If external financing needed cannot be obtained due to poor market conditions, a firm could reduce the amount needed by increasing its retention ratio.

a. True

b. False

Q2. Is it possible for the cash budget and the pro forma income statement to have different results?

a. yes, because revenues and expenses included in each statement are different

b. yes, because revenues and expenses are accounted for over different time periods

c. no, because they contain the same variables, while just using different formats

d. no, because the cash budget and the pro forma income statement provide forecasts for the same time period

Q3. AFB, Inc. is expecting sales to increase by 20% next year, but its net fixed assets are expected to remain at their current level. This is an example of

a. economies of scale.

b. lumpy assets.

c. spontaneous financing.

d. discretionary financing.

Q4. A firm's cash position would most likely be helped by

a. delaying payment of accounts payable.

b. more liberal credit policies for their customers.

c. purchasing land for investment purposes.

d. holding larger inventories.

Q5. A discretionary form of financing would be

a. notes payable.

b. accounts payable.

c. accrued expenses.

d. A and B.

Q6. Ribbon Industries reported sales of $3 million and net income of $400,000 for 2010. The retained earnings balance at the end of 2012 is $7 million. Ribbon Industries has a dividend payout ratio of 30%. If sales are expected to increase by 25% next year, what will be the projected balance in retained earnings using the percent of sales method?

a. $7,280,000

b. $6,720,000

c. $7,350,000

d. $8,750,000

Q7. The primary purpose of a cash budget is to

a. determine the level of investment in current and fixed assets.

b. determine financing needs.

c. provide a detailed plan of future cash flows.

d. determine the estimated income tax for the year.

Q8. Spontaneous sources of financing include

a. accounts payable and accrued expenses.

b. notes payable and mortgages payable.

c. long-term debt and capital leases.

d. common stock and paid-in capital.

Q9. DAS, Inc. is preparing its financial forecast for next year and its discretionary financing needed is negative. This means that

a. sales growth must be negative.

b. the predicted change in total assets must be negative.

c. the predicted change in spontaneous liabilities and retained earnings must be greater than the predicted change in total assets.

d. the dividend payout ratio must be greater than the predicted growth rate in sales.

Q10. ABC Corporation began operations on January 1st of this year with a cash balance of $250,000. ABC had sales of $200,000 for the month of January, all on credit. ABC allows its customers 30 days to pay. ABC's expenses for January equal $150,000, and ABC's ending balance in accounts payable at January 31st is $50,000. In its cash budget for January, ABC's ending cash balance should be equal to

a. $300,000 because of GAAP accrual accounting rules.

b. $150,000.

c. $200,000.

d. $100,000.

Q11. Gerentology Associates, a highly profitable company, is considering two growth strategies, one that will achieve sales growth of 20% in one year, and the other that will achieve 20% growth in sales, but over a 4-year time frame. Assuming Gerentology Associates uses the percent of sales method, which of the following statements is true?

a. Discretionary financing needed will be much greater for the 4-year growth strategy.

b. Discretionary financing needed could be much less for the 4-year growth strategy due to retained earnings.

c. The asset balances at the end of 4 years for strategy two will be much greater than the asset balances required at the end of year one for strategy one.

d. Discretionary financing needed could be much greater for the slow growth strategy because interest charges will accumulate on the company's debt.

Q12. The cash budget represents a detailed plan of future cash flows.

a. True

b. False

Q13. Which of the following actions would improve a firm's liquidity?

a. repurchasing stock

b. selling bonds and increasing cash

c. buying bonds

d. increasing the company's dividend payments

Q14. Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the APY, or annual percentage yield, calculation?

a. 4.33%

b. 10.34%

c. 12.25%

d. 12.46%

Q15. Crawley, Inc. has a line of credit with HNC Bank that allows the company to borrow up to $800,000 at an interest rate of 12 percent. However, Crawley, Inc. must keep a compensating balance of 18 percent of any amount borrowed on deposit at the bank. Crawley, Inc. does not normally keep a cash balance account with HNC Bank. What is the effective annual cost of credit?

