1.

In finance, "working capital" means the same thing as

total assets.

fixed assets.

current assets.

current assets minus current liabilities.

2. Which of the following would be consistent with a more aggressive approach to financing working
capital?
Financing short-term needs with short-term funds.

Financing permanent inventory buildup with long-term debt.

Financing seasonal needs with short-term funds.

Financing some long-term needs with short-term funds.

D.

3. Which asset-liability combination would most likely result in the firm's having the greatest risk of
technical insolvency?
Increasing current assets while lowering current liabilities.

Increasing current assets while incurring more current liabilities.

Reducing current assets, increasing current liabilities, and reducing long-term debt.

Replacing short-term debt with equity.

C.

4. Which of the following illustrates the use of a hedging (or matching) approach to financing?
Short-term assets financed with long-term liabilities.

Permanent working capital financed with long-term liabilities.

 Short-term assets financed with equity.

All assets financed with a 50 percent equity, 50 percent long-term debt mixture.

B.

5. In deciding the appropriate level of current assets for the firm, management is confronted with
a trade-off between profitability and risk.

a trade-off between liquidity and marketability.

a trade-off between equity and debt.

a trade-off between short-term versus long-term borrowing.

A.

6. varies inversely with profitability.

Liquidity.

Risk.

Blue.

False.

A.

7. Spontaneous financing includes

accounts receivable.

accounts payable.

short-term loans.

a line of credit.

B.
8. Permanent working capital
varies with seasonal needs.

includes fixed assets.

is the amount of current assets required to meet a firm's long-term minimum needs.

includes accounts payable.

C.

9. Financing a long-lived asset with short-term financing would be

an example of "moderate risk -- moderate (potential) profitability" asset financing.

an example of "low risk -- low (potential) profitability" asset financing.

an example of "high risk -- high (potential) profitability" asset financing.

an example of the "hedging approach" to financing.

C.

10. Net working capital refers to

total assets minus fixed assets.

current assets minus current liabilities.

current assets minus inventories.

current assets.

B.
1. Marketable securities are primarily
short-term debt instruments.

short-term equity securities.

long-term debt instruments.

long-term equity securities.

A.

2. Time consumed in clearing a check through the banking system.

Processing float
Deposit float
Collection float
Availability float

D.

3. Commercial paper is essentially

another term for a junk bond.
a short-term unsecured corporate IOU.
an intermediate-term corporate bond.
a certificate that may be exchanged for a share of common stock at a specified future
date

4. Concentration banking
increases idle balances.
moves excess funds from a concentration bank to regional banks.
is less important during periods of rising interest rates.
improves control over corporate cash.

D
5. Which would be an appropriate investment for temporarily idle corporate cash that will be used to
pay quarterly dividends three months from now?
A long-term Aaa-rated corporate bond with a current annual yield of 9.4 percent.
A 30-year Treasury bond with a current annual yield of 8.7 percent
Ninety-day commercial paper with a current annual yield of 6.2 percent.
Common stock that has been appreciating in price 8 percent annually, on average, and
paying a quarterly dividend that is the equivalent of a 5 percent annual yield.

6. Which of the following marketable securities is the obligation of a commercial bank?

Commercial paper
Negotiable certificate of deposit
Repurchase agreement
T-bills

7. The movement of business data electronically in a structured, computer-readable format.

EFT
EDI
SWIFT
CHIPS

8. That portion of a firm's total marketable securities portfolio held to take care of probable deficiencies
in the firm's cash account.
Free cash segment
Controllable cash segment
Ready cash segment
None of the above

C
9. The most basic requirement for a firm's marketable securities.
Safety
Yield
Marketability
New York.

A.

10. A non-negotiable check payable to a company account at a concentration bank

Payable through draft (PTD)
Depository transfer check (DTC)
ACH transfer
Repo

11. According to the Bond Equivalent Yield (BEY) method, the yield on a $1,000, 13-week US Treasury bill
purchased for $960 would be closest to .
16.0 percent
16.7 percent
17.0 percent
17.8 percent

B.
12. US Treasury bills are now sold in minimum amounts of and multiples of above the
minimum.
$10,000; $10,000
$10,000; $1,000
$100; $100

13. Accounts receivable conversion (a.k.a., check conversion) is the conversion of a paper check to .
an electronic check image
a "substitute check"
an ACH debit transaction
a foreign currency
1. A single, overall cost of capital is often used to evaluate projects because:
it avoids the problem of computing the required rate of return for each investment
proposal.
it is the only way to measure a firm's required return.
it acknowledges that most new investment projects have about the same degree of risk.
it acknowledges that most new investment projects offer about the same expected return.

