1.

The expectations theory ignores several factors including the

7. EarthCOM. On October 4th, 2000, long distance
idea that:
company, EarthCOM, issued bonds to finance a new wireless
a.
investors may have a preference for investing in longer-term bonds
due to the
risk
theyissued for 30 years (mature on
product.
Theadded
bonds
were
offer over shorter-term bonds.
th
October 4 , 2030), with a face value of P1,000, and semib.
investors may have a preference for investing in shorter-term bonds due to the added risk offered
annual coupons. The coupon rate on these bonds is 8%
by longer-term bonds.
Annual of
Percentage
Rate(APR). Over the last 4 years, the
c.
some investors such as pension funds have a desire to match the maturity
their liabilities.
company has experienced financial difficulty as the long
d.
All of the above
distance market has grown more competitive.
e.
both (b) and (c)

Refer to EarthCOM. The risk associated with EarthCOM

bonds has increased dramatically, as investors now want a
2. Which of the following statements is true?
15% APR return to hold the bonds. What price should the
a.
As time passes and a bond approaches its maturity date the bonds
price will
tradeconverge
at TODAY
to par
(October 4th, 2004)?
value plus the final interest payment.
a.
P544.19
b. The most important factor having an impact on a bond's price
b. is the
P545.66
current yield on the
bond.
c.
P794.99
c.
Bond prices and interest rates move in the same direction. d.
P800.15
d. Shorter-term bonds are more sensitive to changes in interest rates than longer-term
ANS: A
bonds.
n = 26, r = 7.50%, PV = ?, PMT = 8%*1000/2 = P40, FV =
e.
None of the above statements is true.
P1,000
PV = P544.19
ANS: A
ANS: E

3. Additional features offered by bonds may include:

8. Refer to EarthCOM. Suppose that today (October 4th,

EarthCOMprice
admits
to fraud in reporting revenues over
a call feature which allows the issuer to redeem the bond at2002),
a predetermined
prior
the
last
3
years.
The
price
of EarthCOM immediately
to maturity.
tumbles
to
P500.
What
is
the
b. the issuer's right to forgo interest payments to the bondholders without repercussion in new yield-to-maturity on
the event that the firm is undergoing financial difficulty. EarthCOM bonds? (Express as an APR)
16.04%
c.
the ability of the bondholder to convert to a predetermined a.
number
of shares of the
b.
16.21%
issuer's common stock.
c.
18.12%
d. All of the above
d.
20.77%
e.
Both (a) and (c)
ANS: B
ANS: E
n = 52, r = YTM/2, PV = -P500, PMT = 8%*1000/2 = P40,
FV = P1,000
4. Which of the following statements is false?
r =and
8.104%
a.
The valuation process involves linking an asset's past benefits
uncertainty to
YTM
= 16.21%
determine a fair present value.
b. Holding future benefits in the form of cash flows constant, the riskier the benefits the
9. A TIPS bond issued by the Treasury Department was
higher the estimated present value.
issuedfrom
with an
an asset.
annual coupon of 5%. The bond has a par
c.
Finance theory focuses primarily on intangible benefits expected
value of P1,000 and will mature in 10 years. Suppose that
d. All of the above statements are true.
inflation during the first year of the bonds life was 3%.
e.
All of the above statements are false.
What is the new coupon payment for this bond?
ANS: E
a.
P50.97
b.
P51.50
5. A bond pays P60 interest payments twice a year. What is
c.
P53.00
the coupon rate for the bond if the par value of the bond is
d.
P81.50
P1,000?
ANS: B
a.
6.00%
5%*1000 = P50; P50 * (1+.03) = P51.50
b.
9.00%
c.
12.00%
10. A one-year Treasury security currently returns a 4.50%
d.
15.00%
yield to maturity. A two-year Treasury security offers a
4.80% yield to maturity. If the expectations hypothesis is
ANS: C
true, what is the expected return on a one-year security next
P60 * 2 = P120
year?
P120/P1,000 = .12
a.
4.80%
b.
4.90%
6. Which of the following statements are CORRECT?
c. a greater
5.00% price impact on
Statement I:
A change in a bonds interest rate risk has
d.
5.10%
bonds with longer maturities.
Statement II:
Government bonds have lower default ANS:
risk than
D corporate bonds or
municipal bonds.
(1.045)*(1+x)=(1.048)*(1.048)
Statement III:
Trading volume is greater for corporate bonds than government
bonds.
11. A P1,000 par value bond makes two coupon payments
per year of P60 each. What is the bonds yield to maturity if
a.
Statement I only
the bond currently trades at P1,200 and will mature in two
b. Statement II only
years?
c.
Statements I and II only
a.
1.78%
d. Statements II and III only
b.
3.48%
c.
6.00%
ANS: C
d.
6.43%
a.

