SS 11

SS 11 Corporate Finance: Leverage, Dividends and Share
Repurchases, and Working Capital Management
Question #1 of 111 Question ID: 414866
The share price of Solar Automotive Industries is $50 per share. It has a book value of $500 million and 50 million shares
outstanding. What is the book value per share (BVPS) after a share repurchase of $10 million?
A) $10.00.
B) $9.84.
C) $10.12
In a recent staff meeting, David Hurley, stated that analysts should understand that financial ratios mean little by themselves. He
advised his colleagues to evaluate financial ratios carefully. During the discussion he made the following statements:
Statement 1: A company can be compared with others in its industry by relating its financial ratios to industry norms. However,
care must be taken because many ratios are industry-specific, but not all ratios are important to all industries.
Statement 2: Comparing a company to the overall economy is useless because overall business conditions are constantly
changing. Specifically, it is not the case that financial ratios tend to improve when the economy is strong and weaken during
recessionary times.
Are statements 1 and 2 as made by Hurley regarding financial ratio analysis CORRECT?
Statement 1 Statement 2
A) Incorrect Correct
B) Correct Correct
C) Correct Incorrect
Which of the following is NOT a limitation to financial ratio analysis?
A) Differences in international accounting practices.
B) A firm that operates in only one industry.
C) The need to use judgment.

A share repurchase has what effect on shareholder wealth compared to a cash dividend of the same amount, if the tax treatment
of the two alternatives is the same?
A) Same effect.
B) Less effect.
C) Greater effect.
Paying a cash dividend is most likely to result in:
A) an increase in liquidity ratios.

B) an increase in financial leverage ratios.
C) the same impact on liquidity and leverage ratios as a stock dividend.
A firm expects to produce 200,000 units of flour that can be sold for $3.00 per bag. The variable costs per unit are $2.00, the
fixed costs are $75,000, and interest expense is $25,000. The degree of operating leverage (DOL) and the degree of total
leverage (DTL) is closest to:
DOL DTL
A) 1.3 1.3
B) 1.6 1.3
C) 1.6 2.0
Which of the following forms of short-term financing is typically used to facilitate international trade?
A) Overdraft line of credit.
B) Banker's acceptances.
C) Commercial paper.
Liquidating short-term assets and renegotiating debt agreements are best described as a firm's:
A) secondary sources of liquidity.
B) pulls and drags on liquidity.

C) primary sources of liquidity.
A firm records the following cash flows on the same day: $250 million from debt proceeds; $100 million funds transferred to a
subsidiary; $125 million in interest payments; and $30 million in tax payments. The net daily cash position:
A) worsened.
B) remained the same.
C) improved.
Which yield measure is the most appropriate for comparing a company's investments in short-term securities?
A) Money market yield.
B) Bond equivalent yield.

C) Discount basis yield.
Shareholders selling shares between the ex-dividend date and date of record:
A) receive the dividend.
B) forfeit the dividend, with the proceeds staying with the company.
C) forfeit the dividend, with the proceeds going to the buyer.
In reviewing the effectiveness of a company's working capital management, an analyst has calculated operating cycle and cash
conversion cycle measures for the past three years.
20X6 20X7 20X8
Operating cycle (number of days) 55 60 62
Cash conversion cycle (number of
27 30 32
days)
The trends in the operating cycle and cash conversion cycle most likely indicate:
A) slower collections of receivables.

B) improving liquidity.
C) stretching of payables.
Which of the following best describes a firm with low operating leverage? A large change in:
A) earnings before interest and taxes result in a small change in net income.
B) the number of units a firm produces and sells result in a similar change in the firm's earnings before
interest and taxes.
C) sales result in a small change in net income.
Financial managers utilize stock splits and stock dividends because they perceive that:
A) an optimal trading range exists.
B) brokerage fees paid by shareholders will be reduced.
C) investors will double the share price if there is a 20% stock dividend.
Which of the following is a key determinant of operating leverage?
A) The tradeoff between fixed and variable costs.
B) Level and cost of debt.
C) The competitive nature of the business.

Which of the following sources of liquidity is the most reliable?
A) Committed line of credit.

