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Which one of the following statements is correct concerning the
cash cycle?
Accepting a supplier’s discount for early payment decreases the
cash cycle.
Increasing the accounts payable period increases the cash
cycle.
The longer the cash cycle, the more likely a firm will need
external financing.
The cash cycle can exceed the operating cycle if the payables
period is equal to zero.
Offering early payment discounts to customers will tend to
increase the cash cycle.
Precise Machinery is analyzing a proposed project. The
company expects to sell 2100 units give or take 5 percent. The
expected variable cost per unit is $260 and the expected fixed

2. costs are $589,000. Cost estimates are considered accurate
within a plus or minus 4 percent range. The depreciation
expense is $129,000. The sales price is estimated at $750 per
unit, give or take 2 percent. The tax rate is 35 percent. The
company is conducting a sensitivity analysis on the sales price
using a sales price estimate of $755. What is the operating cash
flow based on this analysis?
$86,675
$354,874
$368,015
$293,089
$337,975
You are doing some comparison shopping. Five stores offer the
product you want at basically the same price but with differing
credit terms. Which one of these terms is best-suited to you if
you plan to forgo the discount?
2/10, net 30
2/5, net 30
2/5, net 20
1/10, net 45
1/5, net 15

3. The plowback ratio is:
The dollar increase in net income divided by the dollar increase
in sales.
Equal to net income divided by the change in total equity.
Equal to one minus the retention ratio.
The change in retained earnings divided by the dividends paid.
The percentage of net income available to the firm to fund
future growth.
Which one of the following is the financial statement that
summarizes a firm’s revenue and expenses over a period of
time?
Statement of cash flows
Market value report
Tax reconciliation statement
Balance sheet
Income statement
Kelly’s Corner Bakery purchased a lot in Oil City six years ago at
a cost of $278000. Today, that lot has a market value of
$264,000. At the time of the purchase, the company spent
$6,000 to level the lot and another $8,000 to install storm
drains. The company now wants to build a new facility on that

4. site. The building cost is estimated at $1.03 million. What
amount should be used as the initial cash flow for this project?
-$1,294,000
-$1,322,000
-$1,045,000
-$1,308,000
-$1,308,000
Webster United is paying a dividend of $1.32 per share today.
There are 350,000 shares outstanding with a market price of
$22.40 per share prior to the dividend payment. Ignore taxes.
Before the dividend, the company had earnings per share of
$1.68. As a result of this dividend, the:
Retained earnings will decrease by $350,000.
Earnings per share will increase to $3.
Total firm value will not change.
Price-earnings ratio will be 12.55.
Retained earnings will increase by $462,000.
The common stock of Dayton Repair sells for $43.19 a share.
The stock is expected to pay $2.28 per share next year when the
annual dividend is distributed. The firm has established a
pattern of increasing its dividends by 2.15 percent annually

5. and expects to continue doing so. What is the market rate of
return on this stock?
7.67 percent
7.59 percent
7.43 percent
7.14 percent
7.28 percent
Which one of the following should earn the most risk premium
based on CAPM?
Diversified portfolio with returns similar to the overall market.
Stock with a beta of 1.38.
Portfolio with a beta of 1.01.
U.S. Treasury bill.
Stock with a beta of 0.74.
Which one of these actions will increase the operating cycle?
Assume all else held constant.
Decreasing the receivables turnover rate.
Decreasing the payables period.

6. Decreasing the average inventory level.
Increasing the payables period.
Increasing the inventory turnover rate.
Oil Wells offers 6.5 percent coupon bonds with semiannual
payments and a yield to maturity of 6.94 percent. The bonds
mature in seven years. What is the market price per bond if the
face value is $1,000?
$902.60
$996.48
$913.48
$989.70
$975.93
Three Corners Markets paid an annual dividend of $1.37 a
share last month. Today, the company announced that future
dividends will be increasing by 2.8 percent annually. If you
require a return of 11.6 percent, how much are you willing to
pay to purchase one share of this stock today?
$16.67
$16.00
$18.23

7. $17.68
$15.57
Which one of the following is a source of cash?
Granting credit to a customer
Purchase of inventory
Acquisition of debt
Payment to a supplier
Repurchase of common stock
Nadine’s Home Fashions has $2.12 million in net working
capital. The firm has fixed assets with a book value of $31.64
million and a market value of $33.9 million. The firm has no
long-term debt. The Home Centre is buying Nadine’s for $37.5
million in cash. The acquisition will be recorded using the
purchase accounting method. What is the amount of goodwill
that The Home Centre will record on its balance sheet as a
result of this acquisition?
$5.86 million
$3.34 million
$4.14 million
$1.48 million

8. $3.74 million
Chelsea Fashions is expected to pay an annual dividend of $1.10
a share next year. The market price of the stock is $21.80 and
the growth rate is 4.5 percent. What is the firm’s cost of equity?
9.55 percent
10.54 percent
9.24 percent
7.91 percent
9.77 percent
Operating leverage is the degree of dependence a firm places
on its:
Depreciation tax shield.
Variable costs.
Fixed costs.
Operating cash flows.
Sales.
Phillips Equipment has 75,000 bonds outstanding that are
selling at par. Bonds with similar characteristics are yielding