ANS: A
n = 4, r = YTM/2, PV = -P1,200, FV = P1,000, PMT = P60
r=0.888%
YTM =1.78%
12. Your friend wants you to invest in his new sporting
goods store. For an initial investment, he will pay you
P2,000 per year for the next twenty years. All payments are
at the end of the year. You realize that this is a very risky
investment and want a 20% return on each invested dollar.
How much are you willing to loan him today for his new
store?
a.
P5,946
b.
P9,739
c.
P10,000
d.
P17,027
ANS: B
n = 20, r = 20%, PV =?, PMT = P2,000, FV = P0
PV = P9,739
13. A bond currently trades at P980 on the secondary market.

The bond has 10 years until maturity and pays a semi-annual

coupon at 9% APR of face value. The face value of the bond
is P1,000. What is the yield to maturity for this bond?
a.
9.00%
b.
9.18%
c.
9.25%
d.
9.31%
ANS: D
n = 20, r= YTM/2, PV = -P980, PMT = 9%*1000/2, FV =
P1,000
r = 4.656%
YTM = 4.656% * 2 = 9.31%
14. The Treasury Department sells a zero-coupon bond that

will mature in two years. The bond has a face value of

P10,000, and sold at auction for P9,400. What is the annual
return for an investor buying the bond?
a.
3.00%
b.
3.14%
c.
6.38%
d.
7.00%
ANS: B
n = 2, r = YTM = ?, PV = -P9400, PMT = 0, FV = P10,000
r = 3.14%

a.
b.
c.
d.

P762.08
P763.13
P906.85
P1,000.00

ANS: A
n = 52, r = 6%, PV =?, PMT = 9%*1000/2, FV = P1000
PV = P762.08
17. Suppose investment A and investment B have identical

cash flows. Why would an investor pay more for investment

A than investment B?
a.
This is incorrect. You would always pay the same amount for t
future cash flows.
b. The risk in the cash flows for investment A is greater than the r
investment B.
c.
The risk in the cash flows for investment B is greater than the r
investment A.
d. The return required for investment B is lower than the return re
ANS: C
18. Fence Place Diary Company (FPD) has a 15-year

maturity bond outstanding that is currently convertible into

50 shares of FPD common stock. FPD common stock
currently sells for P25 a share and the coupon rate (semiannual coupons) for the bond is 5%. If the yield on a
similarly rated convertible bond (on The New York Calendar
Corp.) is 5%, then what should be the correct price of the
FPD convertible bond?
a.
P750.00
b.
P1,000
c.
P1,250
d.
either a or b
ANS: C
Conversion Price: 50 * 25 = 1,250
Pure Bond Price: Coupon Rate = Yield ===> 1,000
Max(1,000, 1,250) = 1,250
19. The greater the uncertainty about an assets future

benefits,
a.
the lower the discount rate investors will apply when discounti
present.
b. the higher the discount rate investors will apply when discount
present.
c.
the greater is the present value of those benefits.
d. none of the above.

