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EXAM I: PRACTICE
1.
a.
b.
c.
d.
e.
The forecast of cash receipts and disbursements for the next planning period is called a:
Pro forma income statement.
Statement of cash flows.
Cash budget.
Receivables analysis.
Credit analysis.
2. Which of the following statements is false?
a. While marginal and average tax rates often differ, it is the average tax rate that is relevant
for most financial decisions.
b. The book value of an asset on the balance sheet can be very different from its market
value.
c. Net income as calculated from the income statement is not the net cash flow of the firm.
d. Non-cash items are expenses charged against revenues that do not directly affect cash
flow.
e. The cash flow identity states that all net cash flows earned by the firm are distributed in
whole to its creditors and shareholders.
Taxable income
$
0 – $ 50,000
$ 50,001 – $ 75,000
$ 75,001 – $100,000
$100,001 – $335,000
3.
a.
b.
c.
d.
e.
Tax rate
15%
25%
34%
39%
If taxable income is $92,000, then the ______.
average tax rate is 21.1%
average tax rate is 34.0%
marginal tax rate is 15.0%
marginal tax rate is 25.0%
marginal tax rate is 39.0%
L. Merville
BA 3341
4. An insurance company promises to pay Jane $1 million on her 65th birthday in return for
a one-time payment of $125,000 today. (Jane just turned 30.) At what rate of interest
would Jane be indifferent between accepting the company's offer and investing the
premium on her own?
a. 3.4%
b. 4.5%
c. 5.1%
d. 6.1%
e. 7.2%
5. The interest rate used to calculate the present value of future cash flows is called the
________ rate.
a. free interest
b. annual interest
c. compound interest
d. simple interest
e. discount
In a growing midwestern town, the number of eating establishments at the end of each of the last
five years are as follows:
Year 1 = 273; Year 2 = 279; Year 3 = 302; Year 4 = 320; Year 5 = 344
6. Between the end of year 2 and the end of year 3, the number of eating establishments grew
at a rate of _______ compounded annually.
a. 5.2%
b. 6.7%
c. 7.6%
d. 8.2%
e. 9.3%
7. Which of the following statements is/are false, all else the same?
a.
b.
c.
d.
e.
I. Present values increase as the discount rate increases.
II. Present values increase the further away in time the future value.
III. Present values are always smaller than future values when both r and t are positive.
I only
I and II only
II only
III only
II and III only
8.
a.
b.
c.
d.
The present value factor for annuities is calculated as:
(1 + present value factor)/r
(1 – present value factor)/r
Present value factor + (1/r)
(Present value factor*r) + (1/r)
9. At the end of each year for the next 8 years you will receive cash flows of $500. If the
appropriate discount rate is 7.5%, how much would you pay for this annuity?
a. $4,000.00
b. $5,841.22
c. $1,259.47
d. $2,928.65
e. $3,148.30
10. A machine costs $150 and requires $80 in maintenance for each year of its 3 year life.
After 3 years, this machine will be replaced. If the machine is straight-line depreciable to
zero and has no salvage value, what is the EAC? Assume a tax rate of 35% and a discount
rate of 15%.
a. –$ 44.67
b. –$100.20
c. –$154.51
d. –$200.25
e. –$228.77
11. Which of the following is/are true?
a.
b.
c.
d.
e.
I. Setting the bid price requires finding the point at which project NPV is zero.
II. In a cost-cutting proposal the reduction in costs has the same effect as an increase in
sales.
III. EAC is used to evaluate mutually exclusive projects with different lives if the projects
are expected to be continuously replicated.
III only
I and II only
I and III only
II and III only
I, II, and III
The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the
1960’s era. They expect to sell 250 blocks annually for the next 5 years. The necessary foundry
and machining equipment will cost a total of $800,000 and will be depreciated on a straight-line
basis to zero over the project's life. The firm expects to be able to dispose of the manufacturing
equipment for $150,000 at the end of the project. Labor and materials costs total $500 per engine
block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate.
12. Assume that management believes that auto restorers will pay $3,000 retail per engine
block. What is the NPV of this project?
a. $260,769
b. $401,187
c. $521,309
d. $628,744
e. $644,678
13. The cash flow tax savings generated as a result of a firm's tax-deductible depreciation
expense is called (the) ________.
a. aftertax depreciation savings
b. depreciable basis
c. depreciation tax shield
d. operating cash flow
e. aftertax salvage value
14. What is the profitability index (PI) of the following investment if the required return =
10%?
Year:
Cash Flow:
a.
b.
c.
d.
e.
