Which of the following statements is CORRECT?

a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than
they would be in a partnership.
b. Corporations face fewer regulations than proprietorships.
c. One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation,
because taxes are levied at both the firm level and the owner level.
d. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship,
extensive legal documents are required.
e. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her
investment in the business.

Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation.
Which of the following statements is CORRECT?
a. Relaxant's shareholders (the ex-partners) will now be exposed to less liability.
b. The company will probably be subject to fewer regulations and required disclosures.
c. Assuming the firm is profitable, none of its income will be subject to federal income taxes.
d. The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their
ownership.
e. The firm will find it more difficult to raise additional capital to support its growth.

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share over the long run, which is the stock's intrinsic value.
e. Maximize the stock price on a specific target date.

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders
and managers?
a. Pay managers large cash salaries and give them no stock options.
b. Change the corporation's formal documents to make it easier for outside investors to acquire a
controlling interest in the firm through a hostile takeover.
c. Beef up the restrictive covenants in the firm's debt agreements.
d. Eliminate a requirement that members of the board of directors must hold a high percentage of their
personal wealth in the firm's stock.
e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e.,
the time before options can be exercised and the shares that are received can be sold.

A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who
need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is
one example of a financial intermediary.
a. True
b. False
The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places an
order to buy a stock.
a. True
b. False

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say
that the stock is closely held.
a. True
b. False

You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother
gave you a check for the stock and you gave your brother the stock certificates. Which of the following best
describes this transaction?
a. This is an example of a direct transfer of capital.
b. This is an example of a primary market transaction.
c. This is an example of an exchange of physical assets.
d. This is an example of a money market transaction.
e. This is an example of a derivative market transaction.

Money markets are markets for

a. Foreign currencies.
b. Consumer automobile loans.
c. Common stocks.
d. Long-term bonds.
e. Short-term debt securities such as Treasury bills and commercial paper.

You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:
a. A money market transaction.
b. A primary market transaction.
c. A secondary market transaction.
d. A futures market transaction.
e. An over-the-counter market transaction.
The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization
charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable
will be rolled over.

Balance Sheet (Millions of $)

Assets 2015
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Accruals 5,500
Notes payable 7,000
Total current liabilities $22,000

Long-term bonds $15,000

Total liabilities $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2015

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39

Compute for:
1. Current ratio
2. Quick ratio
3. days sales outstanding? Assume a 365-day year
4. total assets turnover?
5. inventory turnover ratio?
6. TIE?
7. ROA?
8. ROE?
9. BEP?
10. profit margin?
11. operating margin?
 12. dividends per share?
13. P/E ratio?
14. book value per share?
15. equity multiplier?

Which of the following assumptions is embodied in the AFN equation?

a. All balance sheet accounts are tied directly to sales.
b. Accounts payable and accruals are tied directly to sales.
c. Common stock and long-term debt are tied directly to sales.
d. Fixed assets, but not current assets, are tied directly to sales.
e. Last year's total assets were not optimal for last year's sales.

The term "additional funds needed (AFN)" is generally defined as follows:

a. Funds that are obtained automatically from routine business transactions.
b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by
selling new stock, to support operations.
c. The amount of assets required per dollar of sales.
d. The amount of internally generated cash in a given year minus the amount of cash needed to
acquire the new assets needed to support growth.
e. A forecasting approach in which the forecasted percentage of sales for each balance sheet
account is held constant.

Which of the following is NOT one of the steps taken in the financial planning process?
a. Assumptions are made about future levels of sales, costs, and interest rates for use in the
forecast.
b. The entire financial plan is reexamined, assumptions are reviewed, and the management team
considers how additional changes in operations might improve results.
c. Projected ratios are calculated and analyzed.
d. Develop a set of projected financial statements.
e. Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will
maximize profits for our firm and its competitors.
Which of the following statements is CORRECT?
a. The sustainable growth rate is the maximum achievable growth rate without the firm having to
raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.
b. If a firm's assets are growing at a positive rate, but its retained earnings are not increasing,
then it would be impossible for the firm's AFN to be negative.
c. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and
earnings actually decrease, then the firm's actual AFN must, mathematically, exceed the
previously calculated AFN.
d. Higher sales usually require higher asset levels, and this leads to what we call AFN. However,
the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend
payout ratio.
e. Dividend policy does not affect the requirement for external funds based on the AFN
equation.
Last year Godinho Corp. had $250 million of sales, and it had $75 million of fixed assets that were being
operated at 80% of capacity. In millions, how large could sales have been if the company had operated at
full capacity?
a. $312.5
b. $328.1
c. $344.5
d. $361.8
e. $379.8

Last year Wei Guan Inc. had $350 million of sales, and it had $270 million of fixed assets that were used
at 65% of capacity. In millions, by how much could Wei Guan's sales increase before it is required to
increase its fixed assets?
a. $170.09
b. $179.04
c. $188.46
d. $197.88
e. $207.78
Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its Fixed
Assets/Sales ratio was 40%. However, its fixed assets were used at only 75% of capacity. Now the
company is developing its financial forecast for the coming year. As part of that process, the company
wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full
capacity. What target Fixed Assets/Sales ratio should the company set?
a. 28.5%
b. 30.0%
c. 31.5%
d. 33.1%
e. 34.7%

Chua Chang & Wu Inc. is planning its operations for next year, and the CEO wants you to forecast the
firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN
equation, what is the AFN for the coming year?

