REVISION CORPORATE FINANCE

Part 1: Multiple-choice questions

1. Which one of the following is a capital budgeting decision?

A. determining how much debt should be borrowed from a particular lender
B. deciding whether or not to open a new store
C. deciding when to repay a long-term debt
D. determining how much inventory to keep on hand
E. determining how much money should be kept in the checking account

2. The treasurer and the controller of a corporation generally report to the:

A. board of directors.
B. chairman of the board.
C. chief executive officer.
D. president.
E. chief financial officer.

3. Working capital management includes decisions concerning which of the following?

I. Accounts payable
II. long-term debt
III. Accounts receivable
IV. inventory
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and III only
E. I, III, and IV only

4. Working capital management:

A. ensures that sufficient equipment is available to produce the amount of product desired
daily.
B. ensures that long-term debt is acquired at the lowest possible cost.
C. ensures that dividends are paid to all stockholders on an annual basis.
D. balances the amount of company debt to the amount of available equity.
E. is concerned with the upper portion of the balance sheet.

5. Which one of the following statements concerning a sole proprietorship is correct?

A. A sole proprietorship is the least common form of business ownership.
B. The profits of a sole proprietorship are taxed twice.
C. The owners of a sole proprietorship share profits as established by the partnership
agreement.
D. The owner of a sole proprietorship may be forced to sell his/her assets to pay
company debts.
E. A sole proprietorship is often structured as a limited liability company.
6. Which one of the following statements concerning a sole proprietorship is correct?
A. The life of the firm is limited to the life span of the owner.
B. The owner can generally raise large sums of capital quite easily.
C. The ownership of the firm is easy to transfer to another individual.
D. The company must pay separate taxes from those paid by the owner.
E. The legal costs to form a sole proprietorship are quite substantial.

7. Which one of the following best describes the primary advantage of being a limited
partner rather than a general partner?
A. entitlement to a larger portion of the partnership's income
B. ability to manage the day-to-day affairs of the business
C. no potential financial loss
D. greater management responsibility
E. liability for firm debts limited to the capital invested

8. A general partner:
A. has less legal liability than a limited partner.
B. has more management responsibility than a limited partner.
C. faces double taxation whereas a limited partner does not.
D. cannot lose more than the amount of his/her equity investment.
E. is the term applied only to corporations that invest in partnerships.

9. A partnership:
A. is taxed the same as a corporation.
B. agreement defines whether the business income will be taxed like a partnership or a
corporation.
C. terminates at the death of any general partner.
D. has less of an ability to raise capital than a proprietorship.
E. allows for easy transfer of interest from one general partner to another.

10. Which of the following are the disadvantages of a partnership?

I. limited life of the firm
II. personal liability for firm debt
III. greater ability to raise capital than a sole proprietorship
IV. lack of ability to transfer partnership interest
A. I and II only
B. III and IV only
C. II and III only
D. I, II, and IV only
E. I, III, and IV only

11. Which of the following are the advantages of the corporate form of business
ownership?
I. limited liability for firm debt
II. double taxation
III.Ability to raise capital
IV. unlimited firm life
A. I and II only
B. III and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, III, and IV only
12. Which one of the following statements is correct concerning corporations?
A. The largest firms are usually corporations.
B. The majority of firms are corporations.
C. The stockholders are usually the managers of a corporation.
D. The ability of a corporation to raise capital is quite limited.
E. The income of a corporation is taxed as the personal income of the stockholders.

13. Which one of the following statements is correct?

A. Both partnerships and corporations incur double taxation.
B. Both sole proprietorships and partnerships are taxed similarly.
C. Partnerships are the most complicated type of business to form.
D. Both partnerships and corporations have limited liability for general partners and
shareholders.
E. All types of business formations have limited lives.

14. The articles of incorporation:

A. can be used to remove company management.
B. are amended annually by the company stockholders.
C. set forth the number of shares of stock that can be issued.
D. set forth the rules by which the corporation regulates its existence.
E. can set forth the conditions under which the firm can avoid double taxation.

15. The bylaws:

A. establish the name of the corporation.
B. are rules which apply only to limited liability companies.
C. set forth the purpose of the firm.
D. mandate the procedure for electing corporate directors.
E. set forth the procedure by which the stockholders elect the senior managers of the firm.