B) Uncommitted line of credit.
C) Revolving line of credit.
Armsware Industries' board is debating whether to issue a cash dividend or a stock dividend. Director Jones states, "We should
issue a cash dividend because our liquidity ratios will improve and the credit rating agencies will love it." Director Beane states,
"A stock dividend will improve our leverage ratios by increasing contributed capital, which is what the rating agencies are looking
for." Are the statements by Jones and Beane accurate?
Jones Beane
A) Yes No
B) Yes Yes
C) No No
An analyst who is evaluating a firm's working capital management would be least likely to be concerned if the firm's:
A) number of days of inventory is higher than that of its peers.

B) operating cycle is shorter than that of its peers.
C) total asset turnover is lower than its industry average.
An analyst computes the following ratios for Iridescent Carpeting Inc. and compares the results to the industry averages:
Financial Ratio Iridescent Carpeting Industry Average
Current Ratio 2.3x 1.8x
Net Profit Margin 22% 24%
Return on Equity 17% 20%
Total Debt / Total Capital 35% 56%

Times Interest Earned 4.7x 4.1x
Based on the above data, which of the following can the analyst conclude? Iridescent Carpeting:
A) is most likely a younger company than its competitors.
B) has stronger profitability than its competitors.

C) has better short-term liquidity than its competitors.
Which of the following factors is most likely to cause a firm to need short-term financing?
A) Shorter cash conversion cycle than the industry average.

B) Operating cash inflows that fluctuate seasonally.
C) Return of principal from maturing investments.
Which of the following sources of credit would an analyst most likely associate with a borrower of the lowest credit quality?
A) Committed line of credit.

B) Uncommitted line of credit.
C) Revolving line of credit.
Sinclair Construction Company's Board of Directors is considering repurchasing $30,000,000 worth of common stock. Sinclair
assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Sinclair decides to
borrow $30 million that it will use to repurchase shares. Sinclair's Chief Executive Officer (CEO) has compiled the following
information regarding the repurchase of the firm's common stock:
Share price at the time of buyback = $50

Shares outstanding before buyback = 30,600,000
EPS before buyback = $3.33
Earnings yield = $3.33 / $50 = 6.7%
After-tax cost of borrowing = 8.0%
Planned buyback = 600,000 shares
Based on the information above, Sinclair's earnings per share (EPS) after the repurchase of its common stock will be closest to:
A) $3.32.
B) $3.23.
C) $3.18.
Jayco, Inc. has a division that makes red ink for the accounting industry. The unit has fixed costs of $10,000 per month, and is
expected to sell 40,000 bottles of ink per month. If the variable cost per bottle is $2.00 what price must the division charge in
order to breakeven?
A) $2.75.
B) $2.25.
C) $2.50.
What is the impact on shareholder wealth of a share repurchase versus cash dividend of equal amount when the tax treatment of
the two alternatives is the same?
A) A share repurchase will sometimes lead to higher total shareholder wealth than a cash dividend of
an equal amount.
B) A share repurchase will always lead to higher total shareholder wealth than a cash dividend of an
equal amount.
C) A share repurchase is equivalent to a cash dividend of an equal amount, so total shareholder wealth
will be the same.
A company has just received a $5 million shipment from a supplier. Its terms of trade credit are 2/15 net 30. It has access to a
line of credit with an annualized cost of 9%. The best short-term financing strategy is to pay the invoice:
A) immediately.
B) on day 30.
C) on day 15.
Stock splits:
A) increase firm value.

B) are less common than stock dividends.
C) do not in and of themselves affect firm value.
A result that is most likely to give a financial manager concern that his firm's credit policy may have become too lenient is:
A) weighted average collection period has increased.

B) receivables turnover has increased significantly.
C) inventory turnover has decreased considerably.
An analyst is reviewing the working capital portfolio investment policy of a publicly traded firm. Which of the following components
of the policy is the analyst least likely to find acceptable?
A) Authority for selecting and managing short-term investments rests with the firm's treasurer and any
designees selected by the treasurer.
B) Investments must have an A-1 rating from S&P or an equivalent rating from another agency.
C) Investments in U.S. T-bills, commercial paper, and bank CDs are acceptable unless issued by
Stratford Bank.
Pfluger Company's accounts payable department receives an invoice from a vendor with terms of 2/10 net 30. If Pfluger pays the
invoice on its due date, the cost of trade credit is closest to:
A) 43.5%.
B) 27.9%.
C) 44.6%.

