Q1. 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

Q2. Fixed assets are often estimated incorrectly by the percent of sales method because

a. fixed assets remain constant and the percent of sales method assumes all assets increase proportionally with sales.

b. fixed asset are very expensive.

c. fixed assets are typically purchased in "lumps" and therefore do not increase proportionally with sales.

d. fixed assets are part of the capital budgeting process.

Q3. 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.

Q4. 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

Q5. 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.

Q6. For a growing firm, external financing needed will most likely be greater than discretionary financing needed due to increases in accounts payable and accruals.

a. True

b. False

Q7. What differentiates "discretionary financing needs" from "external financing needs"?

a. assets

b. retained earnings

c. sales

d. spontaneous liabilities

Q8. What is the primary tool for short-term financial forecasting?

a. pro forma income statement

b. pro forma balance sheet

c. pro forma cash budget

d. capital budgeting

Q9. 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

Q10. A firm's cash position would most likely be hurt by

a. decreasing excess inventory.

b. establishing stricter (shorter) credit terms.

c. retiring outstanding debt.

d. increasing the net profit margin.

Q11. Which of the following is considered a spontaneous source of financing?

a. short-term notes payable

b. accounts payable

c. long-term notes payable

d. preferred stock

Q12. Which item would constitute poor collateral for an inventory loan?

a. lumber

b. vegetables

c. grain

d. chemicals

Q13. Total assets must always equal the sum of temporary, permanent, and spontaneous sources of financing.

a. True

b. False

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. The prime rate of interest is

a. the rate the bank charges its most credit-worthy borrowers.

b. the rate the bank charges for money it borrows from the Federal Reserve Board.

c. the rate the bank charges its average borrower.

d. the rate the bank charges on home mortgages.

Q16. Accrued wages and accrued taxes are considered to be

a. permanent sources of financing because companies must always pay wages and taxes.

b. spontaneous sources of unsecured short-term financing.

c. secured sources of short-term financing.

d. current assets.

Q17. The cash conversion cycle is a measure of a firm's effectiveness in managing its working capital.

a. True

b. False

Q18. 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 APR, or annual percentage rate, calculation?

a. 3.33%

b. 4.00%

c. 10.00%

d. 11.75%

Q19. The primary advantage that pledging accounts receivable provides is

a. the flexibility it gives to the borrower.

b. that the financial institution bears the risk of collection.

c. the low cost as compared with other sources of short-term financing.

d. that the financial institution services the accounts.

Q20. A company that forgoes the discount when credit terms are 2/10 net 60 due to insufficient cash flow would be better off to borrow funds and take the discount as long the company could borrow the funds at any rate

a. less than 16.33%.

b. less than 15.47%.

c. less than 14.69%.

d. less than 12.00%.

Q21. The time necessary for a deposited check to clear through the commercial banking system causes which of the following types of floats?

a. mail

b. processing

c. transit

d. disbursing

Q22. One advantage of zero balance accounts is an increase in disbursing float.

a. True

b. False

Q23. 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

Q24. Flashbinder Guitars, Inc. is considering a lockbox system that will increase its check processing cost by $.15 per check. The company estimates an average check size of $1,700 and expects the lockbox to reduce check collection time by 3 days. What annual before-tax yield must Flashbinder Guitars, Inc. earn on its marketable securities for the lockbox system to be beneficial?

a. 1.825%

b. 1.118%

c. 1.074%

d. 0.735%

Q25. In the basic EOQ model the optimal inventory level is the point at which

a. total cost is minimized.

b. total revenue is maximized.

c. carrying costs are minimized.

d. ordering costs are minimized.

Q26. Salamander Insurance Company tries to settle claims as quickly as possible. In certain cases, agents can present payments to claimants which are cleared through the banking system like a check, but must be passed through the Insurance Company for approved prior to payment. This is an example of a

a. zero balance account.

b. payable-through draft.

c. insurance float voucher.

d. post-dated check.

Q27. Effective cash management involves the tradeoff between the risk of insolvency (resulting in higher near cash balances) and the desire to earn higher returns (resulting in lower near cash balances).

a. True

b. False

Q28. If you were a treasurer for a Fortune 1,000 corporation who has responsibility for investing "excess cash balances," which of the following alternatives would you be least likely to select?

a. commercial paper

b. common stock

c. bankers' acceptances

d. U.S. Treasury bills

Q29. Payable through drafts

a. provides for effective control over field payments.

b. are not legal instruments.

c. cannot be cleared through the banking system.

d. are a form of commercial paper.

Q30. 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

Q31. The 30-day forward exchange rate is .01073033 dollars per yen. If this forward rate represents a per year discount of 2.5% from the current spot rate, what is the current spot exchange rate?

a. .01073033 dollars per yen

b. .01257754 dollars per yen

c. .01329684 dollars per yen

d. .01093833 dollars per yen

Q32. Which of the following is a reason for international investment?

a. to reduce portfolio risk

b. to increase P/E ratio

c. to gain an advantage in a foreign country

d. to gain access to foreign currency

Q33. If you are an importer of goods and you need to make payment for the purchase of inventory before the close of business today, which of the below is the correct term for the exchange rate that you will use?

a. indirect rate

b. spot rate

c. direct rate

d. forward rate

Q34. Assume that the British pound is worth 1.6242 U.S. dollars. If a new Jaguar costs $138,000, what is the cost in British pounds?

a. 201,000

b. 84,965

c. 71,642

d. 119,998

Q35. A bottle of German wine costs $21 euros in Berlin. According to the purchasing power parity theory, what would the bottle sell for in New York if it costs the New York company $1.25 per bottle to transport the wine to the United States? Assume the exchange rate is $1.32 per euro.

a. $40.54

b. $28.97

c. $27.22

d. $39.50

Q36. If you are an importer of goods and you will make payment for the purchase of inventory on 90-day terms, which of the below is the correct term for the exchange rate that you will use?

a. indirect rate

b. spot rate

c. direct rate

d. forward rate

Q37. Suppose a U.S. importer purchases an Italian product today but will not pay for it for 90 days. The cost of the product today is 30,000 euros. The spot exchange rate today is .6233 euros per dollar. If the U.S. importer does not hedge the position, which of the following spot exchange rates in 90 days will yield the highest returns?

a. 0.6833 euros per dollar

b. 0.6499 euros per dollar

c. $1.4844 per euro

d. $1.5387 per euro

Q38. A British-made component costs 36 U.K. pounds. A company in the United States needs to buy these components and the current indirect quote indicates that one dollar will buy .6250 pounds. Ignoring transactions costs, how much will one component cost in U.S. dollars?

a. $22.50

b. $45.94

c. $57.60

d. $72.00

Q39. Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.

a. True

b. False

Q40. Buying and selling in more than one market to make a riskless profit is called

a. profit-maximization.

b. arbitrage.

c. international trading.

d. cannot be determined from the above information