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Question;TUTORIAL EXAM 2;1. An;increase in financial leverage generally results in a higher return on equity;(ROE).;Top of;Form;?;True;?;False;2. Leverage;and liquidity generally rise or fall together.;Top of;Form;?;True;?;False;3. It is;possible for a company to grow faster than its sustainable growth rate.;Top of;Form;?;True;?;False;4. Which of;the following ratios uses sales in the denominator?;Top of;Form;?;Days in inventory;?;Receivables turnover;?;Cash ratio;?;Average collection period;5. For a;levered firm, EBIT is equivalent to;Top of;Form;?;Net income;?;Pro forma earnings;?;Operating profit;?;Net income before taxes;6.;Common-size financial statements are constructed in order to;Top of;Form;?;Adjust for inflation and risk;?;Facilitate comparisons of different-sized;companies;?;To comply with SEC requirements;?;All of the above;7. A firm;has $100 of average inventory, operating profit of $500 and sales of $1,500.;Its days in inventory is;Top of;Form;?;36.5 days;?;24.3 days;?;73.0 days;?;Not enough information;8. For;which of the following generic businesses would you expect a combination of;high asset turnover and low profit margins?;Top of;Form;?;Supermarkets;?;Banks;?;Software developers;?;Airlines;9. Analysis of a company's financial;statements: Below are simplified versions of the;balance sheet and income statement for Toys by Tom, Inc. Use this;information to answer question 9.;Toys by Tom, Inc. has a current ratio of ____, suggesting;Top of;Form;?;9.6, reasonable ability to cover interest;expense;?;0.57, potential illiquidity;?;0.21, potential collection problems;?;1.75, reasonable liquidity;10. Analysis of a company's financial;statements: Below are simplified versions of the;balance sheet and income statement for Toys by Tom, Inc. Use this;information to answer question 10.;What is Toys by Tom, Inc. return on;assets (ROA)?;Top of;Form;?;6.9%;?;0.86;?;18%;?;1.2;11. Operating;cash flow is generated by a company's daily operations related to production;and sales of goods and/or services.;Top of;Form;?;True;?;False;12. In;general, the reduction of an asset is a source of funds.;Top of;Form;?;True;?;False;13. The;sustainable growth rate is the maximum growth rate achievable over an extended;period of time.;Top of;Form;?;True;?;False;14. The;cash conversion cycle is calculated as;Top of;Form;?;Days in Inventory + Collection Period;?;Days in Inventory - Payables Period;?;Days in Inventory + Collection Period -;Payables Period;?;None of the above;15. A;company can shorten its cash cycle by;Top of;Form;?;Reducing inventory turnover;?;Reducing account payables;?;Reducing days receivable;?;None of the above.;16. 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?;Top of;Form;?;2.5%;?;1.7%;?;3.75%;?;Not enough information given;17.;Scenario analysis is a way of testing forecasts by changing one assumption at a;time.;Top of;Form;?;True;?;False;18. Biases;can and should always be eliminated in financial forecasts.;Top of Form;?;True;?;False;19. Which;of the following is commonly used in preparing pro forma statements;Top of;Form;?;Historical financial statements;?;Projected sales;?;Efficiency ratios;?;All of the above;20. Pro;forma statements are;Top of;Form;?;Summaries of historical financial;statements;?;Government-mandated analyses of financial;statements;?;Projected statements used in financial;planning;?;Estimated tax liabilities;21. Which of the following liabilities;form part of a company's "real" activities?;I. Short-term debt;II. Accounts payable;III. Accrued operating expenses;IV. Long-term debt;Top of;Form;?;III only;?;II and III;?;I and IV;?;I only;22. The;cost of debt is generally lower than the cost of equity.;Top of;Form;?;True;?;False;23.;M&M's Proposition I states that a company's value is independent of its;capital structure.;Top of;Form;?;True;?;False;24. A;higher level of leverage generally reduces managerial discretion.;Top of;Form;?;True;?;False;25. The;Pecking Order Theory of capital structure implies a unique optimum capital;structure.;Top of;Form;?;True;?;False;26. As EBIT;drops, the return on equity (ROE) of a levered firm drops ______ the ROE of an;otherwise identical unlevered firm.;Top of;Form;?;the same as;?;relatively more than;?;relatively less than;?;more or less than (it cannot be;determined);27. 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?;Top of;Form;?;$9,000;?;$5,000;?;$11,000;?;$7,700;28.;Shareholders prefer high risk projects when facing a high probability of;bankruptcy because;Top of;Form;?;High risk projects usually bring high;rewards.;?;Shareholders have the residual claim on a;company.;?;Creditors have the residual claim on a company;and therefore bear the risk.;?;There is a good chance the government will;rescue them in bankruptcy.;29. The;states that the value of the firm is determined solely by the value;of its assets.;Top of;Form;?;Static Tradeoff Model;?;M&M proposition I;?;The Pecking Order Model;?;Agency Theory;30. 