A discretionary form of financing would be

Q1. A discretionary form of financing would be
    a. notes payable.
    b. accounts payable.
    c. accrued expenses.
    d. A and B.

Q2. The primary purpose of a cash budget is to
    a. determine the level of investment in current and fixed assets.
    b. determine financing needs.
    c. provide a detailed plan of future cash flows.
    d. determine the estimated income tax for the year.

Q3. A company calculates its discretionary financing needed and determines this amount of capital cannot be raised at a reasonable cost. Which of the following would reduce the amount of discretionary financing needed?
    a. reduce the company's net profit margin
    b. reduce the company's sales growth rate
    c. increase the company's dividend payout ratio
    d. increase the proportion of the company's sales that are made on credit

Q4. MDX Sales Corp. is expecting a 10% increase in sales next year. MDX has an inventory balance of $1,000,000 and uses the percent of sales forecasting method. Which of the following could explain why the inventory forecast of $1,100,000 might be too high?
    a. The current inventory balance of $1,000,000 is lower than usual because of a one-time end of year fire sale.
    b. The company is going to change its depreciation method in the coming year.
    c. The growth in sales could be as high as 15%.
    d. A fixed amount of inventory is required to do business, so inventory doesn't increase proportionally with sales.

Q5. What is the primary tool for short-term financial forecasting?
    a. pro forma income statement
    b. pro forma balance sheet
    c. pro forma cash budget
    d. capital budgeting

Q6. If external financing needed cannot be obtained due to poor market conditions, a firm could reduce the amount needed by increasing its retention ratio.
    a. True
    b. False

Q7. Which of the following is a limitation of the "percent of sales method" of preparing pro forma financial statements?
    a. A firm's investment in accounts receivable is seldom related to sales volume.
    b. Not all assets and liabilities increase or decrease as a constant percent of sales.
    c. Inventory levels are seldom affected by changes in sales volume.
    d. The dividend payout ratio may change from one year to the next.

Q8. ABC Corporation began operations on January 1st of this year with a cash balance of $250,000. ABC had sales of $200,000 for the month of January, all on credit. ABC allows its customers 30 days to pay. ABC's expenses for January equal $150,000, and ABC's ending balance in accounts payable at January 31st is $50,000. In its cash budget for January, ABC's ending cash balance should be equal to
    a. $300,000 because of GAAP accrual accounting rules.
    b. $150,000.
    c. $200,000.
    d. $100,000.

Q9. The CFO of Twine Enterprises expects sales to increase from $8,000,000 in 2010 to $12,000,000 in 2011. Current assets in 2010 are equal to $5,000,000. Using the percent of sales method, projected current assets for 2011 are equal to
    a. $5,500,000.
    b. $7,083,333.
    c. $9,000,000.
    d. $7,500,000.

Q10. Gerentology Associates, a highly profitable company, is considering two growth strategies, one that will achieve sales growth of 20% in one year, and the other that will achieve 20% growth in sales, but over a 4-year time frame. Assuming Gerentology Associates uses the percent of sales method, which of the following statements is true?
    a. Discretionary financing needed will be much greater for the 4-year growth strategy.
    b. Discretionary financing needed could be much less for the 4-year growth strategy due to retained earnings.
    c. The asset balances at the end of 4 years for strategy two will be much greater than the asset balances required at the end of year one for strategy one.
    d. Discretionary financing needed could be much greater for the slow growth strategy because interest charges will accumulate on the company's debt.

Q11. What differentiates "discretionary financing needs" from "external financing needs"?
    a. assets
    b. retained earnings
    c. sales
    d. spontaneous liabilities

Q12. The cash budget can be used to provide an estimate of the firm's future financing needs.
    a. True
    b. False

Q13. The Native Industries, Inc. is going to issue 180-day commercial paper to raise $25 million. It anticipates a discounted interest rate of 13 percent, and dealer placement costs of approximately $60,000. What is the effective annual cost of credit to Native Industries?
    a. 13.46%
    b. 14.06%
    c. 14.45%
    d. 15.38%

Q14. 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. 23.5%
    b. 22.5%
    c. 21.8%
    d. 19.1%

Q15. Net working capital refers to which of the following?
    a. cash, accounts receivable, and inventory
    b. notes payable, accruals, and accounts payable
    c. current assets plus current liabilities
    d. current assets divided by current liabilities
    e. current assets minus current liabilities

Q16. Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the APY, or annual percentage yield, calculation?
    a. 4.33%
    b. 10.34%
    c. 12.25%
    d. 12.46%

Q17. The prime rate of interest is
    a. the rate the bank charges its most credit-worthy borrowers.
    b. the rate the bank charges for money it borrows from the Federal Reserve Board.
    c. the rate the bank charges its average borrower.
    d. the rate the bank charges on home mortgages.

