Finc 332: Corporate Finance, Pt 2

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• 1.

The value of the firm is maximized when the:

• A.

Debt-equity ratio is set equal to zero

• B.

Debt-equity ratio equals 1.0

• C.

WACC in minimized

• D.

WACC is maximized

C. WACC in minimized
Explanation
Chapter 16, Question 1

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• 2.

Which one of the following states that a firm's WACC is the same regardless of the firm's debt-equity ratio?

• A.

M&M Proposition I without taxes

• B.

M&M Proposition I with taxes

• C.

M&M Proposition II without taxes

• D.

M&M Proposition II with taxes

A. M&M Proposition I without taxes
Explanation
Chapter 16, Question 2

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• 3.

Which one of the following is the preferred source of funding according to the pecking-order theory?

• A.

Common stock

• B.

Preferred stock

• C.

External debt

• D.

Internal financing

D. Internal financing
Explanation
Chapter 16, Question 3

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• 4.

M&M Proposition I with tax implies that a firm's weighted average cost of capital:

• A.

Remains constant regardless of a firm's debt-equity ratio

• B.

Increases as the debt-equity ratio increases

• C.

Decreases as the debt-equity ratio increases

• D.

Varies independently of a firm's debt-equity ratio

C. Decreases as the debt-equity ratio increases
Explanation
Chapter 16, Question 4

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• 5.

Which one of the following is a direct cost of bankruptcy?

• A.

Time spent by company managers on the bankruptcy paperwork

• B.

Administrative expenses related to the bankruptcy filing

• C.

Cash reserves held by a firm

• D.

Cost of actions taken by a firm to avoid a bankruptcy filing

B. Administrative expenses related to the bankruptcy filing
Explanation
Chapter 16, Question 5

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• 6.

The ex-dividend date is defined as ___ business day(s) before the date of record.

• A.

1

• B.

2

• C.

3

• D.

5

• E.

10

B. 2
Explanation
Chapter 17, Question 1

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• 7.

Which one of the following does not affect the total equity of a firm but does increase the number of shares outstanding?

• A.

Special dividend

• B.

Stock split

• C.

Share repurchase

• D.

Rights offer

• E.

Liquidating dividend

B. Stock split
Explanation
Chapter 17, Question 2

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• 8.

Billingsley United declared a \$0.20 a share dividend on Thursday, October 16. The dividend will be paid on Monday, November 10 to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date?

• A.

Tuesday, October 28

• B.

Wednesday, October 29

• C.

Thursday, October 30

• D.

Wednesday, November 5

• E.

Thursday, November 6

B. Wednesday, October 29
Explanation
Chapter 17, Question 3

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• 9.

Which one of the following favors a low dividend policy?

• A.

The tax on capital gains is deferred until the gain is realized

• B.

Few, if any, positive net present value projects are available to a firm

• C.

A majority of the shareholders has a low relevant tax rate

• D.

A majority of the shareholders has better investment opportunities with similar risks

• E.

Corporate tax rates exceed personal tax rates

A. The tax on capital gains is deferred until the gain is realized
Explanation
Chapter 17, Question 4

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• 10.

The information content of a dividend increase generally signals that:

• A.

The firm has a one-time surplus of cash

• B.

The firm has few, if any, net present value projects to pursue

• C.

Management believes earning growht will be strong going forward

• D.

The firm has more cash than it needs to a decling in future orders

• E.

Dividends will thereafter be lower

C. Management believes earning growht will be strong going forward
Explanation
Chapter 17, Question 5

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• 11.

A stock repurchase program:

• A.

Requires all shareholders to sell a fraction of their shares

• B.

Is preferred over a high-dividend program only by tax-exempt shareholders

• C.

Decreases both the number of shares outstanding and the market price per share

• D.

Has no effect on a firm's financial statements

• E.

Is essentially the same as a cash dividend program provided there are no taxes or other costs

E. Is essentially the same as a cash dividend program provided there are no taxes or other costs
Explanation
Chapter 17, Question 6

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• 12.