Which justification for repurchasing stock is the least valid?
A) A cash dividend increase, in response to short-term excess cash flows, may confuse investors.
B) Repurchases offer shareholders more choices than cash dividends.
C) Shareholders prefer capital gains to cash dividends.
Which type of cash dividend is most likely to be declared by a cyclical firm during good times?
A) Stock dividend.
B) Liquidating dividend.
C) Special dividend.
Myron Jackson is a private equity fund manager specializing in distressed companies. His investment philosophy is based on the
principle that capital structure problems can be fixed, but industry characteristics dictate business models. Jackson would most
likely be interested in distressed firms with which of the following characteristics?
A) High operating risk and high financial risk.

B) High financial risk and low operating risk.
C) High operating risk and low financial risk.
Steven's Bakery produces snack cakes and bread. Listed below are the operating costs for the snack cakes division and the
bread division.
Snack cakes Bread
Price per package $2.00 $2.50
Variable cost per package $1.00 $1.30
Fixed operating costs $25,000 $30,000
Fixed financing costs $10,000 $10,000
Compared to the snack cakes division, the operating breakeven quantity for the bread division is:
A) greater.
B) the same.
C) less.
Assume that a 30-day commercial paper security has a holding period yield of 0.80%. The bond equivalent yield of this security
is:
A) 9.60%.
B) 10.12%.
C) 9.73%.
Which of the following statements regarding leverage is most accurate?
A) High levels of financial leverage increase business risk while high levels of operating leverage will
decrease business risk.
B) A firm with low operating leverage has a small proportion of its total costs in fixed costs.
C) A firm with high business risk is more likely to increase its use of financial leverage than a firm with
low business risk.
Additional debt should be used in the firm's capital structure if it increases:
A) firm earnings.
B) earnings per share.
C) the value of the firm.
Which of the following statements about a stock repurchase is least accurate?

A) A stock repurchase occurs when a large block of stock is removed from the marketplace.
B) Management can distribute cash to shareholders at a favorable after-tax rate.
C) Disgruntled stockholders are forced to sell their shares, improving management's position.
Which of the following is least likely a method by which firms repurchase their shares?
A) Exercise a call provision.

B) Direct negotiation.
C) Tender offer.
A periodic payment to shareholders in the form of additional shares of stock instead of cash is a:
A) dividend reinvestment plan

B) stock repurchase
C) stock dividend
A large, creditworthy manufacturing firm would most likely get short-term financing by:
A) factoring its receivables.

B) entering into an agreement for a committed line of credit.
C) issuing commercial paper.
A high cash conversion cycle suggests that a company's investment in working capital is:
A) too high.
B) too low.
C) appropriate.
Yangtze Delta High Technology produces multimedia-enabled wireless phones. The factory incurs rent, depreciation, salary, and
other fixed costs totaling RMB 10 million per year. Also, the company incurs annual interest of RMB 3 million on debt. Each
phone sold by Yangtze Delta sells for RMB 200. The variable cost per phone is RMB 150. Yangtze Delta's operating breakeven
quantity of sales is closest to:
A) 260,000.
B) 200,000.
C) 65,000.
An example of a secondary source of liquidity is:
A) trade credit and bank lines of credit.

B) negotiating debt contracts.
C) cash flow management.
Which of the following strategies is most likely to be considered good payables management?
A) Paying trade invoices on the day they arrive.
B) Paying invoices on the last possible day to still get the supplier's discount for early payment.
C) Taking trade discounts only if the firm's annual return on short-term investments is less than the
discount percentage.
Jayco, Inc. sells 10,000 units at a price of $5 per unit. Jayco's fixed costs are $8,000, interest expense is $2,000, variable costs
are $3 per unit, and earnings before interest and taxes (EBIT) is $12,000. What is Jayco's degree of financial leverage (DFL) and
total leverage (DTL)?
DFL DTL
A) 1.33 1.75
B) 1.20 2.00
C) 1.33 2.00
Given the following information on the annual operating results for ArtFrames, a producer of quality metal picture frames, what is
the degree of operating leverage (DOL) and the degree of financial leverage (DFL)?
Sales of $3.5 million