16. The owners of a limited liability company prefer:

A. being taxed like a corporation.
B. having liability exposure similar to that of a sole proprietor.
C. being taxed personally on all business income.
D. having liability exposure similar to that of a general partner.
E. being taxed like a corporation with a liability like a partnership.

17. Which one of the following business types is best suited to raising large
amounts of capital?
A. sole proprietorship
B. limited liability company
C. corporation
D. general partnership
E. limited partnership

18. Which type of business organization has all the respective rights and privileges of a
legal person?
A. sole proprietorship
B. general partnership
C. limited partnership
D. corporation
E. limited liability company
19. Financial managers should strive to maximize the current value per share of the
existing stock because:
A. doing so guarantees the company will grow in size at the maximum possible rate.
B. doing so increases the salaries of all the employees.
C. the current stockholders are the owners of the corporation.
D. doing so means the firm is growing in size faster than its competitors.
E. The managers often receive shares of stock as part of their compensation.

20. The decisions made by financial managers should all increase the:
A. size of the firm.
B. growth rate of the firm.
C. marketability of the managers.
D. the market value of the existing owners' equity.
E. financial distress of the firm.

21. Depreciation:
A. is a noncash expense that is recorded on the income statement.
B. increases the net fixed assets as shown on the balance sheet.
C. reduces both the net fixed assets and the costs of a firm.
D. is a non-cash expense that increases the net operating income.
E. decreases net fixed assets, net income, and operating cash flows.

22. When you are making a financial decision, the most relevant tax rate is the rate.
A. average
B. fixed
C. marginal
D. total
E. variable

23. An increase in which one of the following will cause the operating cash flow to
increase?
A. depreciation
B. changes in the amount of net fixed capital
C. net working capital
D. taxes
E. costs

24. A firm starts its year with a positive net working capital. During the year,
the firm acquires more short-term debt than it does short-term assets. This
means that:
A. the ending net working capital will be negative.
B. both accounts receivable and inventory decreased during the year.
C. the beginning current assets were less than the beginning current liabilities.
D. accounts payable increased and inventory decreased during the year.
E. the ending net working capital can be positive, negative, or equal to zero.

25. The cash flow to creditors includes the cash:

A. received by the firm when payments are paid to suppliers.
B. outflow of the firm when new debt is acquired.
C. outflow when interest is paid on outstanding debt.
D. inflow when accounts payable decreases.
E. received when long-term debt is paid off.
26. Cash flow to stockholders must be positive when:
A. the dividends paid exceed the net new equity raised.
B. The net sale of common stock exceeds the amount of dividends paid.
C. no income is distributed but new shares of stock are sold.
D. both the cash flow to assets and the cash flow to creditors are negative.
E. both the cash flow to assets and the cash flow to creditors are positive.

27. Which equality is the basis for the balance sheet?

A. Fixed Assets = Stockholder's Equity + Current Assets
B. Assets = Liabilities + Stockholder's Equity
C. Assets = Current Long-Term Debt + Retained Earnings
D. Fixed Assets = Liabilities + Stockholder's Equity
E. None of the above

28. Assets are listed on the balance sheet in order of:

A. decreasing liquidity.
B. decreasing size.
C. increasing size.
D. relative life.
E. None of the above.

29. Debt is a contractual obligation that:

A. requires the payout of residual flows to the holders of these instruments.
B. requires a repayment of a stated amount and interest over the period.
C. allows the bondholders to sue the firm if it defaults.
D. Both A and B.
E. Both B and C.

30. The carrying value or book value of assets:

A. is determined under GAAP/IFRS and is based on the cost of the asset.
B. represents the true market value according to GAAP/IFRS.
C. is always the best measure of the company's value to an investor.
D. is always higher than the replacement cost of the assets.
E. None of the above.

31. Under GAAP/IFRS, a firm's assets are reported as:

A. market value.
B. liquidation value.
C. intrinsic value.
D. cost.
E. None of the above.

32. Which of the following statements concerning the income statement is true?
A. It measures performance over a specific period of time.
B. It determines the after-tax income of the firm.
C. It includes deferred taxes.
D. It treats interest as an expense.
E. All of the above.
33. According to generally accepted accounting principles (GAAP), revenue is
recognized as income when:
A. a contract is signed to perform a service or deliver a good.
B. the transaction is complete and the goods or services are delivered.
C. payment is requested.
D. income taxes are paid.
E. All of the above.

