,000, with
principal payments of $5,000 due at the end of each year and an annual interest rate of 8%. What will be
the company's interest tax shield in the upcoming year?

Ans: (b) $700

Q. Grandma's Applesauce, Inc. has a 0.60 probability of a good year with operating cash flow of $50,000;
and 0.40 probability of a bad year with operating cash flow of $30,000. The Company has a debt of
$35,000 with 8 operations, and a 0% tax rate, which of the following is true?

Ans: (b) Creditors expected claim is $37,800

Q. The cash cycle measures the days required to produce finished goods or delivered services.

Ans: False
Q. Which of the following actions, all else being equal, will increase the sustainable growth rate?

Ans: (d) All of the above

Q. An optimal current ratio should be greater than 1.0

Ans: True

Q. The Pecking Order Theory of capital structure rests on an assumption of

Ans: (c) asymmetric information

Q. Analysis of a company's financial statements: Below are simplified versions of the balance sheet and
income statements for Toys by Tom, Inc. Use this information to answer the following question.

If sales in 2003 were $10,000, what is the compounded average growth rate?

Ans: (c) 6.3%

Q. Enterprise Free Cash Flows should include which of the following:

I.|. Capital expenditures

II.
||. Financing costs
III.
|||. Taxes
IV. Working capital requirements
Ans: (c) I, III annd IV

Q. A project with an internal rate of return greater than the cost of capital should always be accepted.

Ans: False