a. 12.40%

b. 12.83%

c. 14.63%

d. 15.47%

Q16. The risk-return trade-off in managing a firm's working capital involves which of the following?

a. a trade-off between liquidity and activity

b. a trade-off between debt and equity

c. a trade-off between the firm's liquidity and its profitability

d. none of the above

Q17. Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. How much will Brown Inc. need to borrow?

a. $270,000

b. $300,000

c. $312,500

d. $347,222

Q18. The cash conversion cycle is a measure of a firm's effectiveness in managing its working capital.

a. True

b. False

Q19. Blastdale Corp. is considering borrowing $15,000 for a 60-day period. The firm will repay the $15,000 principal amount plus $200 in interest. What is the effective annual rate of interest? Use a 360-day year.

a. 7.2%

b. 8.0%

c. 8.2%

d. 10.5%

Q20. The Boyles Ceramics, Inc. established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent. A compensating balance averaging 25 percent of the amount borrowed is required. Prior to the agreement, Boyles had no deposit with the bank. Shortly after signing the agreement, Boyles needed $240,000 to pay off a note that was due. It borrowed the $240,000 from the bank by drawing on the line of credit. What is the effective annual cost of credit?

a. 12.50%

b. 11.11%

c. 10.67%

d. 8.85%

Q21. The Missouri River Pendant Company uses commercial paper to satisfy part of its short-term financing requirements. Next week, it intends to sell $18 million in 90-day maturity paper on which it expects to have to pay discounted interest at an annual rate of 7 percent per annum. In addition, Stoney River expects to incur a cost of approximately $25,000 in dealer placement fees and other expenses of issuing the paper. What is the effective annual cost of credit to Missouri River?

a. 7.7%

b. 7.5%

c. 7.3%

d. 7.1%

Q22. Which item would constitute poor collateral for an inventory loan?

a. lumber

b. vegetables

c. grain

d. chemicals

Q23. Total assets must always equal the sum of temporary, permanent, and spontaneous sources of financing.

a. True

b. False

Q24. The primary sources of collateral for secured loans are accounts receivable and inventory.

a. True

b. False

Q25. Idaho Mining, Inc borrows at prime plus 1.5% on its line of credit. The line requires a 15% compensating balance. If prime rate is 9%, what is the nominal APR of the line of credit?

a. 9.0%

b. 6.0%

c. 10.6%

d. 12.4%

Q26. Money market funds

a. are tax exempt.

b. typically invest in a diversified portfolio of short-term, high-grade debt instruments.

c. are generally very profitable but fail to provide liquidity to the small investor.

d. typically sell shares to the public in $25,000 denominations.

Q27. Flashbinder Guitars, Inc. is considering a lockbox system that will increase its check processing cost by $.20 per check. The company estimates an average check size of $900 and expects any funds freed up by the new lockbox system can be invested in an account that earns 4% per year before taxes. What reduction in collection time is necessary for the lockbox to be beneficial to Flashbinder Guitars Inc.?

a. 1.96 days

b. 2.03 days

c. 1.73 days

d. 2.15 days

Q28. Assume that liquid funds can be invested to yield 4.5 percent. If annual remittance checks total $2 billion, what is it worth for the firm to reduce float by 1 day?

a. $388,349

b. $246,575

c. $257,534

d. $24,658

Q29. Determine the effective annualized cost of forgoing the trade discount on terms 2/15 net 65.

a. 11.30%

b. 14.69%

c. 32.6%

d. 48.98%

Q30. Transit float is caused by

a. the time necessary for a deposited check to clear the banking system and become usable funds to the company.

b. the time funds are not available, through the company's bank account, until its payment check has cleared the banking system.

c. the elapsed time from the moment a customer mails his remittance check until the firm begins to process it.

d. the time required for the firm to process remittance checks.

Q31. A company is technically insolvent when

a. cash outflows in a given period are greater than cash inflows.

b. earnings before interest payments are less than the interest payments.

c. it lacks the necessary liquidity to promptly pay its current debt obligations.

d. current ratio is less than 1.0.

