Answer: a. True
Question: A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase? a. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. b. The company increases its dividend payout ratio. c. The company begins to pay employees monthly rather than weekly. d. The company’s profit margin increases. e. The company decides to stop taking discounts on purchased materials.
Answer: a. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.
Question: Which of the following statements is CORRECT? a. Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 – T) + Depreciation – [Capital expenditures + ΔNOWC]), hence depreciation is set forth on a separate line in the cash budget. b. If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget.
Answer: b
Question: 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.
Answer: 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.
Question: Inventory management is largely self-contained in the sense that very little coordination among the sales, purchasing, and production personnel is required for successful inventory management. a. True b. False
Answer: b. False
Question: The prime rate charged by big money center banks at any one time is likely to vary greatly (for example, as much as 2 to 4 percentage points) across banks due to banks’ ability to differentiate themselves and because different banks operate in different parts of the country.
Answer Options:
a. True
b. False
Answer: False
Question: If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt. Thus, if a firm’s CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.
Answer Options:
a. True
b. False
Answer: True
Question: Shorter-term cash budgets (such as a daily cash budget for the next month) are generally used for actual cash control while longer-term cash budgets (such as a monthly cash budgets for the next year) are generally used for planning purposes. a. True b. False
Answer: a. True
Question: The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding. a. True b. False
Answer: a. True
Question: A “reverse split” reduces the number of shares outstanding.
Answer Options:
a. True
b. False
Answer: True
Question: The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower’s financial situation deteriorates, then the bank may refuse to roll over the loan.
Answer Options:
a. True
b. False
Answer: True
Question: 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.
Answer: a
Question: On average, a firm collects checks totaling $250,000 per day. It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm. Assume that (1) a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2) the firm could invest any additional cash generated at 6% after taxes. The lockbox system would be a good buy if it costs $25,000 annually.
Answer Options:
a. True
b. False
Answer: True
Question: Long-term loan agreements always contain provisions, or covenants, that constrain the firm’s future actions. Short-term credit agreements are just as restrictive in order to protect the interest of the lender.
Answer Options:
a. True
b. False
Answer: False
Question: Miller and Modigliani’s dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on either its cost of capital or its stock price.
Answer Options:
a. True
b. False
Answer: True