1• The Congress Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost equals $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income (EBIT)?A.5,000 decksB.10,000 decksC.15,000 decksD.20,000 decksE.25,000 decks2• Spontaneous funds are generally defined as follows: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 short-term or long-term borrowing and/or by selling new common or preferred stock.D.Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.E.The amount of cash raised 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.3• A company is considering a new project. The CFO plans to calculate the project’s NPV by estimating the relevant cash flows for each year of the project’s life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company’s overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?A.All sunk costs that have been incurred relating to the project.B.All interest expenses on debt used to help finance the project.C.The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project’s life.D.Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.E.Effects of the project on other divisions of the firm, but only if those effects lower the project’s own direct cash flows4• Last year Godinho Corp. had $250 million of sales, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?A.$312.5B.$328.1C.$344.5D.$361.8E.$379.85• Suppose Leonard, Nixon, & Shull Corporation’s projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company’s weighted average cost of capital is 11%, what is the value of its operations?A.$1,714,750B.$1,805,000C.$1,900,000D.$2,000,000E.$2,100,0006• You 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.7• Trenton Publishing follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm’s dividend per share?A.The firm’s net income increases.B.The company increases the percentage of equity in its target capital structure.C.The number of profitable potential projects increases.D.Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed.E.1. Earnings are unchanged, but the firm issues new shares of common stock.8• The term “additional funds needed (AFN)†is generally defined as follows:A.Funds that are obtained automatically from routine business transactions.B.Funds that a firm must raise externally from non-spontaneous sources, i.e., by 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.9• D&P Co. has a capital budget of $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?A.$100,000B.$200,000C.$300,000D.$400,000E.$500,00010• Liberty Services is now at the end of the final year of a project. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment’s after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment’s final market value is less than its book value, the firm will receive a tax credit as a result of the sale.A.$5,558B.$5,850C.$6,143D.$6,450E.$6,77211• Which of the following assumptions is embodied in the AFN equation?A.None of the firm’s ratios will change.B.Accounts payable and accruals are tied directly to sales.C.Common stock and long-term debt are tied directly to sales.D.Fixed assets, but not current assets, are tied directly to sales.E.Last year’s total assets were not optimal for last year’s sales.12• Brammer Corp.’s projected capital budget is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?A.$122,176B.$128,606C.$135,375D.$142,500E.$150,00013• Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?A.Using some of the firm’s high-quality factory floor space that is currently unused to produce the proposed new product. This space could be used for other products if it is not used for the project under consideration.B.Revenues from an existing product would be lost as a result of customers switching to the new product.C.Shipping and installation costs associated with a machine that would be used to produce the new product.D.The cost of a study relating to the market for the new product that was completed last year. The results of this research were positive, and they led to the tentative decision to go ahead with the new product. The cost of the research was incurred and expensed for tax purposes last year.E.It is learned that land the company owns and would use for the new project, if it is accepted, could be sold to another firm.14• If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest thatA.the dividend payout ratio has remained constant.B.the dividend payout ratio is increasing.C.no dividends were paid during the year.D.the dividend payout ratio is decreasing.E.the dollar amount of investments has decreased.15• Jefferson City Computers has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?A.A sharp increase in its forecasted sales.B.A switch to a just-in-time inventory system and outsourcing production.C.The company reduces its dividend payout ratio.D.The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.E.The company discovers that it has excess capacity in its fixed assets.16• Which of the following factors should be included in the cash flows used to estimate a project’s NPV?A.All costs associated with the project that have been incurred prior to the time the analysis is being conducted.B.Interest on funds borrowed to help finance the project.C.The end-of-project recovery of any working capital required to operate the project.D.Cannibalization effects, but only if those effects increase the project’s projected cash flows.E.Expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.17• Which of the following would be most likely to lead to a decrease in a firm’s dividend payout ratio?A.Its earnings become more 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 decrease 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.18• DeLong Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit. What is the company’s breakeven point, i.e., at what unit sales volume would income equal costs?A.391,667B.411,250C.431,813D.453,403E.476,07319• Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?A.Increase average inventory without increasing sales.B.Take steps to reduce the DSO.C.Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.D.Sell common stock to retire long-term bonds.E.Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.20• Rowell Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Rowell owns the building free and clear–there is no mortgage on it. Which of the following statements is CORRECT?A.Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be reflected in the cash flows for any new project.B.If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.C.This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider.D.Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.E.If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building.21• Your firm’s cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?A.11.7 daysB.13.0 daysC.14.4 daysD.15.2 daysE.16.7 days22• Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?A.Its sales become less stable over time.B.The costs that would be incurred in the event of bankruptcy increase.C.Management believes that the firm’s stock has become overvalued.D.Its degree of operating leverage increases.E.The corporate tax rate increases.23• Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?A.54.30%B.57.16%C.60.17%D.63.33%E.66.67%24• Van Den Borsh Corp. has annual sales of $50,735,000, an average inventory level of $15,012,000, and average accounts receivable of $10,008,000. The firm’s cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a 365-day year?A.-26.6 daysB.-29.5 daysC.-32.8 daysD.-36.4 daysE.-40.5 days25• Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?Year Depreciation Rate1 0.202 0.323 0.194 0.125 0.116 0.06A.$ 8,878B.$ 9,345C.$ 9,837D.$10,355E.$10,90026• Reynolds Resorts is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company’s total assets, nor would it affect the firm’s basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?A.The company’s net income would increase.B.The company’s earnings per share would decline.C.The company’s cost of equity would increase.D.The company’s ROA would increase.E.The company’s ROE would decline.27• When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT:A.Changes in net working capital attributable to the project.B.Previous expenditures associated with a market test to determine the feasibility of the project, provided those costs have been expensed for tax purposes.C.The value of a building owned by the firm that will be used for this project.D.A decline in the sales of an existing product, provided that decline is directly attributable to this project.E.The salvage value of assets used for the project that will be recovered at the end of the project’s life.28• Last year Wei Guan Inc. had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity. In millions, by how much could Wei Guan’s sales increase before it is required to increase its fixed assets?A.$170.09B.$179.04C.$188.46D.$197.88E.$207.7829• A lockbox plan is most beneficial to firms thatA.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.30• Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?A.A firm has a parcel of land that can be used for a new plant site or be sold, rented, or used for agricultural purposes.B.A new product will generate new sales, but some of those new sales will be from customers who switch from one of the firm’s current products.C.A firm must obtain new equipment for the project, and $1 million is required for shipping and installing the new machinery.D.A firm has spent $2 million on R&D associated with a new product. These costs have been expensed for tax purposes, and they cannot be recovered regardless of whether the new project is accepted or rejected.E.A firm can produce a new product, and the existence of that product will stimulate sales of some of the firm’s other products.