34. Which of the following is not included in the computation of operating cash flow?
A. Earnings before interest and taxes
B. Interest paid
C. Depreciation
D. Current taxes
E. All of the above are included

35. Net capital spending is equal to:

A. net additions to net working capital.
B. the net change in fixed assets.
C. net income plus depreciation.
D. total cash flow to stockholders less interest and dividends paid.
E. the change in total assets.

36. Cash flow to stockholders is defined as:

A. interest payments.
B. repurchases of equity less cash dividends paid plus new equity sold.
C. cash flow from financing less cash flow to creditors.
D. cash dividends plus repurchases of equity minus new equity financing.
E. None of the above.

37. Free cash flow is:

A. without cost to the firm.
B. net income plus taxes.
C. an increase in net working capital.
D. cash that the firm is free to distribute to creditors and stockholders.
E. None of the above.

38. The cash flow of the firm must be equal to:

A. cash flow to stockholders minus cash flow to debtholders.
B. cash flow to debtholders minus cash flow to stockholders.
C. cash flow to governments plus cash flow to stockholders.
D. cash flow to stockholders plus cash flow to debtholders.
E. None of the above.
39. Which of the following are all components of the statement of cash flows?
A. Cash flow from operating activities, cash flow from investing activities, and cash flow
from financing activities
B. Cash flow from operating activities, cash flow from investing activities, and cash flow
from divesting activities
C. Cash flow from internal activities, cash flow from external activities, and cash flow from
financing activities
D. Cash flow from brokering activities, cash flow from profitable activities, and cash flow
from non-profitable activities
E. None of the above.

40. One of the reasons why cash flow analysis is popular is because:
A. cash flows are more subjective than net income.
B. cash flows are hard to understand.
C. it is easy to manipulate or spin the cash flows.
D. it is difficult to manipulate or spin the cash flows.
E. None of the above.

41. If shareholders want to know how much profit a firm is making on their entire
investment in the firm, the shareholders should look at the:
A. profit margin.
B. return on assets.
C. return on equity.
D. equity multiplier.
E. earnings per share.

42. BGL Enterprises increases its operating efficiency such that costs decrease while
sales remain constant. As a result, given all else constant, the:
A. return on equity will increase.
B. return on assets will decrease.
C. profit margin will decline.
D. equity multiplier will decrease.
E. price-earnings ratio will increase.

43. The only difference between Joe's and Moe's is that Joe's has old, fully
depreciated equipment. Moe's just purchased all new equipment which will be
depreciated over eight years. Assuming all else equal:
A. Joe's will have a lower profit margin.
B. Joe's will have a lower return on equity.
C. Moe's will have a higher net income.
D. Moe's will have a lower profit margin.
E. Moe's will have a higher return on assets.

44. Last year, Alfred's Automotive had a price-earnings ratio of 15. This year, the
price-earnings ratio is 18. Based on this information, it can be stated with
certainty that:
A. the price per share increased.
B. the earnings per share decreased.
C. investors are paying a higher price for each share of stock purchased.
D. investors are receiving a higher rate of return this year.
E. either the price per share, the earnings per share, or both changed.
45. Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio
of 19. Thus, you can state with certainty that one share of stock in Alfred's:
A. has a higher market price than one share of stock in Turner's.
B. has a higher market price per dollar of earnings than does one share of Turner's.
C. sells at a lower price per share than one share of Turner's.
D. represents a larger percentage of firm ownership than does one share of Turner's stock.
E. earns a greater profit per share than does one share of Turner's stock.

46. Which two of the following are most apt to cause a firm to have a higher price-
earnings ratio?
I. slow industry outlook
II. high prospect of firm growth
III.very low current earnings
IV. investors with a low opinion of the firm
A. I and II only
B. II and III only
C. II and IV only
D. I and III only
E. III and IV only

47. Vinnie's Motors has a market-to-book ratio of 3. The book value per share is
$4.00. Holding market-to-book constant, a $1 increase in the book value per share
will:
A. cause the accountants to increase the equity of the firm by an additional $2.
B. increase the market price per share by $1.
C. increase the market price per share by $12.
D. tends to cause the market price per share to rise.
E. only affects book values but not market values.

