| current ratio
. A potential creditor's judgment about granting credit would be most influenced by the potential customer's:
A) current ratio at the end of the prior fiscal year.
B) most recent acid-test ratio.
C) trend of acid-test ratio over the past three years.
8. The inventory turnover calculation:
A) is wrong unless cost of goods sold is used in the numerator.
B) is wrong unless sales is used in the numerator.
C) is an alternative way of expressing the number of days' sales in inventory.
D) requires knowledge of the inventory cost flow assumption being used.
9. If a firm's payment terms for sales made on account to its customers were 2/10, n30, the number of days' sales in accounts receivable would be expected to be:
A) less than 10.
B) between 10 and 25.
C) between 25 and 40.
D) over 40.
10. Asset turnover calculations:
A) are made by dividing the average asset balance during the year by the sales for the year.
B) are made by dividing sales for the year by the asset balance at the end of the year.
C) communicate information about how promptly the entity pays its bills.
D) should be evaluated by observing the turnover trend over a period of time.
11. The cost of a single unit of production in excess of the breakeven point in units is:
A) its fixed cost and variable cost.
B) its fixed cost only.
C) its variable cost only.
D) none of the above.
12. What percentage of the contribution margin is profit on units sold in excess of the breakeven point?
A) It's 50% to the contribution margin ratio.
B) It's equal to the variable cost ratio.
C) It's equal of the gross profit ratio.
D) It's 100%.
13. Which of the following is a true statement regarding absorption and/or direct costing?
A) A firm can choose to use either absorption or direct costing for income tax purposes.
B) A firm can choose to use either absorption or direct costing for financial reporting purposes.
C) Direct costing assigns only direct materials and direct labor to products.
D) Absorption costing includes fixed overhead in product costs whereas direct costing does not.
E) None of the above.
14. An example of a cost that is likely to have a variable behavior pattern is:
A) sales force salaries.
B) depreciation of production equipment.
C) salaries of production supervisors.
D) direct labor costs.
15. An example of a cost likely to have a fixed behavior pattern is:
A) sales force commission.
B) raw material costs.
C) advertising costs.
D) electricity costs for packaging equipment.
16. Which of the following statements about total capital requirement is least likely to be correct for a profitable firm?
A) Requirements remain constant over time.
B) Seasonal variations are often experienced.
C) The trend is often upward-sloping.
D) A portion of working capital is permanent.
17. Which of the following would not be included among the costs of carrying inventory?
A) Obsolescence
B) Opportunity cost of capital
C) Raw material cost
D) Risk of pilferage
18. When financial managers take action to minimize the carrying costs of current assets, they:
A) are likely to maximize profits.
B) also consider spoilage costs.
C) may increase costs due to shortages.
D) engage in the matching of maturities.
19. When a firm finances long-term assets with short-term sources of funding, it:
A) reduces the risk of cash shortage.
B) will have lower interest expense.
C) improves the leverage ratio.
D) is ignoring the principle of matched maturities.
20. Which of the following would not be included as a source of short-term financing?
A) Line of credit
B) Increase in the minimum operating cash balance
C) Sale of marketable securities
D) Stretching accounts payable
21. Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?
A) $ 952
B) $1,600
C) $1,728
D) $3,973
22. How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for three years?
A) $107.69
B) $133.10
C) $134.49
D) $313.84
23. How much must be invested today in order to generate a five-year annuity of $1,000 per year, with the first payment one year from today, at an interest rate of 12%?
A) $3,604.78
B) $3,746.25
C) $4,037.35
D) $4,604.78
24. Additional paid-in capital refers to:
A) a firm's retained earnings.
B) a firm's treasury stock.
C) the difference between the issue price and the par value.
D) funds borrowed from a bank or bondholders.
25. An increase in dividends might not increase price and may actually decrease stock price if:
A) the dividend increase cannot be sustained.
B) the firm does not maintain an exact dividend payout ratio.
C) the firm has too much retained earnings.
D) markets are weak-form efficient.
Multiple Choice 5 Points Each
26. What is the cash conversion cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables period of 40 days, and an annual cost of goods sold of $18 million?
A) 14.59 days
B) 46.25 days
C) 70.41 days
D) 136.25 days
27. What price would you expect to pay for a stock with 13% required rate of return, 4% rate of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?
A) $27.78
B) $30.28
C) $31.10
D) $31.39
28. What is the required return for a stock that has a 5% constant growth rate, a price of $25, an expected dividend of $2, and a P/E ratio of 10?
A) 5%
B) 10%
C) 13%
D) 22%
29. What is the proportion of debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return on debt? Ignore taxes.
A) 54.0%
B) 60.0%
C) 66.7%
D) 75.0%
30. A firm has an expected return on equity of 16% and an after-tax cost of debt of 8%. What debt-equity ratio should be used in order to keep the WACC at 12%?
A) .50
B) .75
C) 1.00
D) 1.50
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