Variable Costs at 45% of sales
Fixed Costs of $1.05 million
Debt interest payments on $750,000 issued at par with an annual 9.0% coupon (current yield is 7.0%)
Which of the following choices is closest to the correct answer? ArtFrame's DOL and DFL are:
DOL DFL
A) 3.00 1.50
B) 2.20 1.50
C) 2.20 1.08
Annual fixed costs at King Mattress amount to $325,000. The variable cost of raw materials and labor is $120 for the typical
mattress. Sales prices for mattresses average $160. How many units must King Mattress sell to break even?
A) 8,125.
B) 2,708.
C) 40.
All else equal, a firm's business risk is higher when:
A) variable costs are the highest portion of its expense.
B) the firm has low operating leverage.

C) fixed costs are the highest portion of its expense.
Which of the following statements regarding the impact of financial leverage on a company's net income and return on equity
(ROE) is most accurate?
A) If a firm has a positive operating profit margin, using financial leverage will always increase ROE.
B) Using financial leverage increases the volatility of ROE for a level of volatility in operating income.
C) Increasing financial leverage increases both risk and potential return of existing bondholders.
An investment policy statement for a firm's short-term cash management function would least appropriately include:
A) a list of permissible securities.

B) procedures to follow if the investment guidelines are violated.
C) information on who is allowed to invest corporate cash.
Robel Company, which pays no dividends, carries out a 3-for-5 reverse split of its common shares. How will this transaction affect
Robel's forecasts of its net cash position?
A) No effect because this transaction does not affect future cash flows.
B) No effect on the short-term forecast but less net cash in the longterm forecast.
C) More net cash in both the short-term forecast and the long-term forecast.
The cut-off date for receiving the dividend is known as the:
A) date of payment.
B) holder of record date.
C) ex-dividend date.
Which of the following statements about business risk and financial risk is least accurate?
A) Business risk is the riskiness of the company's assets if it uses no debt.
B) The greater a company's business risk, the higher its optimal debt ratio.
C) Factors that affect business risk are demand, sales price, and input price variability.
The share prices of Solar Automotive Industries and Winnipeg Auto Unlimited are both $50 per share, and each company has 50
million shares outstanding. On September 30, both companies announced a $10 million stock buyback. Solar has a book value
of $500 million, while Winnipeg has a book value of $900 million. How much did the book value per share (BVPS) of each
company increase or decrease after the share repurchase?
Solar Automotive Industries Winnipeg Auto Unlimited
A) Decrease by $0.13 Decrease by $0.13
B) Increase by $0.13 Increase by $0.16
C) Decrease by $0.16 Decrease by $0.13
Variability in a firm's operating income is most closely related to its:
A) business risk.
B) internal risk.
C) financial risk.
A firm is choosing among three short-term investment securities:

Security 1: A 30-day U.S. Treasury bill with a discount yield of 3.6%.
Security 2: A 30-day banker's acceptance selling at 99.65% of face value.
Security 3: A 30-day time deposit with a bond equivalent yield of 3.65%.
Based only on these securities' yields, the firm would:

A) prefer the U.S. Treasury bill.
B) prefer the time deposit.

C) prefer the banker's acceptance.
The average number of days that it takes to turn raw materials into cash proceeds is a firm's:
A) receivables cycle.
B) inventory turnover cycle.

C) operating cycle.
Which of the following is least likely an indicator of a firm's liquidity?
A) Cash as a percentage of sales.
B) Inventory turnover.
C) Amount of credit sales.
Which of the following most accurately represents the cash conversion cycle?
A) average days of payables + average days of inventory - average days of receivables.