48. Which one of the following sets of ratios applies most directly to shareholders?
A. return on assets and profit margin
B. quick ratio and times interest earned
C. price-earnings ratio and debt-equity ratio
D. market-to-book ratio and price-earnings ratio
E. cash coverage ratio and times equity multiplier

49. The three parts of the Du Pont identity can be generally described as:
I. operating efficiency, asset use efficiency, and firm profitability.
II. financial leverage, operating efficiency, and asset use efficiency.
III.the equity multiplier, the profit margin, and the total asset turnover.
IV. the debt-equity ratio, the capital intensity ratio, and the profit margin.
A. I and II only
B. II and III only
C. I and IV only
D. I and III only
E. III and IV only

50. If a firm decreases its operating costs, all else constant, then:
A. the profit margin increases while the equity multiplier decreases.
B. the return on assets increases while the return on equity decreases.
C. the total asset turnover rate decreases while the profit margin increases.
D. both the profit margin and the equity multiplier increase.
E. both the return on assets and the return on equity increase.
51. Which one of the following statements is correct?
A. Book values should always be given precedence over market values.
B. Financial statements are frequently the basis used for performance evaluations.
C. Historical information has no value when predicting the future.
D. Potential lenders place little value on financial statement information.
E. Reviewing financial information over time has very limited value.

52. It is easier to evaluate a firm using its financial statements when the firm:
A. is a conglomerate.
B. is global in nature.
C. uses the same accounting procedures as other firms in its industry.
D. has a different fiscal year than other firms in its industry.
E. tends to have one-time events such as asset sales and property acquisitions.

52. Which two of the following represent the most effective methods of directly
evaluating the financial performance of a firm?
I. Comparing the current financial ratios to those of the same firm from prior periods
II. comparing a firm's financial ratios to those of other firms in the firm's peer group who
have similar operations
III.Comparing the financial statements of the firm to the financial statements of similar
firms operating in other countries
IV. comparing the financial ratios of the firm to the average ratios of all firms located in
the same geographic area
A. I and II only
B. II and III only
C. III and IV only
D. I and IV only
E. I and III only

53. In the financial planning model, external funds needed (EFN) are equal to changes in
A. assets - (liabilities - equity).
B. assets - (liabilities + equity).
C. (assets + liabilities - equity).
D. (assets + equity - liabilities).
E. assets - equity.

54. Which of the following represent problems encountered when comparing the
financial statements of one firm with those of another firm?
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of
business.
II. The operations of the two firms may vary geographically.
III. The firms may use differing accounting methods for inventory purposes.
IV. The two firms may be seasonal in nature and have different fiscal year ends.
A. I and II only
B. II and III only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
55. A firm's sustainable growth rate in sales directly depends on its:
A. debt to equity ratio.
B. profit margin.
C. dividend policy.
D. asset efficiency.
E. All of the above.

56. The sustainable growth rate will be equivalent to the internal growth rate when:
A. a firm has no debt.
B. the growth rate is positive.
C. the plowback ratio is positive but less than 1.
D. a firm has a debt-equity ratio exactly equal to 1.
E. net income is greater than zero.

57. The sustainable growth rate:

A. assumes there is no external financing of any kind.
B. is normally higher than the internal growth rate.
C. assumes the debt-equity ratio is variable.
D. is based on receiving additional external debt and equity financing.
E. assumes that 100% of all income is retained by the firm.

58. If a firm bases its growth projection on the rate of sustainable growth, and shows
positive net income, then the:
A. fixed assets will have to increase at the same rate, regardless of the current capacity level.
B. the number of common shares outstanding will increase at the same rate of growth.
C. The debt-equity ratio will have to increase.
D. debt-equity ratio will remain constant while retained earnings increase.
E. fixed assets, debt-equity ratio, and number of common shares outstanding will all increase.

59. Marcie's Mercantile wants to maintain its current dividend policy, which is a
payout ratio of 40%. The firm does not want to increase its equity financing but is
willing to maintain its current debt-equity ratio. Given these requirements, the
maximum rate at which Marcie's can grow is equal to:
A. 40% of the internal rate of growth.
B. 60% of the internal rate of growth.
C. the internal rate of growth.
D. the sustainable rate of growth.
E. 60% of the sustainable rate of growth.

