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56. Use the “percent of sales method” of preparing pro forma financial statements to determine

the projection for next year’s cost of goods sold. Make the following assumptions: current

year’s sales are $27,800,000; current year’s cost of goods sold is $17,528,000; sales are

expected to rise by 30%. What is the projection for next year’s cost of goods sold?

a. $21,459,200

b. $22,786,400

c. $20,481,000

d. $21,138,900

57. Predicting a firm’s future financial needs includes all of the following steps EXCEPT:

a. estimation of projected sales and expenses

b. estimation of investment levels for current and fixed assets

c. review of the firm’s sales revenues and expenses over all past planning periods

d. determination of the firm’s financing needs for the period

58. Which of the following is always a non-cash expense?

a. depreciation

b. salaries

c. income taxes

d. none of the above

59. Which of the following loans provide the least amount of security to the lender?

a. floating lien

b. factoring

c. terminal warehouse agreement

d. chattel mortgage

60. Which of the following statements concerning liquidity and debt is true?

a. A firm can reduce its risk for illiquidity by shifting from short-term debt to long-term


b. The greater the use of short-term debt, the lower the risk of illiquidity.

c. Long-term debt is generally less costly than short-term debt.

d. The risk of illiquidity does not depend on the mix of short-term versus long-term debt.

61. Hyper Retail Outlets sell goods on terms of net 40. The store’s average monthly sales (all on

credit) are $70,000. Hyper pledges all of its receivables to the bank, which advances 80%

of the face value of the receivables at a rate of 2.5% above prime. The bank also charges a

1% processing fee on all receivables pledged. Hyper borrows the full amount possible, and

the current prime rate is 5%. What is the annual percentage rate (APR) of using this source

of financing for one full year?

a. 21.8%

b. 23.5%

c. 22.5%

d. 19.1%

62. The break-even model enables the manager of the firm to:

a. determine the optimal amount of debt financing to use.

b. calculate the minimum price of common stock for certain situations.

c. set appropriate equilibrium thresholds.

d. determine the quantity of output that must be sold to cover all operating costs.

63. QuadCity Manufacturing, Inc. reported the following items: Sales = $6,000,000; Variable

 Costs of Production = $1,500,000; Variable Selling and Administrative

 Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal

 Tax Rate =35%. QuadCity’s break-even point in sales dollars is:

a. $2,050,633

b. $2,438,750

c. $2,785,000

d. $2,197,500

64. Based on the data contained in Table A, what is the break-even point in sales dollars?

               TABLE A

 Average selling price per unit            $18.00

 Variable cost per unit                         $13.00

 Units sold                                           400,000

 Fixed costs                                        $650,000

 Interest expense                                $50,000

a. $1,775,500

b. $1,850,000

c. $700,000

d. $2,340,000

65. Financing a portion of a firm’s assets with securities bearing a fixed rate of return in hopes of

 increasing the return to stockholders refers to:

a. combined leverage

b. business risk

c. financial leverage

d. operating leverage

66. Which of the following statements about combined (operating & financial) leverage is true?

a. High operating leverage and high financial leverage offset one another, meaning that if

 sales increase by 10%, then EPS will also increase by 10%.

b. If a firm employs both operating and financial leverage, any percent change in sales

 will produce a larger percent change in earnings per share.

c. A firm that is in a capital-intensive industry should use a higher level of financial

 leverage than a firm that employs low levels of operating leverage.

d. Usage of both operating and financial leverage reduces a firm’s risk.

67. Assuming no corporate taxes, the independence hypothesis suggests that a firm’s weighted

 average cost of capital will:

a. remain constant because the cost of equity will be increasing as the amount of debt

 increases due to the increased risk.

b. increase proportionally with the increase in the amount of debt a firm uses.

c. remain constant regardless of capital structure because the cost of debt and the cost

 of equity are the same.

d. decrease proportionally with the increase in the amount of debt a firm uses.

