1、Multiple Choice (3 points20 = 60 points):1. Which of the following is not considered one of the basic questions of corporate finance? A) What long-lived assets should the firm invest?B) How much inventory should the firm hold?C) How can the firm raise cash for required capital expenditures?D) How sh
2、ould the short-term operating cash flows be managed?E) All of the above.Answer: B Difficulty: Medium Page: 4 2. Generally accepted accounting principles may recognize and record a sale A) before a customer pays assuming they will pay soon. B) only after the company receives payment in full. C) when
3、the company receives at least 50% of the total revenue from the customer. D) All of the above. E) None of the above. Answer: A Difficulty: Medium Page: 7 3. Working capital management includes decisions concerning which of the following?I. accounts payableII. accounts receivableIII. long-term debtIV
4、. inventory A. I and II onlyB. I and III onlyC. II and IV onlyD. I, II, and IV onlyE. I, III, and IV onlyAnswer:D4. Fixed assets can be either tangible or intangible. Intangible assets A) are property, plant and equipment. B) can be converted to cash in the normal course of business. C) may be very
5、valuable, although they have no physical presence, such as trademarks or patents. D) are highly liquid. E) None of the above. Answer: C Difficulty: Medium Page: 22 5. In 2004, TimeNow Corporation had fixed assets of $1,345, current assets of $260, current liabilities of $180 and shareholders equity
6、of $775. What was the net working capital for TimeNow in 2004? A) $ 80 B) $180 C) $260 D) $390 E) None of the above. Answer: A Difficulty: Medium Page: 26 Rationale: $260 - $180 = $806. What is the effect on net working capital if the corporation decides to increase its investment in inventory and p
7、ay for it with cash? A) Increase in net working capital. B) Decrease in net working capital. C) Depends on the amount of the investment. D) No change in net working capital. E) None of the above. Answer: D Difficulty: Medium Page: 26-27 7. If you have a choice to earn simple interest on $10,000 for
8、three years at 8% or annually compound interest at 7.5% for three years which one will pay more and by how much? A) Simple interest by $50.00 B) Compound interest by $22.97 C) Compound interest by $150.75 D) Compound interest by $150.00 E) None of the above. Answer: B Difficulty: Medium Page: 64 Rat
9、ionale: Simple Interest = $10,000 (.08)(3) = $2,400; Compound Interest = $10,000(1.075)3 1) = $2,422.97;Difference = $2,422.97 - $2,400 = $22.978. What is the relationship between present value and future value interest factors? A. The present value and future value factors are equal to each other.B
10、. The present value factor is the exponent of the future value factor.C. The future value factor is the exponent of the present value factor.D. The factors are reciprocals of each other.E. There is no relationship between these two factors.Answers: D9. You have deposited $1,500 in an account that pr
11、omises to pay 8% compounded quarterly for the next five years. How much will you have in the account at the end? A) $1,598.33 B) $2,203.99 C) $2,228.92 D) $6,991.44 E) None of the above. Answer: C Difficulty: Medium Page: 72-73 Rationale: $1,500(1.02)20 = $2,228.9210. The process of calculating the
12、present value of a future cash flow A) is called discounting which is the same as compounding. B) is called discounting which is the opposite of compounding. C) uses the present value factor to perform the discounting. D) Both A and C. E) Both B and C. Answer: E Difficulty: Medium Page: 75 11. What
13、is the present value of a payment of $21,000 three years from now if the annual interest rate is 4%? A) $17,951 B) $18,480 C) $18,658 D) $18,669 E) $19,218 Answer: D Difficulty: Medium Page: 70 Rationale: PV = FV/(1+r)n = $21,000/(1+.04)3 = $18,668.9212. This afternoon, you deposited $1,000 into a r
14、etirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in forty years. Which one of the following statements is correct? A. The interest you earn six years from now will equal the interest you earn ten yea
15、rs from now.B. The interest amount you earn will double in value every year.C. The total amount of interest you will earn will equal $1,000 .06 40.D. The present value of this investment is equal to $1,000.E. The future value of this amount is equal to $1,000 (1 + 40).06.Answer: D13. Luis is going t
16、o receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts? A. The present values of Luis and Soo Lees monies are equal.B. In future dollars,
17、 Soo Lees money is worth more than Luis money.C. In todays dollars, Luis money is worth more than Soo Lees.D. Twenty years from now, the value of Luis money will be equal to the value of Soo Lees money.E. Soo Lees money is worth more than Luis money given the 7 percent discount rate.Answer: C14. You
18、 want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you
19、are to have your desired $1 million on the day you retire?I. Invest in a different account paying a higher rate of interest.II. Invest in a different account paying a lower rate of interest.III. Retire later.IV. Retire sooner. A. I onlyB. II onlyC. I and III onlyD. I and IV onlyE. II and III onlyAns
20、wer: C15. This morning, TL Trucking invested $80,000 to help fund a company expansion project planned for 4 years from now. How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings? A. $2,940.09B. $3,651.82C. $4,008.17D. $4,219.68E.