B) average days of receivables + average days of inventory - average days of payables.
C) average days of receivables + average days of inventory + average days of payables.
The uncertainty in return on assets due to the nature of a firm's operations is known as:
A) tax efficiency.
B) financial leverage.
C) business risk.
Hughes Continental is assessing its business risk. Which of the following factors would least likely be considered in the analysis?
A) Debt-equity ratio.
B) Input price variability.
C) Unit sales levels.
The share price of Winnipeg Auto Unlimited is $5 per share. There are 50 million shares outstanding, and Winnipeg has a book
value of $900 million. What is the book value per share (BVPS) after the share repurchase of $10 million?
A) $18.54.
B) $21.24.
C) $14.76.
The condition that occurs when a company disburses cash too quickly, stretching the company's cash reserves, is best described
as a:
A) pull on liquidity.
B) drag on liquidity.
C) liquidity premium.
Pearl City Breweries has 8 million shares outstanding that are currently trading at $34 per share. The company is choosing
whether to distribute $22 million as dividends or to use the same amount to repurchase its shares. Ignoring tax effects, what will
be the amount of total wealth from owning one share of Pearl City Breweries under each of these alternatives?
Share
Cash dividend
repurchase
A) $31.25 $34.00
B) $31.25 $37.00
C) $34.00 $34.00
Wanton's San Y'isidro Co. manufactures custom door knobs for international clients. Average Revenue is $35 per unit, variable
costs are $15 per unit, and total costs are $200,000. If sales are 10,000 units, what is the firm's breakeven sales quantity?
A) 2,500 units.
B) 3,000 units.
C) 1,750 units.
Laura's Chocolates, Inc. (LC), is a maker of nut-based toffees. LC is considering a share repurchase and prefers the "tender
offer" method. Which of the following is also known as a "tender offer"?
A) Buying in the open market.

B) Repurchasing by direct negotiation.
C) Buying a fixed number of shares at a fixed price.
With respect to inventory management,:
A) a firm with inventory turnover higher than the industry average can be expected to have better
profitability as a result.
B) an increase in days of inventory on hand can be the result of either good or poor inventory
management.
C) a decrease in a firm's days of inventory on hand indicates better inventory management and can
lead to increased profits.
An analyst has gathered the following expenditure information for three different firms, each of which has a sales level of $4
million.
Costs for firms under consideration
(in millions)
Firm A Firm B Firm C
Variable Costs $2.00 $2.60 $2.40
Fixed Costs $1.00 $1.30 $1.40
Interest Expense $0.20 $0.00 $0.20
Which firm has the highest degree of operating leverage (DOL)?
A) Firm B.
B) Firm A.
C) Firm C.
The combination of operating risk and sales risk is known as:
A) financial risk.
B) business risk.
C) gearing risk.
Stromburg Corporation's sales are $75,000,000. Fixed costs, including research and development, are $40,000,000, while
variable costs amount to 30% of sales. Stromburg plans an expansion which will generate additional fixed costs of $15,000,000,
decrease variable costs to 25% of sales, and permit sales to increase to $100,000,000. What is Stromburg's degree of operating
leverage at the new projected sales level?
A) 3.75.
B) 3.50.
C) 4.20.
Which of the following sources of financing is least likely to increase a firm's financial risk?
A) Fixed-rate debt.
B) Common equity.
C) Operating leases.
Yields on firms' investments in short-term securities for comparison purposes are best stated as:
A)
.
B)
.
C)
.
Pierce Motor Company has an operating cycle of 150 days and a cash conversion cycle of 120 days, while Dunhill Motor, Inc.
has an operating cycle of 140 days and a cash conversion cycle of 125 days. Based on these figures it is most likely that:
A) average days of inventory for Dunhill is less than for Pierce.
B) average days of payables for Dunhill is less than for Pierce.

C) average days of receivables for Dunhill is less than for Pierce.
The current stock price of Westkirk is $50.00 per share. Book value of equity is $200 million and 10 million shares are
outstanding. If Westkirk repurchases $25 million of their stock, the change in book value per share after the repurchase is closest
to a(n):
A) decrease of $2.50.
B) decrease of $1.60.
C) increase of $1.10.

A 30-day bank certificate of deposit has a holding period yield of 1%. What is the annual yield of this CD on a bond-equivalent
basis?
A) 12.17%.
B) 12.00%.
C) 11.83%.
Nelson, Inc. has fixed financing costs of $3 million, fixed operating costs of $5 million, and variable costs of $2.00 per unit. If the
price of Nelson's product is $4.00, Nelson's operating breakeven quantity of sales is:
A) 2.5 million units.
B) 1.0 million units.

C) 4.0 million units.
Which of the following sources of short-term liquidity is considered reliable enough that it can be listed in the footnotes to a firm's
financial statements as a source of liquidity?
A) Factoring agreement.
B) Revolving line of credit.

C) Uncommitted line of credit.
An appropriate cash management strategy for a company that has a seasonally high need for cash prior to the holiday shopping
season would least likely include:
A) borrowing funds though a bank line of credit.