15. Which answer is FALSE regarding bond prices and

ANS: B
interest rates?
a.
Bond prices and interest rates move in opposite directions. 20. With respect to the company that has issued a callable
b. The price of a bond is the present value of the coupon payments
bond,and the face value.
c.
The prices of short-term bonds display greater price sensitivity
interest
changes
a. tothe
value rate
of the
call increases as the stock price increases.
than do the prices of long-term bonds.
b. the value of the call increases as interest rates increase.
d. Interest rate risk can be described as the risk that changes inc.market
willincreases as interest rates decrease.
the interest
value ofrates
the call
cause fluctuations in the bonds price.
d. none of the above.
ANS: C

PTS: 1

DIF: M

16. Consider the following details for a bond issued by Bravo

Incorporated.
Issue Date
Maturity Date
Annual Coupon Rate (semi-annual coupons)
Face Value
Suppose that todays date is 8/5/2004, what should the
current trading price by for this bond if investors want a 12%
annual return?

ANS: C
21. When determining the stock price if a firm never plans to

pay a dividend:
a.
then it cannot have value
b. then there must be an expectation that the firm will distribute c
some point in the future
c.
a very precise process is used that requires little in terms of fut
flows
d. all of the above
e.
none of the above
ANS: B

ANS: C
Return
= (P53-P50
because the valuation formula reduces to the equation for the
present
value of a+ P1)/ P50

22. For the zero growth model:

a.

perpetuity the process is essentially the same for valuing preferred stock.
28.future
A firmvalue
plansofona perpetuity
paying a constant dividend of P2 per
because the valuation formula reduces to the equation for the
share
into
the
foreseeable
future. If investors seek a 12%
the process is essentially the same for valuing preferred stock
return
to
hold
the
firms
stock,
what is fair value for the
c.
because the valuation formula reduces to the equation for the present value of an
companys
stock?
ordinary annuity, the process is essentially the same for valuing preferred stock.
a. future
P13.67
d. because the valuation formula reduces to the equation for the
value of an ordinary
b.
annuity, the process is essentially the same for valuing preferred P15.67
stock.
c.
P16.67
ANS: A
d.
P18.67
b.

ANS: C
=P2/.12
a.
when buyers and sellers contact each other directly to arrange
an exchange of securities.
b. a market in which the buyer and seller are not brought together directly but, rather, have
29. You are asked by the Chief Financial Officer of your firm
their orders executed by securities dealers.
to apredict
whatexchange
the firms
c.
a market in which buyers and sellers are brought together on
securities
tostock price will be exactly 4 years
from
today.
If
your
firm
is expected to grow at 3%
trade securities.
indefinitely
and
the
cost
of capital is 10% while the expected
d. none of the above
annual dividend one year from today is P10, then what
ANS: C
should be the price of your firms stock 4 years from today?
a.
P142.86
24. Stockholder voting rights include:
b.
P160.79
a.
voting on the amount of dividends the firm will pay to current
c. stockholders.
P112.55
b. voting as to whether or not the firm should file for bankruptcy.
d.
none of the above
c.
voting for members on the Board of Directors.
d. voting on whether or not the firm will issue additional debt.ANS: B
P4 = (D1 (1+g)4) / (r - g)
e.
all of the above
P4 = (10 (1.03)4) / (.1 - .03) = 160.79
ANS: C
23. A "broker market" is:

25. A stock is expected to pay a dividend of P3.00 in one

year. To purchase the stock, investors seek a 15% annual

return. If the stock is currently trading at P60, what is the
implied constant growth rate in dividends for the future?
a.
5%
b.
10%
c.
15%
d.
20%
ANS: B
P60 = P3/(.15-g)
.15-g = P3/P60
26. Stone Cold Incorporated reported net income of P10

million for 2003. In addition, shareholder equity for the firm

was P80 million at the end of 2003. The company was able
to pay P3 million out as dividends to the shareholders for
2003. After 2003, excess paid-in-capital was P60 million.
Given this information, what is the growth rate available for
Stone Cold?
a.
3.75%
b.
5.00%
c.
7.50%
d.
8.75%
ANS: D
ROE = P10/P80 = .125
rr = 1 - (P3/P10) = .70