Q18. A floating lien, chattel mortgage, or terminal warehouse receipt have which of the following in common?
    a. They all pledge accounts receivables as security.
    b. They have nothing in common.
    c. They are all unsecured forms of financing.
    d. They all use inventory to secure a loan.

Q19. Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. What will be the annual percentage rate, or APR, for this financing?
    a. 10.00%
    b. 12.12%
    c. 10.67%
    d. 13.33%

Q20. Total assets must always equal the sum of temporary, permanent, and spontaneous sources of financing.
    a. True
    b. False

Q21. A company decreases the risk of insolvency by financing long-term assets with short-term debt.
    a. True
    b. False

Q22. The primary sources of collateral for secured loans are accounts receivable and inventory.
    a. True
    b. False

Q23. Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. How much will Brown Inc. need to borrow?
    a. $270,000
    b. $300,000
    c. $312,500
    d. $347,222

Q24. The Missouri River Pendant Company uses commercial paper to satisfy part of its short-term financing requirements. Next week, it intends to sell $18 million in 90-day maturity paper on which it expects to have to pay discounted interest at an annual rate of 7 percent per annum. In addition, Stoney River expects to incur a cost of approximately $25,000 in dealer placement fees and other expenses of issuing the paper. What is the effective annual cost of credit to Missouri River?
    a. 7.7%
    b. 7.5%
    c. 7.3%
    d. 7.1%

Q25. Which of the following is a disadvantage of the use of current liabilities?
    a. greater risk of illiquidity
    b. less flexibility
    c. higher interest costs
    d. the hedging principle

Q26. In the basic EOQ model the optimal inventory level is the point at which
    a. total cost is minimized.
    b. total revenue is maximized.
    c. carrying costs are minimized.
    d. ordering costs are minimized.

Q27. The time necessary for a deposited check to clear through the commercial banking system causes which of the following types of floats?
    a. mail
    b. processing
    c. transit
    d. disbursing

Q28. Payable through drafts
    a. provides for effective control over field payments.
    b. are not legal instruments.
    c. cannot be cleared through the banking system.
    d. are a form of commercial paper.

Q29. Flashbinder Guitars, Inc. is considering a lockbox system that will increase its check processing cost by $.15 per check. The company estimates an average check size of $1,700 and expects the lockbox to reduce check collection time by 3 days. What annual before-tax yield must Flashbinder Guitars, Inc. earn on its marketable securities for the lockbox system to be beneficial?
    a. 1.825%
    b. 1.118%
    c. 1.074%
    d. 0.735%

Q30. Assume that liquid funds can be invested to yield 4.5 percent. If annual remittance checks total $2 billion, what is it worth for the firm to reduce float by 1 day?
    a. $388,349
    b. $246,575
    c. $257,534
    d. $24,658

Q31. A retailer sells most of its merchandise on credit and bills clients monthly. Which of the following elements of float does the retailer have the most control over?
    a. mail float
    b. processing float
    c. transit float
    d. disbursing float

Q32. How do interest rates affect the optimal order quantity Q*?
    a. As interest rates increase, Q* decreases.
    b. As interest rates decrease, Q* decreases.
    c. As interest rates increase, Q* increases until it reaches a maximum, after which any further increase in interest causes a decline in Q*.
    d. None of the above.

Q33. A company is technically insolvent when
    a. cash outflows in a given period are greater than cash inflows.
    b. earnings before interest payments are less than the interest payments.
    c. it lacks the necessary liquidity to promptly pay its current debt obligations.
    d. current ratio is less than 1.0.

