Question 1

Assume a firm’s production process requires an average of 80 days to go from raw materials to finished products and another 40 days before the finished goods are sold. If the accounts receivable cycle is 70 days and the accounts payable cycle is 80 days, what would the operating cycle be?

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110 days

130 days

190 days

270 days

Question 2

The time between ordering materials and collecting cash from receivables is known as the:

operating cycle

cash conversion cycle

accounts receivable period

term payable cycle

Question 3

The time between when the firm pays its suppliers and when it collects money from its customers is known as the:

operating cycle

cash conversion cycle

accounts receivable period

clearing cycle

Question 4

Which of the following is not an advantage of short-term borrowing?


establishing continuous relationships with a bank or financial institution

frequent renewals

lower cost

Question 5

In June, Erie Plastics had an ending cash balance of $35,000. In July, the firm had total cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is $25,000. At the end of July, Erie Plastics had

an excess cash balance of $25,000

An excess cash balance of $0

required financing of $10,000

required financing of $25,000

Question 6

A compensating balance on a bank loan effectively ____________ the cost of the loan.



has no effect on

has an indeterminate effect on

Question 7

In order to borrow $100,000 for a 10% loan on discount basis, the firm will actually have to borrow:





Question 8

When old short-term debt is replaced by new short-term debt as the old debt comes due, the process is known as:

compensating balance

rolling the debt

fluctuating financing


Question 9

Which of the following short-term sources of funds is available only to the financially strongest concerns?

trade credit

commercial bank loans

finance company loans

commercial paper

Question 10

If a firm actually sells its accounts receivable, the process is known as:

wholesale financing


field crediting


Question 11

The ratio between the present value of a project’s cash inflows and the present value of its initial investment is called the:





Question 12

Internal rate of return (IRR) and net present value (NPV) methods:

generally arrive at the same accept/reject decisions

are less sophisticated than the payback period

cannot make use of the same cash flows

can be substituted for by the payback period

Question 13

Which of the following is not considered a stage in the capital budgeting process?





Question 14

The internal rate of return concept is best explained by which of the following?

rate where NPV is equal to zero

point where initial investment has been returned

marginal cost of capital

average book value

Question 15

The payback period concept is best explained by which of the following?

marginal cost of capital

point where initial investment has been returned

rate where NPV is equal to zero

accounting rate of return

Question 16

The cost of debt:

is typically higher than the cost of preferred stock

must be adjusted to an after-tax cost

is higher than the cost of retained earnings

is the lowest component cost because corporations can deduct 70 percent of the interest expense

Question 17

As a general rule, the capital structure that maximizes stock price also:

minimizes the weighted average cost of capital

maximizes the weighted average cost of capital

minimizes the required rate of return on equity

maximizes the cost of debt

Question 18

The after-tax cost of debt for a firm in the 35% tax bracket with a before-tax cost of debt of 6% is:





Question 19

Ningbo Shipping has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of Ningbo Shipping preferred stock is:





Question 20

A firm’s mix of debt and equity defines the firm’s:

capital structure

working capital

net working capital

degree of operating leverage

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