B) allowing short-term securities to mature without reinvestment.
C) investing in U.S. Treasury notes at other times of the year because they are highly liquid.
Randox Industries has the following investment policy statement: "In order to achieve the safety and liquidity necessary in the
investment of excess cash balances, the CFO or his designee may invest excess cash balances in 30-day U.S. Treasury bills, or
in banker's acceptances with maturities of less than 31 days or 30-day certificates of deposit, where the credit rating of the
issuing bank is A+ or higher." This policy statement is:
A) appropriate because these are all safe, liquid securities.

B) inappropriate because both banker's acceptances and certificates of deposit are illiquid.
C) inappropriate because it is too restrictive.
The additional risk a firm's common shareholders must bear when a firm uses fixed cost financing is best described as:
A) financial risk.
B) business risk.
C) operating risk.
Compared to the prior period, a firm has greater days of receivables. The effect on the firm's cash conversion cycle and operating
cycle are most likely a(n):
Cash conversion cycle Operating cycle
A) Decrease Increase
B) Increase Decrease
C) Increase Increase
Which of the following shows the key dividend dates in their proper sequence?
A) Declaration date, holder-of-record date, ex-dividend date, payment date.
B) Declaration date, ex-dividend date, holder-of-record date, payment date.
C) Ex-dividend date, holder-of-record date, declaration date, payment date.
Question #83 of 111

Question ID: 414879
A firm has average days of receivables outstanding of 22 compared to an industry average of 29 days. An analyst would most
likely conclude that the firm:
A) has a lower cash conversion cycle than its peer companies.

B) may have credit policies that are too strict.
C) has better credit controls than its peer companies.
Pants R Us Inc.'s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Pants R Us assumes that
the stock can be repurchased at the market price of $50 per share. After much discussion Pants R Us decides to borrow $30
million that it will use to repurchase shares. Pants R Us' Chief Investment Officer (CIO) has compiled the following information
regarding the repurchase of the firm's common stock:

Earnings yield = $3.33 / $50 = 6.7%
After-tax cost of borrowing = 6.7%
Based on the information above, what will be Pants R Us' earnings per share (EPS) after the repurchase of its common stock?
A) $3.40.
B) $3.28.
C) $3.33.
Alton Industries will have better liquidity than its peer group of companies if its:
A) quick ratio is lower.
B) average trade payables are lower.
C) receivables turnover is higher.
The two major types of risk affecting a firm are:

A) financial risk and cash flow risk.
B) business risk and financial risk.

C) business risk and collection risk.
The quick ratio is considered a more conservative measure of liquidity than the current ratio because the quick ratio excludes:
A) accounts receivable, which may not be collectible in the short term.
B) short-term marketable securities, which may need to be sold at a significant loss.

C) inventories, which are not necessarily liquid.
Which of the following factors is least likely to affect business risk?
A) Operating leverage.
B) Interest rate variability.

C) Demand variability.
FCO, Inc. (FCO) is comparing EBIT forecasts to help determine the impact its capital structure has on net income.
Expected EBIT EBIT + 10%
EBIT $80,000 $88,000
Interest expense 15,000 15,000
EBT 65,000 73,000
Taxes 26,000 29,200
Net income 39,000 43,800
Liabilities 200,000
Shareholder equity 250,000

Return on equity 15.60%
FCO's degree of financial leverage is closest to:
A) 0.80.
B) 0.60.
C) 1.25.
Ignoring tax consequences, given a choice between a cash dividend and a share repurchase of the same amount, a rational
investor would:
A) be indifferent between a cash dividend and a share repurchase.

B) prefer a cash dividend to a share repurchase.
C) prefer a share repurchase to a cash dividend.
Annah Korotkin is the sole proprietor of CoverMeUp, a business that designs and sews outdoor clothing for dogs. Each year, she
rents a booth at the regional Pet Expo and sells only blankets. Korotkin views the Expo as primarily a marketing tool and is happy
to breakeven (that is, cover her booth rental). For the last 3 years, she has sold exactly enough blankets to cover the $750 booth
rental fee. This year, she decided to make all blankets for the Expo out of high-tech waterproof/breathable material that is more
expensive to produce, but that she believes she can sell for a higher profit margin. Information on the two types of blankets is as
follows:
Per Unit Last Year's (Basic) Blanket This Year's (New) Blanket
Sales Price $25 $40
Variable Cost $20 $33
Assuming that Korotkin remains most interested in covering the booth cost (which has increased to $840), how many more or
fewer blankets (new style) does she need to sell to cover the booth cost? To cover this year's booth costs, Korotkin needs to sell:
A) 30 fewer blankets than last year.
B) 42 more blankets than last year.
C) 42 fewer blankets than last year.