21、$4,711.08Future value = $80,000 (1 + .05)4 = $97,240.50Future value = $80,000 (1 + .04)4 = $93,588.68Difference = $97,240.50 - $93,588.68 = $3,651.8216. Theo needs $40,000 as a down payment for a house 6 years from now. He earns 3.5 percent on his savings. Theo can either deposit one lump sum today
22、for this purpose or he can wait a year and deposit a lump sum. How much additional money must he deposit if he waits for one year rather than making the deposit today? A. $878.98B. $911.13C. $1,138.90D. $1,348.03E. $1,420.18Present value = $40,000 1/(1 + .035)6 = $32,540.03Present value = $26,000 1/
23、(1 + .035)5 = $33,678.93Difference = $33,678.93 - $32,540.03 = $1,138.9017. One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn? A. 6.59 percentB. 6.67 percentC. 6.88 percentD. 6.92 percentE. 7.01 percent$1,924.62 = $1,800 (1 + r)1; r = 6.92 percent18.
24、According to the Rule of 72, you can do which one of the following? A. double your money in five years at 7.2 percent interestB. double your money in 7.2 years at 8 percent interestC. double your money in 8 years at 9 percent interestD. triple your money in 7.2 years at 5 percent interestE. triple y
25、our money at 10 percent interest in 7.2 yearsRule of 72 = 72/8 years = 9 percent interest19. Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 10.5 percent per
26、year? A. 13.33 yearsB. 16.98 yearsC. 17.64 yearsD. 19.29 yearsE. 21.08 years$214,800 = $36,900 (1 + .105)t; t = 17.64 years20. Sixteen years ago, Alicia invested $1,000. Eight years ago, Travis invested $2,000. Today, both Alicias and Travis investments are each worth $2,400. Assume that both Alicia
27、 and Travis continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments? A. Three years from today, Travis investment will be worth more than Alicias.B. One year ago, Alicias investment was worth less than Travis investment.C. Trav
28、is earns a higher rate of return than Alicia.D. Travis has earned an average annual interest rate of 3.37 percent.E. Alicia has earned an average annual interest rate of 6.01 percent.Alicia: $2,400 = $1,000 (1 + r)16; r = 5.62 percentTravis: $2,400 = $2,000 (1 + r)8; r = 2.31 percentSince both Alici
29、a and Travis have equal account values today and since Alicia earns the higher rate of return, her account had to be worth less than Travis account one year ago.Concept Questions (5 points2 = 10 points)1. What is a liquid asset and why is it necessary for a firm to maintain a reasonable level of liq
30、uid assets? Liquid assets are those that can be sold quickly with little or no loss in value. A firm that has sufficient liquidity will be less likely to experience financial distress.Difficulty level: DifficultTopic: Liquid Assets2. Why is interest expense excluded from the operating cash flow calc
31、ulation? Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities. Interest expense arises from a financing decision and thus should be considered as a cash flow to creditors.P43-21Dahlia Industries had the following operating results for 2
32、009: Sales=$22,800; Cost of goods sold = $16,050; depreciation expense = $4,050; Interest expense = $1,830; Dividends paid = $1,300. At the beginning of this year, net fixed assets were $13,650, current assets were $4,800, and current liabilities were $2,700. At the end of the year, net fixed assets