30. Predictable Corp has increased its annual dividend each

year of its life by 2% (and will continue to do so

indefinitely). If Predictable paid its annual dividend
yesterday of P8 and the cost of capital is currently 4%, then
by what amount will the stock price decrease by if the cost
of capital increases to 5%?
a.
P408.00
b.
P272.00
c.
P136.00
d.
none of the above
ANS: C
Now: (8 1.02) / (.04-.02) = 408.00
Later: (8 1.02) / (.05-.02) = 272.00
Decrease = 408 - 272 = 136
31. ConsGrough, Inc. has increased its annual common

dividend by 3% in each of the years that the company has

existed. If you believe that the company can continue to do
so indefinitely, then what price would you be will to pay for
ConsGrough if the required rate of return is 6% and the
dividend that it paid yesterday was P5?
a.
P85.83
b.
P166.67
c.
P171.67
d.
P200.00
ANS: C
(5 1.03)/(.06 - .03)

Growth = .7*.125
32. When valuing a preferred stock, the type of security that

27. An investor bought a stock this morning for P50, and

plans to sell the stock one year from today. The investor
believes the stock will pay a P1 dividend during the next
year, and that the stock can be sold for P53 in one year.
Given the investors beliefs, what is the return from
investing in this stock for the next year?
a.
4%
b.
6%
c.
8%
d.
10%

we treat the preferred stock like, for valuation purposes, is

a.
a bond.
b. a perpetuity.
c.
a common stock.
d. none of the above.
ANS: B

33. Which of the following is not an important consideration

ANS: B
when an underwriter is trying to establish the price for an
41. When investors take a short position in one asset to invest
initial public offering?
more in another asset, they are using:
a.
the underwriters reputation
a.
capital budgeting
b. the value of the firm
b. corporate leverage
c.
the demand for the securities of the issuer
c. of the
financial
d. providing the absolute maximum price possible for the issuer
sharesleverage
d. none of the above
ANS: D
ANS: C
PTS: 1
DIF: M
34. Retained earnings represents
42. Which of the following statements is true?
a.
a pool of cash that the firm can use should a need for cash arise.
a.
Because expected returns on stocks exceeds expected returns o
b. the increased market value, due to managements efforts, of all ofactually
the firmsoutperform
equity
bonds in any given year.
securities issued.
b. Because expected returns on stocks exceeds expected returns o
c.
earnings that a firm reinvested during the firms history.
reasonable to expect that stocks will outperform bonds in any g
d. the cumulative amount of cash that the firm has paid out in c.
dividends.
Expected return is the return one will actually receive.
d. Both (a) and (c)
ANS: C
e.
All of the above statements are true.
35. If the required return on the stock investment is 13%,

what should be Millers stock price five years from today?

a.
P11.50
b.
P6.24
c.
P19.69
d.
P16.28
ANS: A
P10 = 1.50(1.05)/(.13-.05) = 19.69
P5 = (1.5 + 19.69)/(1.13)^5 = 11.50
36. Which of the following investors can force a firm into

bankruptcy court if the firm does not pay the expected cash
flow to the investor?
a.
common equity investor
b. preferred equity investor
c.
debt investor
d. none of the above
ANS: C

ANS: B
43. Security I has a beta of 1.3, the risk-free rate is 4%, and

the expected market risk premium is 11%. What is the

expected return for Security I?
a.
15.0%
b.
18.3%
c.
14.6%
d.
13.1%
ANS: B
4% + (11%)1.3 = 18.3%
44. The formula for the Capital Asset Pricing Model is:

a.
b.
c.
d.