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.];Top of;Form;?;VL = PV(Tax Shield) - PV(CFD);?;VL = VU + PV(Tax Shield) / PV(CFD);?;VL = VU + PV(Tax Shield) - PV(CFD);?;VL = VU + PV(Tax Shield);31. A;example of indirect costs of bankruptcy is;Top of;Form;?;Court costs;?;Attorney and advisor fees;?;Lost sales due to costumers and suppliers;lost trust;?;All of the above;32. Which;of the following are equivalent under M&M proposition I?;Top of;Form;?;Maximizing firm value and maximizing firm;profit;?;Maximizing firm value and minimizing the;cost of capital;?;Minimizing firm's cost of capital and;minimizing firm's debt burden;?;Maximizing profit and minimizing taxes;33. Which;of the following is not an assumption underlying M&M proposition I?;Top of;Form;?;No arbitrage;?;No taxes;?;Corporate investments are risk-free;?;Symmetric information;34. Which;trait is commonly found in debt contracts?;Top of;Form;?;Seniority;?;Covenants;?;Callability;?;All of the above;35. Selecting;investment projects according to rules based either on project NPV or IRR;results in maximizing firm value.;Top of;Form;?;True;?;False;36. A;dollar today is worth more than a dollar tomorrow.;Top of;Form;?;True;?;False;37. The NPV;rule, which says companies should invest in projects for which NPV is greater;than 0, depends on the assumption of value maximization.;Top of;Form;?;True;?;False;38. If you;invest $2,000 today for three years at 5% interest paid annually, you will earn;a total of $______ in interest. Assume you re-invest all interest.;Top of;Form;?;205.00;?;300.00;?;315.25;?;500.00;39. The;amount by which a project increases the value of the firm is given by which of;the following?;Top of;Form;?;The project's accounting rate of return;?;The project's net present value (NPV).;?;The project's internal rate of return;(IRR).;?;The project's present value.;40.Which;items are necessary in calculating the net present value of a project?;I. Investment outlays;II. Discount rate;III. Incremental cash flow;IV. Time period for the project;Top of;Form;?;I, II and IV;?;I, II and III;?;II, III and IV;?;All of the above;41. Compute;the net present value of an investment with 5 years of annual cash inflows of;$100 and two cash outflows, one today of $100 and one at the beginning of the;second year of $50. Use a discount rate of 10 percent.;Top of;Form;?;$229.08;?;$287.60;?;$233.62;?;$271.53;42. Suppose a riskless project requires an;initial investment of $10 and will generate a one-time cash inflow of $30 two;years later. Assuming a risk-free interest rate of 5%, which of the following;statements about the project is NOT true?;Top of;Form;?;The net present value of the project is;positive;?;The IRR is greater than 50 percent.;?;The accounting rate of return on the;project is positive.;?;The payback period is less than 2 years.;43. What is;the present value of a perpetuity of $100 given a discount rate of 5%?;Top of;Form;?;$ 2,000;?;$ 3,000;?;$ 1,500;?;$ 500;44. All;else equal, when a company's debt ratio rises, its beta falls.;Top of;Form;?;True;?;False;45. If you;borrow capital to start a business and the money is provided interest-free;then your cost of capital is zero.;Top of;Form;?;True;?;False;46.;Increasing a company's leverage has no effect on its cost of equity.;Top of;Form;?;True;?;False;47. Which;of the following assumptions regarding investor behavior are required by the;CAPM?;I. Investors try to maximize their wealth;II. Investors consider only risk when making;investments;III. Investors are risk averse;IV. Investors adopt a long-term perspective;Top of;Form;?;I and III;?;I, II and III;?;I and IV;?;All of the above;48. For a;firm with an optimal capital structure, the weighted average cost of capital;(WACC) is;Top of;Form;?;higher than the cost of equity;?;lower than the cost of debt;?;lower than the cost of unlevered equity;?;independent of the capital structure;49. Which;is NOT required information when calculating the weighted average cost of;capital for a company with debt?;Top of;Form;?;its capital structure ratios;?;its cost of debt;?;its current ratio;?;its tax rate;50. In the;CAPM, the parameter beta measures;Top of;Form;?;non-systematic (diversifiable) risk;?;systematic (non-diversifiable) risk;?;total risk;?;risk-adjusted stock returns


Paper#47720 | Written in 18-Jul-2015

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