33、 were $16,800, current assets were $5,930, and current liabilities were $3,150. The tax rate for 2009 was 34%a. What is the net income for 2009?b. What is the operating cash flow for 2009?c. What is the cash flow from assets for 2009? Is this possible? Explain.d. If no new debt was issued during the
34、 year, what is the cash flow to creditors?What is the cash flow to stockholders? Explain and interpret the positive and negative signs of your answers in (a) and (b).21. a.Income StatementSales $22,800Cost of goods sold 16,050Depreciation 4,050EBIT $ 2,700Interest 1,830Taxable income $ 870Taxes (34%
35、) 296Net income $ 574b. OCF = EBIT + Depreciation Taxes= $2,700 + 4,050 296 = $6,454c. Change in NWC = NWCend NWCbeg= (CAend CLend) (CAbeg CLbeg)= ($5,930 3,150) ($4,800 2,700)= $2,780 2,100 = $680Net capital spending = NFAend NFAbeg + Depreciation= $16,800 13,650 + 4,050 = $7,200CFA = OCF Change in
36、 NWC Net capital spending= $6,454 680 7,200 = $1,426The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed asse
37、ts and net working capital; it had to raise a net $1,426 in funds from its stockholders and creditors to make these investments.d. Cash flow to creditors = Interest Net new LTD = $1,830 0 = $1,830Cash flow to stockholders = Cash flow from assets Cash flow to creditors = $1,426 1,830 = $3,256 We can
38、also calculate the cash flow to stockholders as:Cash flow to stockholders = Dividends Net new equity Solving for net new equity, we get:Net new equity = $1,300 (3,256) = $4,556The firm had positive earnings in an accounting sense (NI 0) and had positive cash flow from operations. The firm invested $
39、680 in new net working capital and $7,200 in new fixed assets. The firm had to raise $1,426 from its stakeholders to support this new investment. It accomplished this by raising $4,556 in the form of new equity. After paying out $1,300 of this in the form of dividends to shareholders and $1,830 in t
40、he form of interest to creditors, $1,426 was left to meet the firms cash flow needs for investment.2. Refer to the corporate marginal tax rate information in Table 2a. Why do you think the marginal tax rate jumps up from 34% to 39% at a taxable income of 100,001, and then falls back to a 34% margina
41、l rate at a taxable income of $335,001?b. Compute the average tax rate for a corporation with exactly $335,001 in taxable income. Does this confirm your explanation in part (a)? What is the average tax rate for a corporation with exactly $18,333,334? Is the same thing happening here?c. The 39% and 3
42、8% tax rates both represent what is called a tax “bubble.” Suppose the government wanted to lower the upper threshold of the 39% marginal tax bracket from $335,000 to $200,000. What would the new 39% bubble rate have to be?Answers:a. The tax bubble causes average tax rates to catch up to marginal ta
43、x rates, thus eliminating the tax advantage of low marginal rates for high income corporations. b. Taxes = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($235,000) = $113,900 Average tax rate = $113,900 / $335,000 = 34%The marginal tax rate on the next dollar of income is 34 percent.For corpor
44、ate taxable income levels of $335,000 to $10 million, average tax rates are equal to marginal tax rates.Taxes = 0.34($10,000,000) + 0.35($5,000,000) + 0.38($3,333,333)= $6,416,667Average tax rate = $6,416,667 / $18,333,334 = 35%The marginal tax rate on the next dollar of income is 35 percent. For corporate taxable income levels over $18,333,334, average tax rates are again equal to marginal tax rates.c.