A.

2. The cost of equity capital is all of the following EXCEPT:

the minimum rate that a firm should earn on the equity-financed part of an investment.
a return on the equity-financed portion of an investment that, at worst, leaves the market
price of the stock unchanged.
by far the most difficult component cost to estimate.
generally lower than the before-tax cost of debt.

D.

3. In calculating the proportional amount of equity financing employed by a firm, we should use:
the common stock equity account on the firm's balance sheet.
the sum of common stock and preferred stock on the balance sheet.
the book value of the firm.
the current market price per share of common stock times the number of shares
outstanding.

D.

4. To compute the required rate of return for equity in a company using the CAPM, it is necessary to
know all of the following EXCEPT:
the risk-free rate.
the beta for the firm.
the earnings for the next time period.
the market return expected for the time period.

C.
5. In calculating the costs of the individual components of a firm's financing, the corporate tax rate is
important to which of the following component cost formulas?
common stock.
debt.
preferred stock.
none of the above.

B.

6. The common stock of a company must provide a higher expected return than the debt of the same
company because
there is less demand for stock than for bonds.
there is greater demand for stock than for bonds.
there is more systematic risk involved for the common stock.
there is a market premium required for bonds.

C.

7. A quick approximation of the typical firm's cost of equity may be calculated by

adding a 5 percent risk premium to the firm's before-tax cost of debt.
adding a 5 percent risk premium to the firm's after-tax cost of debt.
subtracting a 5 percent risk discount from the firm's before-tax cost of debt.
subtracting a 5 percent risk discount from the firm's after-tax cost of debt.

A.

8. Market values are often used in computing the weighted average cost of capital because
this is the simplest way to do the calculation.
this is consistent with the goal of maximizing shareholder value.
this is required in the U.S. by the Securities and Exchange Commission.
this is a very common mistake.

B
9. For an all-equity financed firm, a project whose expected rate of return plots should be
rejected.
above the characteristic line
above the security market line
below the security market line
below the characteristic line

C.

10. Some projects that a firm accepts will undoubtedly result in zero or negative returns. In light of this
fact, it is best if the firm
adjusts its hurdle rate (i.e., cost of capital) upward to compensate for this fact.
adjusts its hurdle rate (i.e., cost of capital) downward to compensate for this fact.
does not adjust its hurdle rate up or down regardless of this fact.
raises its prices to compensate for this fact.

C.

11. The Tchotchke Knick-Knack Company relies on preferred stock, bonds, and common stock for its
long-term financing. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax
component costs of the Tchotchke Company's long-term financing.
1 = bonds; 2 = common stock; 3 = preferred stock.
1 = bonds; 2 = preferred stock; 3 = common stock.
1 = common stock; 2 = preferred stock; 3 = bonds.
1 = preferred stock; 2 = common stock; 3 = bonds.

B.

12. Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual dividend. The
preferred stock has a current market price of $96 a share. The firm's marginal tax rate (combined federal
and state) is 40 percent, and the firm plans to maintain its current capital structure relationship into the
future. The component cost of preferred stock to Lei-Feng, Inc. would be closest to .
6 percent
6.25 percent
10 percent
10.4 percent

D.
13. David Ding is evaluating two conventional, independent capital budgeting projects (X and Y) by
making use of the risk-adjusted discount rate (RADR) method of analysis. Projects X and Y have internal
rates of return of 16 percent and 12 percent, respectively. The RADR appropriate to Project X is 18
percent, while Project Y's RADR is only 10 percent. The company's overall, weighted-average cost of
capital is 14 percent. David should .
accept Project X and accept Project Y.
accept Project X and reject Project Y.
reject Project X and accept Project Y.
reject Project X and reject Project Y.

C.

14. One way to visualize the RADR approach is to make (new) use of an "old friend," the .
Security Market Line (SML)
characteristic line
NPV profile
C.