E(Ri) = Rf + i(E(Rm) - Rf)

E(Ri) = Rf + iE(Rm)
E(Ri) =i(E(Rm) - Rf)
E(Ri) + Rf = i(E(Rm) - Rf)

ANS: A

37. Which of the following securities poses the greatest

financial risk for the investor?

a.
common equity
b. preferred equity
c.
debt
d. convertible debt
ANS: A
38. Which of the following is not a difficulty associated with

45. The slope of the security market line is:

a.
b.
c.
d.

the return on the market.

beta.
the market risk premium.
the risk-free rate.

ANS: C

46. The difference between the return on the market portfolio

valuing common stock?
a.
Common stock does not have a specific expiration date. and the risk-free rate is known as the:
a.
total return.
b. The required rate of return is difficult to estimate.
b.
systematic premium.
c.
Common stock does not promise a fixed cash flow stream.
c.
unsystematic
return.
d. All of the above are considered difficulties associated with valuing
common stock.
d. market risk premium.
ANS: D
ANS: D
39. The first public sale of company stock to outside
47. Exhibit 7-7
investors is called a/an
a.
seasoned equity offering.
Security
P Invested
Beta
b. shareholders meeting.
1
P3,000
1.2
c.
initial public offering.
2
P7,000
1.4
d. proxy fight.
3
P2,000
0.9
ANS: C
Given Exhibit 7-7, what is the portfolio beta?
40. Which statement about common shareholders is
a.
0.4987
incorrect?
b.
0.9273
a.
Shareholders only have a residual claim.
c.
0.3791
b. Shareholders have precedence over all other claimholders ind.the case
of bankruptcy.
1.2667
c.
Shareholders have a voting right.
ANS: B
d. Shareholders are the ultimate owners of a corporation.

3000/12000*1.2 + 7000/12000*1.4 + 2000/12000*0.9 =

1.2667

53. A particular asset has a beta of 1.2 and an expected return

of 10%. The expected return on the market portfolio is 13%
and the risk-free is 5%. Which of the following statement is
48. Suppose Sarah can borrow and lend at the risk free-rate
correct?
of 3%. Which of the following four risky portfolios should
a.
This asset lies on the security market line.
she hold in combination with a position in the risk-free
b. This asset lies above the security market line.
asset?
c.
This asset lies below the security market line.
a.
portfolio with a standard deviation of 15% and an expectedd.returnCannot
of 12%tell from the given information.
b. portfolio with a standard deviation of 19% and an expected return of 15%
c.
portfolio with a standard deviation of 25% and an expectedANS:
return C
of 18%
Equilibrium
d. portfolio with a standard deviation of 12% and an expected return of 9%return = 5% + 1.2 (13%-5%) = 14.6%
ANS: B

54. A particular asset has a beta of 1.2 and an expected return

of 10%. The expected return on the market portfolio is 13%

and the risk-free is 5%. The stock is
a.
overpriced
b. underpriced
c.
appropriately priced
d. Cannot tell from the given information
ANS: A
Equilibrium return = 5% + 1.2 (13%-5%) = 14.6%
55. A stock that pays no dividends is currently priced at P40

To determine which portfolio is the best, draw a line from

the risk-free rate to each dot in the figure and choose the line
with the highest slope.
49. The risk-free rate is 5% and the expected return on the

market portfolio is 13%. A stock has a beta of 1.5, what is its

expected return?
a.
17%
b.
12%
c.
19.5%
d.
24.5%
ANS: A
E(R) = 5% + 1.5(13%-5%) = 17%
50. According to the CAPM (capital asset pricing model), the

security market line is a straight line. The intercept of this

line should be equal to
a.
zero
b. the expected risk premium on the market portfolio
c.
the risk-free rate
d. the expected return on the market portfolio

and is expected to increase in price to P45 by year end. The

expected risk premium on the market portfolio is 6% and the
risk-free is 5%. If the stock has a beta of 0.6, the stock is
a.
overpriced
b. underpriced
c.
appropriately priced
d. Cannot tell from the given information
ANS: B
Equilibrium return = 5% + 0.6 (6%) = 8.6%
Stock expected return = (45-40)/40 = 12.5%
56. A particular stock has a beta of 1.4 and an expected

return of 13%. If the expected risk premium on the market

portfolio is 6%, whats the expected return on the market
portfolio?
a.
10.6%
b.
4.6%
c.
8.4%
d.
9.3%