Which one of the following statements is correct?

• A.

Firms prefer to cut dividend payments rather than borrow money to fund a short-term cash need

• B.

Share repurchases tend to increase agency costs

• C.

Maintaining a steady dividend is a key goal of most dividend-paying firm

• D.

Tax rates are the key factor in determining a firm's dividend policy

• E.

Stock prices tend to ignore expected changes in dividend payments

C. Maintaining a steady dividend is a key goal of most dividend-paying firm
Explanation
Chapter 17, Question 7

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• 13.

Revol-Tech is a technology firm with excellent growth prospects. The firm wishes to do something to acknowledge the loyalty of the shareholders but needs all of its available cash to fund the firm's rapid growth. The market price of the stock is currently trading at the upper end of its preferred trading range. The firm is most apt to consider which one of the following in this situation?

• A.

Liquidating dividend

• B.

Stock split

• C.

Reverse stock split

• D.

Small stock dividend

• E.

Special cash dividend

B. Stock split
Explanation
Chapter 17, Question 8

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• 14.

A stock split:

• A.

Increases the total value of the common stock account

• B.

Decreases the value of the retained earnings account

• C.

Increases the par value per share

• D.

Increases the value of the capital in excess of par account

• E.

Decreases the market value per share

E. Decreases the market value per share
Explanation
Chapter 17, Question 9

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• 15.

Steve purchased 300 shares of Alpha Beta stock on May 9. On May 15, he purchased another 200 shares and then on May 22 he purchased a final 400 shares of Alpha Beta stock. The company declared a dividend of \$1.60 a share on April 30 to holders of record on Friday, May 23. The dividend is payable on June 2. How much dividend income will Steve receive on June 2 from Alpha Beta?

• A.

\$0

• B.

\$480

• C.

\$800

• D.

\$1,200

• E.

\$1,440

C. \$800
Explanation
Ex-dividend date Wednesday, May 21.
Dividend received = \$1.60(300 + 200) = \$800
Chapter 17, Question 10

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• 16.

Which one of the following is a source of cash?

• A.

An increase in inventory

• B.

An increase in accounts payable

• C.

The purchase of a fixed asset

• D.

The payment of a long-term loan

B. An increase in accounts payable
Explanation
Chapter 18, Question 1

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• 17.

A firm has an accounts payable period of 51 days, an inventory period of 38 days, and an accounts receivable period of 32 days. What is the length of the cash cycle?

• A.

13 days

• B.

19 days

• C.

32 days

• D.

45 days

B. 19 days
Explanation
Chapter 18, Question 2

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• 18.

Peterson's Nursery has sales of \$640,000 and COGS equal to 60% of sales. The beginning inventory is \$54,000 and the ending inventory \$58,000. What is the length of the inventory period?

• A.

31.94 days

• B.

46.67 days

• C.

49.08 days

• D.

53.23 days

D. 53.23 days
Explanation
COGS = \$640,000 *.6 = 384,000
Avg inventory = (54,000+58,000)/2 = 56,000
Inventory turnover = 384,000/56,000 = 6.86 times
365/6.86 = 53.21 days
Chapter 18, Question 3

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• 19.

A flexible short-term financial policy is characterized by:

• A.

Large investment in inventory

• B.

Low cash balances

• C.

Limited credit sales

• D.

Few, if any, investments in marketable securities

A. Large investment in inventory
Explanation
Chapter 18, Question 4

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• 20.

A restrictive short-term financial policy:

• A.

Tends to produce periodic cash surpluses which can be invested in marketable securities

• B.

Involves more long-term financing than does a flexible policy

• C.

Is also referred to as a compromise policy

• D.

Relies on short-term financing to fund seasonal fluctuations

D. Relies on short-term financing to fund seasonal fluctuations
Explanation
Chapter 18, Question 5

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• 21.

Your firm has projected quarterly sales of \$900, \$1,500, \$1,600, and \$2,000, respectively for the next year starting with the first quarter. The accounts receivable period is 60 days. How much will you collect in Quarter 3? Assume that a year has 360 days.

