Question 1 Assume a firm’s production process requires an average of 80 days to go from raw materials to finished products and another 40 days before the finished goods are sold. If the accounts receivable cycle is 70 days and the accounts payable cycle is 80 days, what would the operating cycle be? 110 days 130 days 190 days 270 days Question 2 The time between ordering materials and collecting cash from receivables is known as the: operating cycle cash conversion cycle accounts receivable period term payable cycle Question 3 The time between when the firm pays its suppliers and when it collects money from its customers is known as the: operating cycle cash conversion cycle accounts receivable period clearing cycle Question 4 Which of the following is not an advantage of short-term borrowing? flexibility establishing continuous relationships with a bank or financial institution frequent renewals lower cost Question 5 In June, Erie Plastics had an ending cash balance of $35,000. In July, the firm had total cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is $25,000. At the end of July, Erie Plastics had an excess cash balance of $25,000 An excess cash balance of $0 required financing of $10,000 required financing of $25,000 Question 6 A compensating balance on a bank loan effectively ____________ the cost of the loan. raises lowers has no effect on has an indeterminate effect on Question 7 In order to borrow $100,000 for a 10% loan on discount basis, the firm will actually have to borrow: $110,000 $111,111 $100,000 $90,000 Question 8 When old short-term debt is replaced by new short-term debt as the old debt comes due, the process is known as: compensating balance rolling the debt fluctuating financing re-terming Question 9 Which of the following short-term sources of funds is available only to the financially strongest concerns? trade credit commercial bank loans finance company loans commercial paper Question 10 If a firm actually sells its accounts receivable, the process is known as: wholesale financing pledging field crediting factoring Question 11 The ratio between the present value of a project’s cash inflows and the present value of its initial investment is called the: MIRR. IRR. PI. NPV. Question 12 Internal rate of return (IRR) and net present value (NPV) methods: generally arrive at the same accept/reject decisions are less sophisticated than the payback period cannot make use of the same cash flows can be substituted for by the payback period Question 13 Which of the following is not considered a stage in the capital budgeting process? development production implementation selection Question 14 The internal rate of return concept is best explained by which of the following? rate where NPV is equal to zero point where initial investment has been returned marginal cost of capital average book value Question 15 The payback period concept is best explained by which of the following? marginal cost of capital point where initial investment has been returned rate where NPV is equal to zero accounting rate of return Question 16 The cost of debt: is typically higher than the cost of preferred stock must be adjusted to an after-tax cost is higher than the cost of retained earnings is the lowest component cost because corporations can deduct 70 percent of the interest expense Question 17 As a general rule, the capital structure that maximizes stock price also: minimizes the weighted average cost of capital maximizes the weighted average cost of capital minimizes the required rate of return on equity maximizes the cost of debt Question 18 The after-tax cost of debt for a firm in the 35% tax bracket with a before-tax cost of debt of 6% is: 6% 2.1% 3.9% 5.8% Question 19 Ningbo Shipping has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock …
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