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Corporate Finance

REVISION

Introduction to Corporate Finance


"Shareholder wealth" in a firm is represented by:
the number of people employed in the firm.
the book value of the firm's assets less the book
value of its liabilities.
the amount of salary paid to its employees.
the market price per share of the firm's common
stock.

Introduction to Corporate Finance


The focal point of financial management in a
firm is:
the number and types of products or
services provided by the firm.
the minimization of the amount of taxes
paid by the firm.
the creation of value for shareholders.
the dollars profits earned by the firm.

Working Capital Management


Which of the following statements about cash
conversion cycle is correct ?
a) the longer it is, the better for the company;
b) cant take negative values;
c) is the period of time the money are tide up in
inventories and receivables;
d) the longer it is, the higher the amount of
financing the firm needs to secure to support
operations;

Working Capital Management

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.

Working Capital Management

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.

Working Capital Management


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.

Working Capital Management

Ninety-percent of Vogel Bird Seed's total sales of


$600,000 is on credit. If its year-end receivables
turnover is 5, the average collection period
(based on a 365-day year) and the year-end
receivables are, respectively:
365 days and $108,000.
73 days and $120,000.
73 days and $108,000.
81 days and $108,000.

Working Capital Management

A company has $100000 commercial


papers. The bank it offers a credit for 45
days (including three banks days) with an
annual interest rate of 10%. What is the
cost of this credit on commercial papers?
13,5%
11%
10,12%
10,84%

Working Capital Management

A company lose 1% discount if the payment of


its invoices is not made within 15 days, but it not
pay any additional charges within the following
45 days credit terms. What is the cost of the
trade credit?
1%
6,14%
24,57%
8,19%

INCOME STATEMENT
How much does each additional sales
dollar contribute toward profit for a firm
with $6 million break-even level of
revenues and $1.5 million in fixed costs
including depreciation?
a) $0.30;
b) $0.25;
c) $0.75;
d) $0.50;

INCOME STATEMENT
A manufacturer contemplates a change in
technology that would reduce fixed costs from
$800,000 to $600,000, and reduce depreciation
expense from $125,000 to $100,000. However,
the ratio of variable costs to sales will increase
from 68% to 80%. What will happen to breakeven level of revenues?
a) A reduction to the level of $875,000.
b) A reduction to the level of $2,890,625.
c) An increase to the level of $3,500,000.
d) An increase to the level of $3,625,000.

INCOME STATEMENT
For a firm with a DOL (degree of operating
leverage) of 1.5, an increase in sales of
6% will:
a) increase operating profits by 1.5%.
b) decrease operating profits by 1.5%.
c) increase operating profits by 9 %.
d) increase operating profits by 7.5%.

Cash Flow Statement Analysis


Which of the following changes in working
capital will result in a decrease in cash
flows?
a) Decrease in accounts payable;
b) Decrease in inventories;
c) Decrease in accounts receivable;
d) Increase in other current liabilities;

Cash Flow Statement Analysis


A decrease of Accounts Receivable will lead to:
a decrease of companys cash flow from
operating activity (CFO)
an increase of companys cash flow from
financing activity (CFF)
an increase of companys cash flow from
operating activity (CFO)
an increase of companys cash conversion
cycle

Cash Flow Statement Analysis


An increase of depreciation expenses with 150
mil. Euro will lead to (income tax is 16%):
a) a decrease of the net income and CFO with
150 mil. Euro;
b) a decrease of the net income with 126 mil.
Euro and CFO with 24 mil. Euro
c) a decrease of the net income with 126 mil.
Euro and an increase CFO with 24 mil. Euro
d) a decrease of the net income with 150 mil.
Euro and an increase CFO with 24 mil. Euro

Ratio Analysis
Kanji Company had sales last year of $265 million,
including cash sales of $25 million. If its average
collection period was 36 days, its ending
accounts receivable balance is closest to
.
(Assume a 365-days year.)
$26.1 million
$23.7 million
$7.4 million
$18.7 million

Ratio Analysis
An increase in the firm's receivable
turnover ratio means that:
it is collecting credit sales more quickly
than before.
cash sales have decreased.
it has initiated more liberal credit terms.
inventories have increased.

Ratio Analysis
Felton Farm Supplies, Inc., has an 8 percent
return on total assets of $300,000 and a
net profit margin of 5 percent. What are its
sales?
$3,750,000
$480,000
$300,000
$1,500,000

Ratio Analysis
Determine a firm's total asset turnover
(TAT) if its net profit margin (NPM) is 5
percent, total assets are $8 million, and
ROA is 8 percent.
1.60
2.05
2.50
4.00

Ratio Analysis
Profit Margin and ROE Burger Corp has $500,000 of
assets, and it uses only common equity capital (zero
debt). Its sales for the last year were $600,000, and its
net income after taxes was $25,000. Stockholders
recently voted in a new management team that has
promised to lower costs and get the return on equity up
to 15%. What profit margin would Burger need in order
to achieve the 15% ROE, holding everything else
constant?
a. 8.00%
b. 9.50%
c. 11.00%
d. 12.50%

Ratio Analysis
A firm's inventory turnover (IT) is 5 times on a cost
of goods sold (COGS) of $800,000. If the IT is
improved to 8 times while the COGS remains
the same, a substantial amount of funds is
released from or additionally invested in
inventory. In fact,
$160,000 is released.
$100,000 is additionally invested.
$60,000 is additionally invested.
$60,000 is released.

Ratio Analysis
Which of the following would NOT improve
the current ratio?
Borrow short term to finance additional
fixed assets.
Issue long-term debt to buy inventory.
Sell common stock to reduce current
liabilities.
Sell fixed assets to reduce accounts
payable.

Ratio Analysis

Which of the following statements (in general) is


correct?
A low receivables turnover is desirable.
The lower the total debt-to-equity ratio, the lower
the financial risk for a firm.
An increase in net profit margin with no change
in sales or assets means a poor ROIC.
The higher the tax rate for a firm, the lower the
interest coverage ratio.