Last year's sales = S0 $200,000 Last year's accounts payable $50,000

Sales growth rate = g 40% Last year's notes payable $15,000
Last year's total assets = A0* $135,000 Last year's accruals $20,000
Last year's profit margin = PM 20.0% Target payout ratio 25.0%
a. −$14,440
b. −$15,200
c. −$16,000
d. −$16,800
e. −$17,640
Howton & Howton Worldwide (HHW) is planning its operations for the coming year, and the CEO wants
you to forecast the firm's additional funds needed (AFN). Data for use in the forecast are shown below.
However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was
used in the past to 50%, which the firm's investment bankers have recommended. Based on the AFN
equation, by how much would the AFN for the coming year change if HHW increased the payout from
10% to the new and higher level? All dollars are in millions.

Last year's sales = S0 $300.0 Last year's accounts payable $50.0

Sales growth rate = g 40% Last year's notes payable $15.0
Last year's total assets = A0* $500.0 Last year's accruals $20.0
Last year's profit margin = PM 20.0% Initial payout ratio 10.0%
a. $31.9
b. $33.6
c. $35.3
d. $37.0
e. $38.9

Other things held constant, which of the following will cause an increase in net working capital?
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock issue.
e. Missing inventory is written off against retained earnings.

Firms generally choose to finance temporary current assets with short-term debt because
a. matching the maturities of assets and liabilities reduces risk under some circumstances, and
also because short-term debt is often less expensive than long-term capital.
b. short-term interest rates have traditionally been more stable than long-term interest rates.
c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt
than a firm that borrows short term.
d. the yield curve is normally downward sloping.
e. short-term debt has a higher cost than equity capital.

Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it
take?
a. Increases average inventory without increasing sales.
b. Take steps to reduce the DSO.
c. Start paying its bills sooner, which would reduce the average accounts payable but not affect
sales.
d. Sell common stock to retire long-term bonds.
e. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.

A lockbox plan is
a. used to protect cash, i.e., to keep it from being stolen.
b. used to identify inventory safety stocks.
 c. used to slow down the collection of checks our firm writes.
d. used to speed up the collection of checks received.
e. used primarily by firms where currency is used frequently in transactions, such as fast food
restaurants, and less frequently by firms that receive payments as checks.

Which of the following is NOT commonly regarded as being a credit policy variable?
a. Credit period.
b. Collection policy.
c. Credit standards.
d. Cash discounts.
e. Payments deferral period.

Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from
$320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity
matching (or moderate) working capital financing policy, what is the most likely total of long-term debt
plus equity capital?
a. $260,642
b. $274,360
c. $288,800
d. $304,000
e. $320,000

Edwards Enterprises follows a moderate current asset investment policy, but it is now considering a
change, perhaps to a restricted or maybe to a relaxed policy. The firm's annual sales are $400,000; its
fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is
$35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current
assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference
in the projected ROEs between the restricted and relaxed policies.
a. 4.25%
b. 4.73%
c. 5.25%
d. 5.78%
e. 6.35%

A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days.
What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)
a. 14.34%
b. 15.10%
c. 15.89%
d. 16.69%
e. 17.52%
Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays
on time, 60 days after the invoice date. Net purchases amount to $450,000 per year. On average, how
much "free" trade credit does the firm receive during the year? (Assume a 365-day year, and note that
purchases are net of discounts.)
a. $18,493
b. $19,418
c. $20,389
d. $21,408
e. $22,479

Ingram Office Supplies, Inc., buys on terms of 2/15, net 50 days. It does not take discounts, and it
typically pays on time, 50 days after the invoice date. Net purchases amount to $450,000 per year. On
average, what is the dollar amount of costly trade credit (total credit − free credit) the firm receives during
the year? (Assume a 365-day year, and note that purchases are net of discounts.)
a. $43,151
b. $45,308
c. $47,574
d. $49,952
e. $52,450

Roton Inc. purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before
taking off the discount) are $800,000 per year. What is the maximum dollar amount of costly trade credit
the firm could get, assuming it abides by the supplier's credit terms? (Assume a 365-day year.)
a. $53,699
b. $56,384
c. $59,203
d. $62,163
e. $65,271

Affleck Inc.'s business is booming, and it needs to raise more capital. The company purchases supplies on
terms of 1/10, net 20, and it currently takes the discount. One way of acquiring the needed funds would be
to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse
effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a
365-day year.)
a. 10.59%
b. 11.15%
c. 11.74%
d. 12.36%
e. 13.01%
Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that
the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable
balance? Assume a 365-day year.
a. $458,160
b. $482,273
c. $507,656
d. $534,375
e. $562,500

Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases. The
standard industry credit terms offered by all its suppliers are 2/10, net 30 days, and the firm pays on time.
The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking
discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases
are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate
is 40%. If the firm implements the plan, what is the expected change in net income?
a. $32,964
b. $34,699
c. $36,526
d. $38,448
e. $40,370