• A.

\$1,000

• B.

\$1,066.67

• C.

\$1,533.33

• D.

\$1,566.67

C. \$1,533.33
Explanation
= (Receivables period / collection period)(Q3 beg sales) + (1/2 receivables period/ collection period)(Q3 end sales)
= (60/90)(\$1,500) + (30/90)(\$1,600)
= \$1,533.33
Chapter 18, Question 6

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• 22.

Your firm has projected monthly sales of \$800, \$700, \$1,100, and \$1,300 for the months of January through April, respectively. Your cost of goods sold is 70 percent of the selling price and your AP period is 30 days. You purchase goods one month prior to the month to the month of sale. What are your cash disbursements for March?

• A.

\$770

• B.

\$840

• C.

\$870

• D.

\$910

A. \$770
Explanation
=\$1,100*.7
=\$770
Chapter 18, Question 7

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• 23.

You have a \$60,000 line of credit with your local bank. The interest rate is 9 percent compounded quarterly. The loan agreement requires that 5 percent of the unused amount be maintained at the bank in a non-interest bearing account. On average, you earn a rate of 1 percent per quarter on your short-term investments. What is the effective annual rate of this agreement assuming that you never borrow any money during the year?

• A.

4.06 percent

• B.

4.18 percent

• C.

9.28 percent

• D.

9.31 percent

A. 4.06 percent
Explanation
Effective rate = (1+ earned rate)^# of periods - 1
= (1.01)^4 - 1 = .0406 = 4.06%
Chapter 18, Question 8

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• 24.

A bank account which receives funds only as needed to cover the demands for payments is called a ______ account.

• A.

Float

• B.

Controlled disbursement

• C.

Master

• D.

Compensating balance

B. Controlled disbursement
Explanation
Chapter 19, Question 1

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• 25.

Which one of the following will increase your disbursement float?

• A.

Issuing checks from a remote location

• B.

Installing a lockbox system for payments

• C.

Paying bills electronically

• D.

Collecting payments electronically

A. Issuing checks from a remote location
Explanation
Chapter 19, Question 2

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• 26.

Which one of the following statements is correct?

• A.

Lockboxes are designed to eliminate disbursement float

• B.

Providing early payment discounts to customers increases your collecting float

• C.

Cash concentration accounts increase the funds available for short-term investing

• D.

Money market accounts are relatively liquid

C. Cash concentration accounts increase the funds available for short-term investing
Explanation
Chapter 19, Question 3

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• 27.

Collection time includes each of the following EXCEPT the time it takes:

• A.

The bank to make funds available once you deposit your customer's checks

• B.

Your staff to process and deposit checks

• C.

For your customers' checks to reach you office once they are mailed

• D.

Your staff to verify and pay invoices

D. Your staff to verify and pay invoices
Explanation
Chapter 19, Question 4

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• 28.

When you reconciled your checkbook to the bank, you had outstanding deposits of \$11,219 and outstanding checks of \$14,708. Your adjusted check book balance is \$5,239.

• A.

\$3,489

• B.

\$9,469

• C.

\$11,219

• D.

\$14,708

C. \$11,219
Explanation
Chapter 19, Question 5

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• 29.

Your firm receives the following checks each month. The average amount of each check and the average collection delay are as shown below. What is the weighted average delay assuming that each month has 30 days? A        31,000      3 days B        48,000      5 days C        91,000      2 days

• A.

3.03 days

• B.

3.16 days

• C.

3.33 days

• D.

3.72 days

A. 3.03 days
Explanation
Total receipts = 31,000 + 48,000 + 91,000 = 170,000
Weighted Average delay = (31,000/170,000)*3 + (48,000/170,000)*5 + (91,000/170,000)*2
= 3.03 days
Chapter 19, Question 6

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• Current Version
• Apr 11, 2023
Quiz Edited by
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• May 02, 2011
Quiz Created by
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