1. Operating cash flow is generated by a company’s daily operations related to production and sales of goods and/or services.
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2. In general, the reduction of an asset is a source of funds.
4. The cash conversion cycle is calculated as:
a. Days in Inventory + Collection Period
b. Days in Inventory – Payables Period
c. Days in Inventory + Collection Period – Payables Period
d. None of the above
5. A company can shorten its cash cycle by:
a. Reducing inventory turnover
b. Reducing account payables
c. Reducing days receivable
d. None of the above
6. A company has a retention rate of 50%, sales of $25,000, beginning equity of $50,000 and profit margins of 10%, an asset turnover ratio of .75 and debt of $10,000. What is its sustainable growth rate?
d. Not enough information given
7. Scenario analysis is a way of testing forecasts by changing one assumption at a time.
9. Which of the following is commonly used in preparing pro forma statements:
a. Historical financial statements
b. Projected sales
c. Efficiency ratios
d. All of the above
10. Pro forma statements are:
a. Summaries of historical financial statements
b. Government-mandated analyses of financial statements
c. Projected statements used in financial planning
d. Estimated tax liabilities
11. Which of the following liabilities form part of a company’s “real” activities?
i. I. Short-term debt
ii. II. Accounts payable
iii. III. Accrued operating expenses
iv. IV. Long-term debt
b. III only
c. II and III
d. I and IV
e. I only
12. The cost of debt is generally lower than the cost of equity.
13. M&M’s Proposition I states that a company’s value is independent of its capital structure.
14. A higher level of leverage generally reduces managerial discretion.
15. The Pecking Order Theory of capital structure implies a unique optimum capital structure.
16. As EBIT drops, the return on equity (ROE) of a levered firm drops ______ the ROE of an otherwise identical unlevered firm.
a. the same as
b. relatively more than
c. relatively less than
d. more or less than (it cannot be determined)
17. The owner of Grandma’s Applesauce is planning to retire after the coming year. She has to repay a loan $50,000 plus 8 percent interest and must rely on cash flow from operations to do so. Cash flow from operations is uncertain; there is a 70% probability it will equal $65,000, and a 30% probability it will equal $45,000. Assuming a tax rate of 0%, what is the owner’s expected cash flow after debt service?
18. Shareholders prefer high risk projects when facing a high probability of bankruptcy because
a. High risk projects usually bring high rewards.
b. Shareholders have the residual claim on a company.
c. Creditors have the residual claim on a company, and therefore bear the risk.
d. There is a good chance the government will rescue them in bankruptcy.
19. The _________ states that the value of the firm is determined solely by the value of its assets.
a. Static Tradeoff Model
b. M&M proposition I
c. The Pecking Order Model
d. Agency Theory
20. Which of the following expresses the value of a levered firm (VL) in the Static Tradeoff model of optimal capital structure? [Note: VU denotes the value of the unlevered firm; CFD denotes expected costs of financial distress; and PV denotes present value.]
a. VL = PV(Tax Shield) – PV(CFD)
b. VL = VU + PV(Tax Shield) / PV(CFD)
c. VL = VU + PV(Tax Shield) – PV(CFD)
d. VL = VU + PV(Tax Shield)
21. A example of indirect costs of bankruptcy is
a. Court costs
b. Attorney and advisor fees
c. Lost sales due to costumers and suppliers lost trust
d. All of the above
22. Which of the following are equivalent under M&M proposition I?
a. Maximizing firm value and maximizing firm profit
b. Maximizing firm value and minimizing the cost of capital
c. Minimizing firm’s cost of capital and minimizing firm’s debt burden
d. Maximizing profit and minimizing taxes