68. Mix Sweet Shop bakes and sells pies. Mix has annual fixed costs of $880,000 and a variable

 cost per pie of $7.50. Each pie sells for $15.50 each. The firm expects to sell 500,000

 pies annually. What is the break-even point in sales dollars?

a. $2,875,000

b. $1,625,000

c. $3,100,000

d. $1,705,000

69. Which of the following transactions will lower a company’s financial leverage?

a. A mortgage loan is obtained and the proceeds are used to pay off existing short-term


b. Common stock is sold and the proceeds are used to pay off existing short-term debt.

c. Preferred stock is sold and the proceeds are used to pay off existing short-term debt.

d. Short-term debt is obtained to get the company through a period of negative net

 income and cash flow.

70. Dividend changes may be used by management as a credible communication tool to signal

 investors about future earnings under which of the following dividend policy theories?

a. the residual dividend theory

b. the information effect

c. the expectations theory

d. the clientele effect

71. An increase in flotation costs will most likely result in which of the following?

a. smaller dividend payments so that less external equity financing is needed

b. larger dividend payments so shareholders are able to earn their required returns

c. no change in dividend policies because flotation costs are paid by purchasers of

 common stock

d. larger dividend payments to offset higher taxes paid by investors

72. Assume that the tax on dividends and the tax on capital gains is the same. All else equal,

 what would a prudent investor prefer?

a. The prudent investor would prefer capital gains—the capital gain tax liability can be

 deferred until gains are realized.

b. The prudent investor would be indifferent between receiving dividends or capital gains.

c. The prudent investor would prefer dividends—a dollar today is always worth more than

 a dollar to be received in the future.

d. More information is needed.

73. While Rogue Corporation has been in business for over 50 years, newly developed products

 pushed the firm’s year-over-year growth rate to 35% during the latest three years. The firm is

 proud of its history of paying dividends, but the vigorous recent growth of the firm has left it

 cash challenged. Which of the following policies/procedures would you consider best under

 the circumstances?

a. Substitute a stock dividend for the current cash dividend.

b. Look seriously for a merger partner.

c. Enter into a long-term stock repurchase program.

d. Borrow long-term to pay the current dividend.

74. The president of Smith Brothers, Inc. wants a dividend policy that minimizes the likelihood

 of decreasing the company’s dividend per share. Which of the following policies should

 the CEO select?

a. regular dividend plus a year-end extra

b. constant dividend payout ratio

c. stable dollar dividend per share

d. All policies have the same likelihood of a dividend decrease because dividend changes

 are dependent on changes in earnings.

75. Plantain, Inc. declared a dividend of $1 per share on March 1. The ex-dividend date is

 March 15th, and the payment date is april 1st. The most likely record date is:

a. February 27th

b. March 13th

c. March 29th

d. March 17th

76. How frequently do corporations generally pay dividends?

a. semiannually

b. quarterly

c. monthly

d. annually

77. All of the following are potential benefits of stock repurchases EXCEPT:

a. a favorable impact on earnings per share

b. the elimination of a minority ownership group of stockholders

c. an approach for maintaining the existing capital structure while still making a

 distribution to shareholders

d. a means for providing an internal investment opportunity

78. Which of the following strategies may be used to alter a firm’s capital structure toward a

 higher percentage of debt compared to equity?

a. maintain a low dividend payout ratio

b. stock split

c. stock repurchase

d. stock dividend

79. Sinkmaster Corp. settled a large lawsuit that caused earnings to be negative for the quarter.

 This quarterly loss was the first in 22 years. In addition, the company has a record of 48

 consecutive quarters of dividend payments. Which of the following is correct?

a. The company can omit the dividend; shareholders are always understanding about the

 riskiness of business.

b. The company can use cash generated through prior retention of earnings, or borrowed

 funds to pay the dividend.

c. The clientele effect says that investor choice of investment vehicle is independent of

 dividend policy and therefore the payment/omission of the dividend is immaterial.

d. The company cannot pay dividends this quarter since the company had no earnings.

80. Which of the following is a spontaneous source of financing?

a. notes payable

b. common stock

c. accrued expenses

d. paid-in-capital

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