60. One of the primary weaknesses of many financial planning models is that they:
A. rely too much on financial relationships and too little on accounting relationships.
B. are iterative in nature.
C. ignore the goals and objectives of senior management.
D. are based solely on best-case assumptions.
E. ignore the size, risk, and timing of cash flows.
61. The financial statement showing a firm's accounting value on a particular date is
the:
A. income statement.
B. balance sheet.
C. statement of cash flows.
D. tax reconciliation statement.
E. shareholders' equity sheet.

62. A current asset is:

A. an item currently owned by the firm.
B. an item that the firm expects to own within the next year.
C. an item currently owned by the firm that will convert to cash within the next 12 months.
D. the amount of cash on hand the firm currently shows on its balance sheet.
E. the market value of all items currently owned by the firm.

63. The long-term debts of a firm are liabilities:

A. that come due within the next 12 months.
B. that do not come due for at least 12 months.
C. owed to the firm's suppliers.
D. owed to the firm's shareholders.
E. the firm expects to incur within the next 12 months.

64. Net working capital is defined as:

A. total liabilities minus shareholders' equity.
B. current liabilities minus shareholders' equity.
C. fixed assets minus long-term liabilities.
D. total assets minus total liabilities.
E. current assets minus current liabilities.

65. A(n) asset can be quickly converted into cash without significant loss in value.
A. current
B. fixed
C. intangible
D. liquid
E. long-term

66. The financial statement summarizing a firm's accounting performance over a

period of time is the:
A. income statement.
B. balance sheet.
C. statement of cash flows.
D. tax reconciliation statement.
E. shareholders' equity sheet.

67. Noncash items refer to:

A. the credit sales of a firm.
B. the accounts payable of a firm.
C. the costs incurred for the purchase of intangible fixed assets.
D. expenses charged against revenues that do not directly affect cash flow.
E. all accounts on the balance sheet other than cash on hand.
68. Your tax rate is the amount of tax payable on the next taxable dollar you
earn.
A. deductible
B. residual
C. total
D. average
E. marginal

69. Your tax rate is the total taxes you pay divided by your taxable income.
A. deductible
B. residual
C. total
D. average
E. marginal

70. refers to the cash flow that results from the firm's ongoing, normal
business activities.
A. Cash flow from operating activities
B. Capital spending
C. Net working capital
D. Cash flow from assets
E. Cash flow to creditors

71. refers to the changes in net capital assets.

A. Operating cash flow
B. Cash flow from investing
C. Net working capital
D. Cash flow from assets
E. Cash flow to creditors

72. refers to the difference between a firm's current assets and its current
liabilities.
A. Operating cash flow
B. Capital spending
C. Net working capital
D. Cash flow from assets
E. Cash flow to creditors

73. is calculated by adding back noncash expenses to net income and

adjusting for changes in current assets and liabilities.
A. Operating cash flow
B. Capital spending
C. Net working capital
D. Cash flow from operations
E. Cash flow to creditors

74. refers to the firm's interest payments less any net new borrowing.
A. Operating cash flow
B. Capital spending
C. Net working capital
D. Cash flow from shareholders
E. Cash flow to creditors
75. refers to the firm's dividend payments less any net new equity raised.
A. Operating cash flow
B. Capital spending
C. Net working capital
D. Cash flow from creditors
E. Cash flow to stockholders

76. Earnings per share is equal to:

A. net income divided by the total number of shares outstanding.
B. net income divided by the par value of the common stock.
C. gross income multiplied by the par value of the common stock.
D. operating income divided by the par value of the common stock.
E. net income divided by total shareholders' equity.

77. Dividends per share is equal to dividends paid:

A. divided by the par value of common stock.
B. divided by the total number of shares outstanding.
C. divided by total shareholders' equity.
D. multiplied by the par value of the common stock.
E. multiplied by the total number of shares outstanding.