Q34. The purpose of carrying inventory is to
    a. make different production processes more dependent on sales.
    b. make sales more independent of the production process.
    c. have collateral for loans.
    d. improve the current ratio.

Q35. Mountain Snow Sports, Inc. is trying to determine the optimal order quantity for snow boards for the next twelve months. Annual sales are expected to be 1,000,000 units at a retail price of $400 each. The cost of carrying snow boards is $80 per year. Studies show that it costs Mountain Snow $250 to prepare and receive an order. What is the EOQ?
    a. 2,750
    b. 2,500
    c. 2,000
    d. 1,850

Q36. The PMI, Inc. processes an estimated 200,000 checks per year from its customers. Total revenue collected by check is $40,000,000. The average float time until the funds are credited to PMI's checking account is 6 days. For an extra cost of $ .06/check, PMI's bank will install a lock-box system that will reduce float time from 6 days to 2.5 days. If PMI earns 3.5% on its checking account, how much per check will PMI make if it uses the lock-box system?
    a. $.005
    b. $.006
    c. $.007
    d. $.008

Q37. Which of the following would be an example of the "precautionary motive" for a firm holding cash balances?
    a. purchase of inventory
    b. anticipating a strike
    c. purchase fixed assets
    d. make dividend payments

Q38. A wide bid/ask spread could indicate which of the following?
    a. the presence of arbitrageurs
    b. large volume transactions are taking place
    c. frequent trading of a currency
    d. an inefficient market

Q39. IMXP Corp. enters into a 30-day forward exchange contract to buy 113,540,000 yen for $100,000. Which of the following statements is true concerning this transaction?
    a. IMXP will pay $100,000 and receive 113,540,000 yen 30 days from now.
    b. IMXP will pay $100,000 today and receive 113,540,000 yen 30 days from now.
    c. The spot exchange rate in 30 days will be 113.54 yen per dollar.
    d. IMXP will receive 113,540,000 yen today and pay $100,000 30 days from now.

Q40. The forward-spot differential is the difference between the forward rate and the expected future spot rate.
    a. True
    b. False

Q41. Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.
    a. True
    b. False

Q42. Suppose the current spot rate in New York is .0119 dollars per yen. Inflation for the coming year in the United States is expected to be 3%, while inflation for the coming year is Japan is expected to be only 1%. Using the purchasing power parity theory, what is the expected spot rate at the end of the year should be
    a. .0110147 dollars per yen.
    b. .0108159 dollars per yen.
    c. .0138373 dollars per yen.
    d. .0121356 dollars per yen.

Q43. Exchange rate changes tend to reflect international differences in inflation rates. What is the name of this theory?
    a. the purchasing power parity theory
    b. the IMF effect
    c. interest rate parity theory
    d. the law of one price

Q44. A narrow spread indicates efficiency in the spot exchange market.
    a. True
    b. False

Q45. A forward exchange contract
    a. gives the owner the right, but not the obligation, to buy a foreign currency at a fixed exchange rate for a fixed period of time.
    b. gives the owner the right to purchase a foreign currency at some point in the future and any gains or losses are credited/debited to the account at the close of business each day.
    c. requires delivery, at a specified future date, of one currency for a specified amount of another currency.
    d. requires delivery, within two working days, of one currency for a specified amount of another currency.

Q46. The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate is .6211 pounds per dollar. Therefore, pounds in the forward market are selling at a ________ to the current spot rate.
    a. .958 discount
    b. .958 premium
    c. .04 discount
    d. .04 premium

Q47. Why do currency exchange rates throughout the world trade within a very narrow range on any given day?
    a. because of purchasing power parity
    b. because of the international translation effect
    c. because of arbitrage
    d. because of the law of one price

Q48. Buying and selling in more than one market to make a riskless profit is called
    a. profit-maximization.
    b. arbitrage.
    c. international trading.
    d. cannot be determined from the above information

Q49. Argentina experienced a period of extremely high inflation relative to its trading partners and Argentina's currency decreased in value. This is an example of purchasing power parity theory.
    a. True
    b. False

Q50. An important (additional) consideration for a direct foreign investment is
    a. political risk.
    b. maximizing the firm's profits.
    c. attaining a high international P/E ratio.
    d. maintaining the domestic cost of capital.