ANS: C

ANS: A
13% = Rf + 1.4 (6%)
Rf = 4.6%

51. According to the CAPM (capital asset pricing model), the

Expected market return = 4.6% + 6% = 10.6%

security market line is a straight line. The slope of this line

should be equal to
a.
zero
b. the expected risk premium on the market portfolio
c.
the risk-free rate
d. the expected return on the market portfolio
ANS: B
52. If the market portfolio has an expected return of 0.12 and

a standard deviation of 0.40, and the risk-free rate is 0.04,

what is the slope of the security market line?
a.
0.08
b.
0.20
c.
0.04
d.
0.12
ANS: A
Slope = 0.12 - 0.04 = 0.08

57. A particular stock has an expected return of 18%. If the

expected return on the market portfolio is 13%, and the riskfree rate is 5%, whats the stocks CAPM beta?
a.
1.000
b.
1.625
c.
2.250
d.
1.385
ANS: B
18% = 5% + (8%)
= 1.625
58. The stock of Alpha Company has an expected return of

15.5% and a beta of 1.5, and Gamma Company stock has an

expected return of 13.4% and a beta of 1.2. Assume the
CAPM holds. Whats the expected return on the market?
a.
12%
b.
7%
c.
10.3%
d.
11.2%

ANS: A
Suppose the risk free rate is Rf, and the expected market
return is Rm.

65. Place the following in the correct order of priority for

selecting short-term investments:
a.
expected return, liquidity, preservation of capital
b. expected return, preservation of capital, liquidity
c.
liquidity, expected return, preservation of capital
d. preservation of capital, liquidity, expected return

15.5% = Rf +1.5(Rm-Rf)
13.4% = Rf +1.2(Rm-Rf)
Rf = 5%
Rm = 12%

ANS: D

59. The CAPM (capital asset pricing model) assumes that:

a.
b.
c.
d.

all assets can be traded

investors are risk-averse
investors have homogeneous expectations
all of the above

ANS: C

ANS: D
60. Expected returns are:

a.
b.
c.
d.

always positive.
always greater than the risk-free rate.
inherently unobservable.
usually equal to actual returns.

67. The difference between a lockbox system and a mail-based

system is
a.
that a mail-based system is more secure.
b. that a lockbox system is really a post office box that is emptied
c.
that a lockbox system requires a larger in-house collection syst
d. none of the above.

ANS: C
61. Bavarian Brew receives about 350 checks a day with an

average check size of P550. Currently customers payments

spend 2 days in the mail. Once a check is received it takes
about 1.5 days to process it and another 4 days to clear the
banking system. The firms opportunity cost is 10%. Assume
a 365-day year.
61. What is Bavarian Brews collection float?
a.
4 days
b.
2 days
c.
1.5 days
d.
7.5 days
ANS: A
2+1.5+4 = 7.5
62. Special post office boxes set up by the firm to expedite

the receipt and processing of its accounts receivables are

called
a.
safety-deposit boxes
b. Lockboxes
c.
float reducers
d. none of the above
ANS: B
63. You are contemplating purchasing a P1,000,000 181 day

T-Bill that is selling at a discount of 4.25%. What is the

purchase price of the T-Bill?
a.
P21,368.06
b. P978,631.94
c.
P1,000,000
d. P954,621.52
ANS: B
discount = (1000000)(.0425)(181/360) = 21368.06
pp = 1,000,000 - 21368.06 = 978631.94
64. The benefit(s) of a lock box system include

a.
b.
c.
d.

reduction of mail float.

reduction of processing float.
reduction of availability float.
all of the above.

