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A project has the following cash flows. What is the internal rate of return?

Year                                       0              1                              2                                              3

Cash flow            -$520,000             $112,900              $367,200              $204,600

a)      less than 10%

b)      approximately 14%

c)       more than 16%

d)      more than 18% but less than 20%



7. Which one of the following is a correct statement?

a)      Current tax laws favor debt financing.

b)      A decrease in the dividend growth rate increases the cost of equity.

c)       An increase in the systematic risk of a firm will decrease the firm's cost of capital.

d)      A decrease in a firm's debt-equity ratio will usually decrease the firm's cost of capital.

e)      The cost of preferred stock decreases when the tax rate increases.


8. The six percent preferred stock of FKH Manufacturing is selling for $62 a share. What is the firm's cost of preferred stock, if the tax rate is 34 percent and the par value per share is $100?

a)      5.98%

b)      7.06%

c)       8.05%

d)      9.68%

e)      10.10%



10. Which of the following statements is true regarding the cost of capital?

a)      The cost of capital should not consider any flotation costs.

b)      All other being equal, it is preferable to use book value weights than market value weights.

c)       The WACC is the most appropriate discount rate for all projects.

d)      Depends primarily on the use of the funds, not the source.


11. Which of the following increases the cash account?

a)      Goods are sold on credit

b)      An interest payment on a notes payable is made

c)       A payment due is received from a client

d)      Raw materials are purchased and paid for with credit


12. Which of the following statements is true?

a)      The optimal credit policy minimizes the total cost of granting credit.

b)      Firms should avoid offering credit at all cost.

c)       An increase in a firm's average collection period generally indicates that an increased number of customers are taking advantage of the cash discount.

d)      Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.

e)      The optimal credit policy is the policy that produces the largest amount of sales for a firm.


13. All else constant, a decrease in the accounts receivable period will:

a)      Lengthen the accounts payable period.

b)      Shorten the inventory period.

c)       Lengthen the operating cycle.

d)      Shorten the cash cycle.

e)      Shorten the accounts payable period.


14. The Yellow Box has the following estimated quarterly sales for next year. The accounts receivable period is 45 days. What is the expected accounts receivable balance at the end of the third quarter? Assume each month has 30 days.

                Q1          Q2          Q3          Q4

Sales      $1,200   $1,400   $1,800   $1,700

a)      $600

b)      $750

c)       $900

d)      $1,050

e)      $1,200


15. Which one of the following actions best matches the primary goal of financial management?

a)      increasing the net, working capital while lowering the long-term asset requirements

b)      improving the operating efficiency, thereby increasing the market value of the stock

c)       increasing the firm’s market share

d)      reducing fixed costs and increasing variable costs

e)      increasing the liquidity of the firm by transferring short-term debt into long-term debt


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