Q32. One advantage of zero balance accounts is an increase in disbursing float.

a. True

b. False

Q33. Cash management system objectives include

a. maintaining sufficient cash to meet disbursal needs.

b. maintaining idle cash balances at "doomsday event" levels.

c. maintaining accounts payable balances at zero by early bill payment.

d. all of the above are objectives of the system.

Q34. The PMI, Inc. processes an estimated 200,000 checks per year from its customers. Total revenue collected by check is $40,000,000. The average float time until the funds are credited to PMI's checking account is 6 days. For an extra cost of $ .06/check, PMI's bank will install a lock-box system that will reduce float time from 6 days to 2.5 days. If PMI earns 3.5% on its checking account, how much per check will PMI make if it uses the lock-box system?

a. $.005

b. $.006

c. $.007

d. $.008

Q35. Krause Precision Tools, Inc. will use an estimated 700,000 small processors in its manufacturing process next year. The carrying cost of processor inventory is $3.00 per unit and the cost of reordering processors is $100 per order. What is Krause's economic ordering quantity for small processors?

a. 6,340

b. 6,831

c. 7,118

d. 7,300

Q36. Float is best described by which of the below?

a. investing excess cash balances

b. the time required for a deposited check to clear through the commercial banking system and be available for payment

c. the term used to describe payment for the purchase of raw materials that are needed to complete production of a luxury liner

d. the time that is required to receive payment on a zero balance account

Q37. The purpose of carrying inventory is to

a. make different production processes more dependent on sales.

b. make sales more independent of the production process.

c. have collateral for loans.

d. improve the current ratio.

Q38. International expansion often occurs because it is generally easier for firms to expand the market for their products rather than to develop new products.

a. True

b. False

Q39. Exchange rate risk is highest for companies with

a. international trade contracts denominated in the foreign currency.

b. investment portfolios that contain foreign securities.

c. direct foreign investments in foreign subsidiaries.

d. international trade contracts denominated in the domestic currency.

Q40. Exchange rate changes tend to reflect international differences in inflation rates. What is the name of this theory?

a. the purchasing power parity theory

b. the IMF effect

c. interest rate parity theory

d. the law of one price

Q41. Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.

a. True

b. False

Q42. An important (additional) consideration for a direct foreign investment is

a. political risk.

b. maximizing the firm's profits.

c. attaining a high international P/E ratio.

d. maintaining the domestic cost of capital.

Q43. Suppose the current spot rate in New York is .0119 dollars per yen. Inflation for the coming year in the United States is expected to be 3%, while inflation for the coming year is Japan is expected to be only 1%. Using the purchasing power parity theory, what is the expected spot rate at the end of the year should be

a. .0110147 dollars per yen.

b. .0108159 dollars per yen.

c. .0138373 dollars per yen.

d. .0121356 dollars per yen.

Q44. Triangular arbitrage eliminates exchange rate differentials across three markets for three currencies.

a. True

b. False

Q45. With international investing, unlike domestic investing, exchange rate risk could cause a marginally-positive-NPV project to be rejected due to the additional risk.

a. True

b. False

Q46. A narrow spread indicates efficiency in the spot exchange market.

a. True

b. False

Q47. The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate is .6211 pounds per dollar. Therefore, pounds in the forward market are selling at a ________ to the current spot rate.

a. .958 discount

b. .958 premium

c. .04 discount

d. .04 premium

Q48. Since 1973 the exchange rates between the major currencies of the world are

a. on a floating exchange rate system.

b. on an arbitrage exchange rate system.

c. on a fixed exchange rate system.

d. on a spot exchange rate system.

Q49. A forward exchange contract

a. gives the owner the right, but not the obligation, to buy a foreign currency at a fixed exchange rate for a fixed period of time.

b. gives the owner the right to purchase a foreign currency at some point in the future and any gains or losses are credited/debited to the account at the close of business each day.

c. requires delivery, at a specified future date, of one currency for a specified amount of another currency.

d. requires delivery, within two working days, of one currency for a specified amount of another currency.

Q50. Money-market hedges and forward market hedges rely on the

a. interest rate parity theory.

b. purchasing power parity theory.

c. law of large numbers.

d. capital asset pricing model.