The least appropriate security for investing short-term excess cash balances would be:
A) bank certificates of deposit.
B) preferred stock.
C) time deposits.
What is the earliest day on which an investor can currently purchase Amex, Inc., if the investor wants to avoid receiving a
dividend and thereby avoid paying tax on the distribution, if the date of record is Thursday, October 31?
A) Thursday, October 24.

B) Tuesday, October 29.
C) Monday, October 28.
All else equal, which of the following statements about operating leverage is least accurate?
A) Operating leverage reflects the tradeoff between variable costs and fixed costs.
B) Firms with high operating leverage experience greater variance in operating income.
C) Lower operating leverage generally results in a higher expected rate of return.
A 91-day Treasury bill has a holding period yield of 1.5%. What is the annual yield of this T-bill on a bond-equivalent basis?
A) 6.24%.
B) 6.02%.
C) 6.65%.
The following information reflects the projected operating results for Opstalan, a catalog printer.
Sales of $5.0 million.
Variable Costs at 40% of sales.
Fixed Costs of $1.0 million.
Debt interest payments on $1.5 million issued with an annual 7.0% coupon (current yield is 8.0%).
Tax Rate of 0.0%.
Opstalan's degree of total leverage (DTL) is closest to:
A) 1.59.
B) 1.41.
C) 2.58.
Given the following information on the annual operating results for ArtFrames, a producer of quality metal picture frames:
Sales of $3,500,000.
Variable costs at 45% of sales.
Fixed costs of $1,050,000.
Debt interest payments on $750,000 issued at par with an annual 9.0% coupon; market yield is currently 7.0%.
ArtFrames's degree of operating leverage (DOL) and degree of financial leverage (DFL) are closest to:
DOL DFL
A) 2.20 1.08
B) 3.00 1.50
C) 2.20 1.50
An example of a primary source of liquidity is:
A) renegotiating debt agreements.
B) filing for bankruptcy.
C) using trade credit from vendors.
Jim Davis and Thurgood Owen, two equity analysts at Ferguson Capital Management, were reviewing the financial statements of
Peregrine Foodstuffs Ltd. Davis and Owen noticed that Peregrine has been repurchasing its common shares in the market over
the past three years. Owen thought this was an important issue to look into in greater detail. Upon completion of his review,
Owen made the following two statements:
Statement 1: Peregrine has bought back shares in the open market during its repurchase program. This method of repurchase
gave the company the flexibility to choose the timing of the transaction.
Statement 2: Peregrine plans to buy back shares by making tender offers during the coming year. By making tender offers, the
company will be able to repurchase shares at a discount to the prevailing market price.
With respect to Owen's statements:
A) only one is correct.

B) both are incorrect.
C) both are correct.
A company's use of financial leverage:
A) decreases default risk and decreases potential return on equity.

B) increases default risk and decreases potential return on equity.
C) increases default risk and increases potential return on equity.
Francis Investment Inc's Board of Directors is considering repurchasing $30,000,000 worth of common stock. Francis assumes
that the stock can be repurchased at the market price of $50 per share. After much discussion Francis decides to borrow $30
million that it will use to repurchase shares. Francis' Chief Financial Officer (CFO) has compiled the following information
regarding the repurchase of the firm's common stock:

Earnings yield = $3.33 / $50 = 6.7%
After-tax cost of borrowing = 4%
Based on the information above, after the repurchase of its common stock, Francis' EPS will be closest to:
A) $3.36.
B) $3.39.
C) $3.41.
Financial leverage magnifies:
A) taxes.
B) operating income variability.