78. Which of the following are included in current assets?

I. equipment
II. inventory
III.Accounts payable
IV. cash
A. II and IV only
B. I and III only
C. I, II, and IV only
D. III and IV only
E. II, III, and IV only

79. Which of the following are included in current liabilities?

I. note payable to a supplier in eighteen months
II. debt payable to a mortgage company in nine months
III.Accounts payable to suppliers
IV. loan payable to the bank in fourteen months
A. I and III only
B. II and III only
C. III and IV only
D. II, III, and IV only
E. I, II, and III only

80. An increase in total assets:

A. means that net working capital is also increasing.
B. requires an investment in fixed assets.
C. means that shareholders' equity must also increase.
D. must be offset by an equal increase in liabilities and shareholders' equity.
E. can only occur when a firm has positive net income.
81. One key reason a long-term financial plan is developed is because:
A. the plan determines your financial policy.
B. the plan determines your investment policy.
C. there are direct connections between achievable corporate growth and financial policy.
D. there is unlimited growth possible in a well-developed financial plan.
E. None of the above.

82. Projected future financial statements are called:

A. plug statements.
B. pro forma statements.
C. reconciled statements.
D. aggregated statements.
E. none of the above.

83. The percentage of sales method:

A. requires that all accounts grow at the same rate.
B. separates accounts that vary with sales and those that do not vary with sales.
C. allows the analyst to calculate how much financing the firm will need to support the
predicted sales level.
D. Both A and B.
E. Both B and C.

84. A standardizes items on the income statement and balance sheet as a

percentage of total sales and total assets, respectively.
A. tax reconciliation statement
B. statement of standardization
C. statement of cash flows
D. common-base year statement
E. common-size statement

85. Relationships determined from a firm's financial information and used for
comparison purposes are known as:
A. financial ratios.
B. comparison statements.
C. dimensional analysis.
D. scenario analysis.
E. solvency analysis.

86. Financial ratios that measure a firm's ability to pay its bills over the short run
without undue stress are known as ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. market value
87. The current ratio is measured as:
A. current assets minus current liabilities.
B. current assets divided by current liabilities.
C. current liabilities minus inventory, divided by current assets.
D. cash on hand divided by current liabilities.
E. current liabilities divided by current assets.

88. The quick ratio is measured as:

A. current assets divided by current liabilities.
B. cash on hand plus current liabilities, divided by current assets.
C. current liabilities divided by current assets, plus inventory.
D. current assets minus inventory, divided by current liabilities.
E. current assets minus inventory minus current liabilities.

89. The cash ratio is measured as:

A. current assets divided by current liabilities.
B. current assets minus cash on hand, divided by current liabilities.
C. current liabilities plus current assets, divided by cash on hand.
D. cash on hand plus inventory, divided by current liabilities.
E. cash on hand divided by current liabilities.

90. Ratios that measure a firm's financial leverage are known as ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. market value

91. The financial ratio measured as total assets minus total equity, divided by total
assets, is the:
A. total debt ratio.
B. equity multiplier.
C. debt-equity ratio.
D. current ratio.
E. times interest earned ratio.

92. The debt-equity ratio is measured as total:

A. equity minus total debt.
B. equity divided by total debt.
C. debt divided by total equity.
D. debt plus total equity.
E. debt minus total assets, divided by total equity.

93. The equity multiplier ratio is measured as the total:

A. equity divided by total assets.
B. equity plus total debt.
C. assets minus total equity, divided by total assets.
D. assets plus total equity, divided by total debt.
E. assets divided by total equity.
94. The financial ratio measured as earnings before interest and taxes, divided by
interest expense is the:
A. cash coverage ratio.
B. debt-equity ratio.
C. times interest earned ratio.
D. gross margin.
E. total debt ratio.

95. The financial ratio measured as earnings before interest and taxes, plus
depreciation, divided by interest expense, is the:
A. cash coverage ratio.
B. debt-equity ratio.
C. times interest earned ratio.
D. gross margin.
E. total debt ratio.

96. Ratios that measure how efficiently a firm uses its assets to generate sales are
known as
ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. market value

97. The inventory turnover ratio is measured as:

A. total sales minus inventory.
B. inventory times total sales.
C. cost of goods sold divided by inventory.
D. inventory times cost of goods sold.
E. inventory plus cost of goods sold.

98. The financial ratio of days' sales in inventory is measured as:

A. inventory turnover plus 365 days.
B. inventory times 365 days.
C. inventory plus cost of goods sold, divided by 365 days.
D. 365 days divided by the inventory.
E. 365 days divided by the inventory turnover.

99. The receivables turnover ratio is measured as:

A. sales plus accounts receivable.
B. sales divided by accounts receivable.
C. sales minus accounts receivable, divided by sales.
D. accounts receivable times sales.
E. accounts receivable divided by sales.