0
1
-$150 $50
2
$75
3
$75
0.94
1.09
1.18
1.27
1.45
15. Which capital investment evaluation technique is described by the following
characteristics? (1) Closely related to NPV; (2) Easy to understand and communicate; (3)
May lead to incorrect decisions when comparing mutually exclusive investments; (4)
May be useful when the available investment budget is limited.
a. NPV
b. PI
c. IRR
d. AAR
e. Payback period
16. Which of the following investment criteria is the least consistent relative to the goal of
maximizing shareholder wealth?
a. Discounted payback
b. Average accounting return
c. Profitability index
d. Net present value
e. Internal rate of return
17. You have discovered from looking at charts of past stock prices that if you buy just after a
stock price has declined for three consecutive days, you make money every time! If this
also holds in the future, then this is clearly a violation of _____ market efficiency.
a. weak form
b. semi-weak form
c. semi-strong form
d. strong form
e. NYSE stock
Use the following historical data over the 1926–2000 period to answer the next two questions.
Asset
Average Return
Standard Deviation
Large-company stocks
13.0%
20.2%
Small-company stocks
17.3%
33.4%
Long-term government bonds
5.7%
9.4%
US Treasury bills
3.9%
3.2%
18. If the returns on large-company stocks are normally distributed, for which of the
following returns can you NOT state, with 95% confidence, that next year's stock return
might be equal to?
a. –30.4%
b. –25.6%
c. 20.3%
d. 33.5%
e. 52.0%
19.
a.
b.
c.
d.
e.
Over the past 75 years, which of the following investments has been the least risky?
Small company stocks
Common stocks
Treasury bills
Treasury bonds
Corporate bonds
20.
a.
b.
c.
d.
e.
Which of the following describes a portfolio that plots above the security market line?
The security is overvalued.
The security's reward to risk ratio is too high.
The security is providing a return that is less than expected.
The security's beta is too high.
The security provides a return that is less than the average return on the market.
21. Regarding diversification, _________.
a. most of the benefits are realized with just 20 stocks.
b. it is the process of increasing the riskiness associated with individual assets by spreading
an investment across numerous assets.
c. it is the only type of risk that matters to a rational investor.
d. the portfolio returns are reduced, and the standard deviation of that portfolio remains
unchanged.
e. there is no limit to the amount of risk that can be eliminated through this process.
22. The percentage of a portfolio's total value invested in a particular asset is called that
asset's:
a. Portfolio return.
b. Portfolio weight.
c. Portfolio risk.
d. Rate of return.
e. Investment value.
23. A firm keeps excess cash on hand in case of an industrial accident in its manufacturing
plant. This is an example of a _______ need for holding cash.
a. speculative
b. precautionary
c. transactions
d. deterministic
e. compensating balances
24.
a.
b.
c.
Which of the following statements is correct?
In the Miller-Orr model the greater the interest rate, the greater the target cash balance.
In the BAT model the greater the order cost, the higher the target cash balance.
If a firm chooses to borrow, rather than invest in marketable securities, it will find that
borrowing is likely to be less expensive than selling marketable securities.
d. A firm is less likely to have to borrow to cover an unexpected cash outflow the greater its
cash flow variability.
e. A firm is less likely to have to borrow to cover an unexpected cash outflow the lower its
investment in marketable securities.
A firm reported sales of $20,000 in November, $30,000 in December, and projects sales of
$40,000 for January, $50,000 for February, and $35,000 for March. The firm's cost of goods sold
every month is equal to 75% of the next month's sales. The firm collects its receivables in 60 days
and pays its payables in 30 days. The firm begins January 1 with $50,000 in cash. All sales and
purchases are on credit. Answer the following question:
25.
a.
b.
c.
d.
e.
What are the total cash collections in March?
$20,000
$30,000
$40,000
$50,000
$70,000
26. Suppose that the inventory period is 60 days, the accounts receivable period is 30 days,
and the cash cycle is 35 days. What is the accounts payable period?
a. 35 days
b. 45 days
c. 55 days
d. 90 days
e. 135 days
27.
a.
b.
c.
d.
e.
The process of determining the likelihood that customers will not pay is called ____.
the terms of sale
credit analysis
the collection policy
the payables policy
disbursement analysis
28. JJJ, Inc. recently extended its credit period from net 30 days to net 40 days. This
represents a change in the firm's _____.
a. collection policy
b. terms of sale
c. receivables policy
d. credit-granting policy
e. loan policy
29. An analysis of the relation between sales volume and various measures of profitability is
called:
a. Forecasting analysis.
b. Scenario analysis.
c. Sensitivity analysis.
d. Simulation analysis.
e. Break-even analysis.
30.
a.
b.
c.
d.
e.
The degree to which a firm or project relies on fixed production costs is called its:
Operating leverage.
Financial break-even.
Contribution margin.
Cost sensitivity.
Profit margin.