C) earnings per share variability.
The purchaser of a stock will receive the next dividend if the order is filled before the:
A) holder-of-record date.
B) ex-dividend date.
C) payment date.
Compared to the prior year, Chart Industries has reported that its operating cycle has remained relatively stable while its cash
conversion cycle has decreased. The most likely explanation for this is that the firm:
A) is paying its bills for raw materials more rapidly.
B) has improved its inventory turnover.

C) is relying more on its suppliers for short-term liquidity.
A company is most likely to use a Dutch auction when repurchasing shares:

A) with a tender offer.
B) by direct negotiation.
C) in the open market.
Which of the following statements about leverage is most accurate?
A) If the company has no debt outstanding, then its degree of total leverage equals its degree of
operating leverage.
B) An increase in fixed costs (holding sales and variable costs constant) will reduce the company's
degree of operating leverage.
C) A decrease in interest expense will increase the company's degree of total leverage.
A banker's acceptance that is priced at $99,145 and matures in 72 days at $100,000 has a(n):
A) money market yield greater than its discount yield.

B) bond equivalent yield greater than its effective annual yield.
C) discount yield greater than its bond equivalent yield.
As financial leverage increases, what will be the impact on the expected rate of return and financial risk?
A) Both will rise.

B) Both will fall.
C) One will rise while the other falls.
During a period of expansion in the economy, compared to firms with lower operating expense levels, earnings growth for firms
with high operating leverage will be:
A) higher.
B) unaffected.
C) lower.
Jayco, Inc., sells blue ink for $4.00 a bottle. The ink's variable cost per bottle is $2.00. Ink has fixed cost of $10,000. What is Jayco's
breakeven point in units?
A) 6,000.
B) 2,500.
C) 5,000.
If a 10% increase in sales causes EPS to increase from $1.00 to $1.50, and if the firm uses no debt, then what is its degree of
operating leverage?
A) 4.2.
B) 4.7.
C) 5.0.

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SS 11 Corporate Finance: Leverage, Dividends and Share

Repurchases, and Working Capital Management

Question #1 of 111 Question ID: 414866

Question #2 of 111 Question ID: 414882

Question #3 of 111 Question ID: 414877

Which of the following is NOT a limitation to financial ratio analysis?

A) Differences in international accounting practices.

B) A firm that operates in only one industry.

C) The need to use judgment.

Question #5 of 111 Question ID: 414850

Paying a cash dividend is most likely to result in:

A) an increase in liquidity ratios.

C) the same impact on liquidity and leverage ratios as a stock dividend.

Question #6 of 111 Question ID: 414832

Question #7 of 111 Question ID: 434359

A) Overdraft line of credit.

A) secondary sources of liquidity.

B) pulls and drags on liquidity.

Question #9 of 111 Question ID: 414890

Question #10 of 111 Question ID: 414891

A) Money market yield.

B) Bond equivalent yield.

Question #11 of 111 Question ID: 414856

A) receive the dividend.

C) forfeit the dividend, with the proceeds going to the buyer.

Question #12 of 111 Question ID: 460669

A) slower collections of receivables.

Question #13 of 111 Question ID: 414836

Question #14 of 111 Question ID: 414853

A) an optimal trading range exists.

B) brokerage fees paid by shareholders will be reduced.

Question #15 of 111 Question ID: 414840

Which of the following is a key determinant of operating leverage?

A) The tradeoff between fixed and variable costs.

B) Level and cost of debt.

C) The competitive nature of the business.

Which of the following sources of liquidity is the most reliable?

A) Committed line of credit.

Question #17 of 111 Question ID: 487760

Question #18 of 111 Question ID: 414886

A) number of days of inventory is higher than that of its peers.

Question #19 of 111 Question ID: 414876

Financial Ratio Iridescent Carpeting Industry Average

Current Ratio 2.3x 1.8x

Net Profit Margin 22% 24%

Return on Equity 17% 20%

Total Debt / Total Capital 35% 56%

A) is most likely a younger company than its competitors.

B) has stronger profitability than its competitors.

Question #20 of 111 Question ID: 414889

A) Shorter cash conversion cycle than the industry average.

Question #21 of 111 Question ID: 414904

A) Committed line of credit.

C) Revolving line of credit.

Question #22 of 111 Question ID: 434349

Share price at the time of buyback = $50

Question #23 of 111 Question ID: 414843

Question #24 of 111 Question ID: 414870

Question #25 of 111 Question ID: 485792