100. The financial ratio of days' sales in receivables is measured as:

A. receivables turnover plus 365 days.
accounts receivable times 365 days.
B. accounts receivable plus sales, divided by 365 days.
C. 365 days divided by the receivables turnover.
D. 365 days divided by the accounts receivable.
 Part 2: Essays

Question 1:
1. If the corporate form of business organization has so many advantages over the sole
proprietorship, why is it so common for small businesses to initially be formed as sole
proprietorships?
2. What should be the goal of the financial manager of a corporation? Why?
3. Do you think agency problems arise in sole proprietorships and/or partnerships?
4. Assume for a moment that the stockholders in a corporation have unlimited liability for
corporate debts. If so, what impact would this have on the functioning of primary and
secondary markets for common stock?
5.What is a liquid asset and why is it necessary for a firm to maintain a reasonable level of
liquid assets?
6. Why is interest expense excluded from the operating cash flow calculation?
7. Explain why the income statement is not a good representation of cash flow.
8. Why is it important for managers to understand the importance of both the internal and the
sustainable rates of growth?
9. State the assumptions that underlie the sustainable growth rate and interpret what the
sustainable growth rate means.
10. Suppose a firm calculates its external funding needs and finds that it is negative. What are
the firm's options in this case?

Question 1:
1. If the corporate form of business organization has so many advantages over the
sole proprietorship, why is it so common for small businesses to initially be
formed as sole proprietorships?
Small businesses often start as sole proprietorships due to their simplicity and low
regulatory requirements. Setting up a sole proprietorship is straightforward, involves
minimal paperwork, and has fewer legal and compliance formalities compared to
incorporating. Additionally, the owner has complete control over the business and its
profits.
2. What should be the goal of the financial manager of a corporation? Why?
The goal of a financial manager should be to maximize shareholder wealth, typically
measured by the company's stock price. This objective aligns with the interests of the
shareholders and ensures efficient allocation of resources, leading to the long-term
sustainability and growth of the corporation.
3. Do you think agency problems arise in sole proprietorships and/or partnerships?
 Agency problems can arise in any organization where the interests of the owners
(principals) differ from those of the managers (agents). While it's more evident in
corporations, agency problems can still emerge in sole proprietorships and partnerships
if the owners delegate decision-making to managers who may not always act in the
owners' best interests.
4. Assume for a moment that the stockholders in a corporation have unlimited
liability for corporate debts. If so, what impact would this have on the functioning
of primary and secondary markets for common stock?
Unlimited liability would significantly discourage investors from buying stock in the
primary and secondary markets. Investors could potentially lose personal assets
beyond their initial investment, making investing in such corporations highly risky.
This would likely reduce demand for the stock and impede the functioning of both
primary and secondary markets.
5. What is a liquid asset and why is it necessary for a firm to maintain a reasonable
level of liquid assets?
A liquid asset is an asset that can be quickly converted into cash without significant
loss of value. It is necessary for a firm to maintain a reasonable level of liquid assets to
meet short-term obligations and unforeseen expenses. This ensures the company's
ability to cover its immediate financial needs and operate smoothly even in times of
economic uncertainty.
6. Why is interest expense excluded from the operating cash flow calculation?
Interest expense is excluded from the operating cash flow calculation because it is a
financing cost and not directly related to the core operational activities of the business.
Operating cash flow focuses on the cash generated or used by the primary business
operations, excluding financing and investing activities.
7. Explain why the income statement is not a good representation of cash flow.
The income statement includes non-cash items such as depreciation and
amortization, which affect reported profits but don't involve actual cash transactions.
Additionally, changes in working capital, financing activities, and investments are not
fully captured. Therefore, while the income statement provides insight into
profitability, it doesn't accurately represent the actual cash flow of a business.
8. Why is it important for managers to understand the importance of both the
internal and the sustainable rates of growth?
Internal growth rate indicates the maximum rate at which a firm can grow its sales
without external financing, while the sustainable growth rate considers external
financing. Managers need to understand both rates to make informed decisions about
the firm's growth strategies, funding requirements, and potential limitations on growth
 without jeopardizing financial stability.
9. State the assumptions that underlie the sustainable growth rate and interpret
what the sustainable growth rate means.
The assumptions underlying the sustainable growth rate include constant profit
margins, a constant dividend payout ratio, and a consistent return on equity. The
sustainable growth rate represents the rate at which a company can grow its sales,
earnings, and dividends without having to increase debt or equity, maintaining its
financial structure and stability.
10. Suppose a firm calculates its external funding needs and finds that it is negative.
What are the firm's options in this case?
If a firm has negative external funding needs, it means that the internally generated
funds are sufficient to cover its growth or investment plans. In this case, the firm's
options include reducing debt, returning excess cash to shareholders through dividends
or buybacks, or exploring new investment opportunities to further enhance shareholder
value.
Question 2:
Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market
the game either as a traditional board game or as an interactive DVD, but not both. Consider
the following cash flows of the two mutually exclusive projects for Mario Brothers. Assume
the discount rate for Mario Brothers is 10 percent.
Year Board Game DVD
0 −$750 −$1,800
1 600 1,300
2 450 850
3 120 350
a. Based on the payback period rule (PP and DPP), which project should be chosen?
b. Based on the NPV, which project should be chosen?
c. Based on the IRR, which project should be chosen?
d. Based on the PI, which project should be chosen?

