1. The Securities Investor Protection Corporation protects individuals from
• brokerage firm failures
• making poor investment decisions
• fraud by corporations
• other investors who fail to make delivery
2. You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?
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3. When calculating the weighted average cost of capital, which of the following has to be adjusted for taxes?
• Preferred stock
• Retained earnings
• Common stock
4. Buying and selling in more than one market to ...view middle of the document...
• Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
8. Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta expects its working capital to increase $1,000 during the life of the project. Delta will depreciate the machine using the straight-line method over the project's five year life to a salvage value of zero. The machine's purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The machine's initial cash outflow is:
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9. Which of the following is most likely to occur if a firm over-invests in net working capital?
• The return on investment will be lower than it should be.
• The times interest earned ratio will be lower than it should be.
• The current ratio will be lower than it should be.
• The quick ratio will be lower than it should be.
10. Metals Corp. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common equity. Metals Corp.'s after-tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Metals Corp.'s weighted average cost of capital?
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11. Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?
• Return on investment
• Gross profit margin
• Current ratio
• Quick ratio
12. We compute the profitability index of a capital-budgeting proposal by Initial outlay = $1,748.80
• dividing the present value of the annual after-tax cash flows by the cost of capital.
• multiplying the cash inflow by the IRR.
• multiplying the IRR by the cost of capital.
• dividing the present value of the annual after-tax cash flows by the cost of the project.
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13. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?
14. Which of the following could offset the higher risk exposure a company would face if it’s current ratio and net working capital were relatively low?
• Its accounts receivable collection policy could increase the average collection period.
• It could offer no discounts for early payment by its customers.
• It could buy back some of its shares in the open market in order to reduce its equity.
• Its current assets would need to be highly liquid.
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