Finc 332: Corporate Finance, Pt 2

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

Special dividend

Stock split

Share repurchase

Rights offer

Liquidating dividend

Chapter 17, Question 2

Explanation

Chapter 17, Question 2

2. 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?

13 days

19 days

32 days

45 days

Chapter 18, Question 2

Explanation

Chapter 18, Question 2

3. The value of the firm is maximized when the:

Debt-equity ratio is set equal to zero

Debt-equity ratio equals 1.0

WACC in minimized

WACC is maximized

Chapter 16, Question 1

Explanation

Chapter 16, Question 1

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

Time spent by company managers on the bankruptcy paperwork

Administrative expenses related to the bankruptcy filing

Cash reserves held by a firm

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

Chapter 16, Question 5

Explanation

Chapter 16, Question 5

5. 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?

Tuesday, October 28

Wednesday, October 29

Thursday, October 30

Wednesday, November 5

Thursday, November 6

Chapter 17, Question 3

Explanation

Chapter 17, Question 3

6. 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?

$0

$480

$800

$1,200

$1,440

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

Explanation

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

7. Which one of the following is a source of cash?

An increase in inventory

An increase in accounts payable

The purchase of a fixed asset

The payment of a long-term loan

Chapter 18, Question 1

Explanation

Chapter 18, Question 1

8. A stock split:

Increases the total value of the common stock account

Decreases the value of the retained earnings account

Increases the par value per share

Increases the value of the capital in excess of par account

Decreases the market value per share

Chapter 17, Question 9

Explanation

Chapter 17, Question 9

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

1

2

3

5

10

Chapter 17, Question 1

Explanation

Chapter 17, Question 1

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

M&M Proposition I without taxes

M&M Proposition I with taxes

M&M Proposition II without taxes

M&M Proposition II with taxes

Chapter 16, Question 2

Explanation

Chapter 16, Question 2

11. 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?

Liquidating dividend

Stock split

Reverse stock split

Small stock dividend

Special cash dividend

Chapter 17, Question 8

Explanation

Chapter 17, Question 8

12. 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.

$1,000

$1,066.67

$1,533.33

$1,566.67

= (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

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

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

Common stock

Preferred stock

External debt

Internal financing

Chapter 16, Question 3

Explanation

Chapter 16, Question 3

14. Which one of the following favors a low dividend policy?

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

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

A majority of the shareholders has a low relevant tax rate

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

Corporate tax rates exceed personal tax rates

Chapter 17, Question 4

Explanation

Chapter 17, Question 4

15. The information content of a dividend increase generally signals that:

The firm has a one-time surplus of cash

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

Management believes earning growht will be strong going forward

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

Dividends will thereafter be lower

Chapter 17, Question 5

Explanation

Chapter 17, Question 5

16. A restrictive short-term financial policy:

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

Involves more long-term financing than does a flexible policy

Is also referred to as a compromise policy

Relies on short-term financing to fund seasonal fluctuations

Chapter 18, Question 5

Explanation

Chapter 18, Question 5

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

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

Increases as the debt-equity ratio increases

Decreases as the debt-equity ratio increases

Varies independently of a firm's debt-equity ratio

Chapter 16, Question 4

Explanation

Chapter 16, Question 4

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?

31.94 days

46.67 days

49.08 days

53.23 days

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

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

19. Which one of the following will increase your disbursement float?

Issuing checks from a remote location

Installing a lockbox system for payments

Paying bills electronically

Collecting payments electronically

Chapter 19, Question 2

Explanation

Chapter 19, Question 2

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

Float

Controlled disbursement

Master

Compensating balance

Chapter 19, Question 1

Explanation

Chapter 19, Question 1

21. A stock repurchase program:

Requires all shareholders to sell a fraction of their shares

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

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

Has no effect on a firm's financial statements

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

Chapter 17, Question 6

Explanation

Chapter 17, Question 6

22. Which one of the following statements is correct?

Lockboxes are designed to eliminate disbursement float

Providing early payment discounts to customers increases your collecting float

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

Money market accounts are relatively liquid

Chapter 19, Question 3

Explanation

Chapter 19, Question 3

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

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

Your staff to process and deposit checks

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

Your staff to verify and pay invoices

Chapter 19, Question 4

Explanation

Chapter 19, Question 4

24. Which one of the following statements is correct?

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

Share repurchases tend to increase agency costs

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

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

Stock prices tend to ignore expected changes in dividend payments

Chapter 17, Question 7

Explanation

Chapter 17, Question 7

25. 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?

$770

$840

$870

$910

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

Explanation

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

26. A flexible short-term financial policy is characterized by:

Large investment in inventory

Low cash balances

Limited credit sales

Few, if any, investments in marketable securities

Chapter 18, Question 4

Explanation

Chapter 18, Question 4

27. 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?

4.06 percent

4.18 percent

9.28 percent

9.31 percent

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

Explanation

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

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.

$3,489

$9,469

$11,219

$14,708

Chapter 19, Question 5

Explanation

Chapter 19, Question 5

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

3.03 days

3.16 days

3.33 days

3.72 days

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

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