Hint:
a. The payback period is the time that it takes for the cumulative undiscounted cash
inflows to equal the initial investment.
Board game:
Cumulative cash flows Year 1 = $600 = $600
Cumulative cash flows Year 2 = $600 + 450 = $1,050
Payback period = 1 + $150 / $450 = 1.33 years
DVD:
Cumulative cash flows Year 1 = $1,300 = $1,300
Cumulative cash flows Year 2 = $1,300 + 850 = $2,150
 Payback period = 1 + ($1,800 – 1,300) / $850 = 1.59 years
Since the board game has a shorter payback period than the DVD project, the
company should choose the board game.

DPP approach:

b. The NPV is the sum of the present value of the cash flows from the project, so the
NPV of each project will be:
Board game:
NPV = –$750 + $600 / 1.10 + $450 / 1.102 + $120 / 1.103
NPV = $257.51
DVD:
NPV = –$1,850 + $1,300 / 1.10 + $850 / 1.102 + $350 / 1.103
NPV = $347.26
Since the NPV of the DVD is greater than the NPV of the board game, choose
the DVD.

c. The IRR is the interest rate that makes the NPV of a project equal to zero. So, the IRR
of each project is:
Board game:
0 = –$750 + $600 / (1 + IRR) + $450 / (1 + IRR)2 + $120 / (1 + IRR)3
IRR = 33.79%
DVD:
0 = –$1,850 + $1,300 / (1 + IRR) + $850 / (1 + IRR)2 + $350 / (1 + IRR)3
IRR = 23.31%
Since the IRR of the board game is greater than the IRR of the DVD, IRR
implies
we choose the board game.

d. PI = (NPV + I)/I
Board game:
PI =
DVD:
PI =

Question 3:
XYZ Joint Stock Company has a mobile phone production project with a total capital of VND
120 billion sourced from debt financing, preferred stock, and common equity. Of this amount,
the debt accounts for VND 40 billion with a pre-tax cost of debt at 10% per annum. The
company's funding from preferred stock is VND 10 billion. The cost of using preferred equity
is 2.5% per annum higher than the pre-tax cost of corporate debt. The company's shares are
traded on the stock market and are rated by securities firms with a beta coefficient of 1.2. The
treasury bill rate is known to be 5% per annum. The return on the market investment portfolio
is 16.5% per annum. The corporate income tax rate is 20%.
a. Calculate the cost of common equity for the company.
b. Calculate the Weighted Average Cost of Capital (WACC) for this project.
Hint:
a. Calculate the cost of common equity for the company.
R = Rf + Beta*(Rm-Rf)
= 5% + 1.2 *(16.5%-5%)
18.80%
b. Calculate the Weighted Average Cost of Capital (WACC) for this project.
Kd = Kd’ * (1-tax) = 10%*(100%-20%) =8.00%
Wd = 40/120 = 33.33%
Wps = 10/120 = 8.33%
Wcs = (120-40-10)/120 = 58.33%
WACC = kd.Wd + Kps.Wps + Kcs.Wcs = 33.33%*8%+8.33%*(10%+2.5%) + 58.33%*18.8%
=14.67%