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Question(s) / Instruction(s):

1. Which of the following statements is CORRECT?
a. In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.
b. Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
c. In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.
d. In the statement of cash flows, depreciation charges are reported as a use of cash.
e. In the statement of cash flows, a decrease in inventories is reported as a use of cash.


2. Which of the following statements is CORRECT?
a. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies’ debt ratios to be lower than they would be if interest and dividends were both deductible.
b. Interest paid to an individual is counted as income for tax purposes and taxed at the individual’s regular tax rate, which in 2008 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
c. The maximum federal tax rate on corporate income in 2008 was 50%.
d. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.
e. The maximum federal tax rate on personal income in 2008 was 50%.



3. Which of the following statements is CORRECT?
a. Dividends paid reduce the net income that is reported on a company’s income statement.
b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.
c. If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year.
d. Accounts receivable are reported as a current liability on the balance sheet.
e. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous years balance.


4. Which of the following statements is CORRECT?
a. Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firms goals.
b. A firm’s corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.
c. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.
d. A firm’s mission statement defines its lines of business and geographic area of operations.
e. The corporate scope is a condensed version of the entire set of strategic plans.


5. Which of the following statements is CORRECT?
a. Trade credit is provided only to relatively large, strong firms.
b. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
c. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.
d. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
e. Commercial paper is typically offered at a long-term maturity of at least five years.


6. Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?
a. The firm must make a known future payment, such as paying for a new plant that is under construction.
b. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline.
c. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases.
d. The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.
e. The firm just won a product liability suit one of its customers had brought against it.


7. Which of the following statements is CORRECT?
a. The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
c. If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
d. Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.
e. All else equal, increasing the debt ratio will increase the ROA.


8. The CFO of Shalit Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?
a. The company’s taxable income would fall.
b. The company’s interest expense would remain constant.
c. The company would have less common equity than before.
d. The company’s net income would increase.
e. The company would have to pay less taxes.


9. Last year Roussakis Company’s operations provided a negative net cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company’s financial statements were prepared under generally accepted accounting principles?
a. The company repurchased some of its common stock.
b. The company dramatically increased its capital expenditures.
c. The company retired a large amount of its long-term debt.
d. The company sold some of its fixed assets.
e. The company had high depreciation expenses.



10. Assume that Pappas Company commenced operations on January 1, 2010, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2010 management realized that the assets would last for only 10 years. The firms accountants plan to report the 2010 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements?
a. The firm’s reported net fixed assets would increase.
b. The firm’s EBIT would increase.
c. The firms reported 2010 earnings per share would increase.
d. The firms cash position in 2010 and 2011 would increase.
e. The firm’s net liabilities would increase.

11. Which of the following statements is CORRECT?
a. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.
b. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
c. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.
d. If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.
e. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.


12. Which of the following statements is CORRECT?
a. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.
b. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE.
c. The modified Du Pont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
d. Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.
e. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.


13. Firms generally choose to finance temporary current operating assets with short-term debt because
a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
b. short-term interest rates have traditionally been more stable than long-term interest rates.
c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
d. the yield curve is normally downward sloping.
e. short-term debt has a higher cost than equity capital.


14. A lockbox plan is
a. used to protect cash, i.e., to keep it from being stolen.
b. used to identify inventory safety stocks.
c. used to slow down the collection of checks our firm writes.
d. used to speed up the collection of checks received.
e. used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.


15. A lockbox plan is most beneficial to firms that
a. have suppliers who operate in many different parts of the country.
b. have widely dispersed manufacturing facilities.
c. have a large marketable securities portfolio and cash to protect.
d. receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
e. have customers who operate in many different parts of the country.


16. Which of the following is NOT commonly regarded as being a credit policy variable?
a. Credit period.
b. Collection policy.
c. Credit standards.
d. Cash discounts.
e. Payments deferral period.


17. Other things held constant, which of the following would tend to reduce the cash conversion cycle?
a. Carry a constant amount of receivables as sales decline.
b. Place larger orders for raw materials to take advantage of price breaks.
c. Take all discounts that are offered.
d. Continue to take all discounts that are offered and pay on the net date.
e. Offer longer payment terms to customers.


18. Which of the following items should a company report directly in its monthly cash budget?
a. Its monthly depreciation expense.
b. Cash proceeds from selling one of its divisions.
c. Accrued interest on zero coupon bonds that it issued.
d. New shares issued in a stock split.
e. New shares issued in a stock dividend.


19. Which of the following statements is CORRECT?
a. Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
b. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make equired payments.
c. Common equity includes common stock and retained earnings, less accumulated depreciation.
d. The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.
e. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.


20. Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?
a. Given this information, LD must have the higher ROE.
b. Company LD has a higher basic earning power ratio (BEP).
c. Company HD has a higher basic earning power ratio (BEP).
d. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the higher ROE.
e. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.

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