ANS: D

66. The firm needs to manage its accounts payable in a

fashion that
a.
lengthens the payment period.
b. preserves the firms credit reputation.
c.
both a and b.
d. neither a nor b.

ANS: B
68. Your firm is expected to have P15,000,000 in sales next
year and its cost of capital is 13.5%. How many days of float
will a lockbox system have to save you in order to pay for a
system that will cost your firm P27,740 per year?
a.
2 days
b.
3 days
c.
4 days
d.
5 days
ANS: D
27,740 = 15,000,000 (days/365) .135
days = 5
69. You are offered credit terms of 1/20 net 45. What is the

implied rate of interest by the discount?

a.
1.01%
b.
12.12%
c.
14.75%
d.
25.25%
ANS: C
(.01/.99) (365/25) = .1475

70. Which of the following statements concerning mailbased collection systems is true?
a.
Regardless of recent developments in payment processing equi
expensive for smaller companies to use mail-based collection s
b. Generally it is cheaper for high-volume processors to use the lo
mail-based collection systems.
c.
Low-volume processors may find that using a lockbox system
a mail-based collection system.
d. All of the above statements are true.
e.
Only (a) and (b) are true.
ANS: C
71. The inventory control system technique that segregates

inventory into three groups is called the

a.
economic order quantity model
b. ABC system
c.
material requirements planning system
d. just-in-time system
ANS: B

72. A firm that moves from traditional inventory stocking

methods to a just-in-time (JIT) system should expect to see
a.
its inventory turnover decrease and its average age of inventory

b. its inventory turnover decrease and its average age of inventory decrease.
c.
its inventory turnover increase and its average age of inventory
77. For
increase.
accounts receivable, with respect to cost trade-offs
d. its inventory turnover increase and its average age of inventory
the costs
decrease.
that must be evaluated are:
a.
the cost of investment in accounts receivable and bad debts and
ANS: D
lost sales due to overly restrictive credit policy and/or terms.
73. If a firm is contemplating a relaxation of its credit
b. carrying costs and order and setup costs associated with replen
standards, which of the following might be expected to
finished goods.
result?
c.
costs of reduced liquidity and financing costs resulting from th
a.
decreased unit sales
short-term financing.
b. increased contribution margin
d. none of the above
c.
increased investment in accounts receivable
ANS: A
d. decreased bad debt expense
78. In the ABC System, inventory is categorized based upon:
ANS: C
a.
volume
74. The outright sale of a firms receivables to a third party is
b. color
called
c.
peso investment
a.
a write-off.
d. none of the above
b. factoring.
ANS: C
c.
re-invoicing.
d. none of the above.
79. Factors to consider when granting credit to customers
include:
ANS: B
a.
the variable costs of the products the firm is selling on credit.
b. the credit limit being offered to the customer.
75. A positive cash conversion cycle means that:
c.
the ability of the customer to repay.
a.
trade credit is providing enough financing to cover the firm's entire operating cycle.
d. all of the above
b. the firm collects on sales more slowly than it pays its payables.
e.
(b) and (c) only
c.
the firm collects on sales more quickly than it pays its payables.
ANS: D
d. trade credit does not provide enough financing to cover the firm's entire operating cycle.
ANS: D
80. The schedule that indicates the portions of the total
accounts receivable balance that have been outstanding for
76. With respect to inventory:
specified periods of time is known as the
a.
more is better as it will lead to happier customers
a.
payment pattern monitoring.
b. the larger the level, the faster the total asset turnover and the higher the return on total
b. aging of accounts receivable.
assets
c.
credit scoring.
c.
additional investment in inventory must be justified by additional returns.
d. just-in-time system.
d. all of the above
e.
none of these
e.
(b) and (c) only
ANS: B
ANS: C