9. 7.5 percent. The company also has 750,000 shares of 6 percent
preferred stock and 2.5 million shares of common stock
outstanding. The preferred stock sells for $64 a share. The
common stock has a beta of 1.21 and sells for $44 a share. The
U.S. Treasury bill is yielding 2.3 percent and the return on the
market is 11.2 percent. The corporate tax rate is 34 percent.
What is the firm’s weighted average cost of capital?
11.56 percent
11.30 percent
11.18 percent
10.64 percent
9.69 percent
Andy deposited $3,000 this morning into an account that pays 5
percent interest, compounded annually. Barb also deposited
$3,000 this morning into an account that pays 5 percent
interest, compounded annually. Andy will withdraw his
interest earnings and spend it as soon as possible. Barb will
reinvest her interest earnings into her account. Given this,
which one of the following statements is true?
Barb will earn more interest the second year than Andy.
Barb will earn more interest the first year than Andy will.
Andy will earn compound interest.
Andy will earn more interest in year three than Barb will.

10. After five years, Andy and Barb will both have earned the same
amount of interest.
When utilizing the percentage of sales approach, managers:
1. Estimate company sales based on a desired level of net
income and the current profit margin.
2. Consider only those assets that vary directly with sales.
III. Consider the current production capacity level.
1. Can project both net income and net cash flows.
III and IV only
I, III, and IV only
II and III only
II, III, and IV only
I and II only
You are comparing two investment options that each pay 6
percent interest compounded annually. Both options will
provide you with $12000 of income. Option A pays $2,000 the
first year followed by two annual payments of $5,000 each.
Option B pays three annual payments of $4,000 each. Which
one of the following statements is correct given these two
investment options? Assume a positive discount rate.
Option B is a perpetuity.

11. Option B has a higher present value at time zero.
Both options are of equal value since they both provide $12,000
of income.
Option A has the higher future value at the end of year three.
Option A is an annuity.
The condition stating that the interest rate differential between
two countries is equal to the percentage difference between the
forward exchange rate and the spot exchange rate is called:
Uncovered interest rate parity.
The unbiased forward rates condition.
Purchasing power parity.
Interest rate parity.
The international Fisher effect.
The Dry Dock is considering a project with an initial cost of
$118400. The project’s cash inflows for years 1 through 3 are
$37200, $54600 and $46900, respectively. What is the IRR of
this project?
8.42 percent
7.48 percent
8.56 percent

12. 8.04 percent
8.22 percent
The 7 percent bonds issued by Modern Kitchens pay interest
semiannually mature in eight years and have a $1000 face
value. Currently, the bonds sell for $1,032. What is the yield to
maturity?
7.20 percent
6.87 percent
6.48 percent
6.92 percent
6.08 percent
Al invested $7200 in an account that pays 4 percent simple
interest. How much money will he have at the end of five years?
$8,678
$8,710
$8,299
$8,056
$8,640

13. All of the following represent potential gains from an
acquisition except the:
Use of surplus funds.
Tax loss carryovers acquired in the acquisition.
Obtainment of a beachhead.
Diseconomies of scale related to increased labor demand.
Lower costs per unit realized.
Fresno Salads has current sales of $6000 and a profit margin of
6.5 percent. The firm estimates that sales will increase by 4
percent next year and that all costs will vary in direct
relationship to sales. What is the pro forma net income?
$438.70
$327.18
$405.60
$303.33
$441.10
A news flash just appeared that caused about a dozen stocks to
suddenly drop in value by 20 percent. What type of risk does
this news flash best represent?
Market

14. Unsystematic
Portfolio
Total
Non-diversifiable
Which one of the following terms is defined as the mixture of a
firm’s debt and equity financing?
Cash management
Cost analysis
Working Capital Management
Capital Structure
Capital budgeting
George and Pat just made an agreement to exchange currencies
based on today’s exchange rate. Settlement will occur
tomorrow. Which one of the following is the exchange rate that
applies to this agreement?
Forward exchange rate
Triangle rate
Cross rate
Current rate

15. Spot exchange rate
Isaac has analyzed two mutually exclusive projects that have 3-
year lives. Project A has an NPV of $81,406, a payback period of
2.48 years, and an AAR of 9.31 percent. Project B has an NPV of
$82,909, a payback period of 2.57 years, and an AAR of 9.22
percent. The required return for Project A is 11.5 percent while
it is 12 percent for Project B. Both projects have a required AAR
of 9.25 percent. Isaac must make a recommendation and justify
it in 15 words or less. What should his recommendation be?
Accept Project A because it has the lower required return.
Accept both projects because both NPVs are positive.
Accept Project A because it has the shortest payback period.
Accept Project B and reject Project A based on the NPVs.

16. Accept Project A and reject Project B based on their AARs.