Quiz Week 2

ACF103 2014 – Week 2 Quiz
Chapter 5
1. For Stock A, Std Dev (A) = 0.10 and CV = 0.44; for Stock B, Std Dev (B) =
0.15 and CV = 0.19. Therefore, Stock B has higher relative risk than Stock A.
True?
False?
2. If a stock has a beta of 1.2, its excess return varies less than proportionally to
the excess return of the market portfolio.
True?
False?
3. An investor is considering investing in only one of the following securities:
A B C
Expected Return 0.10 0.10 0.15
Standard Deviation 0.05 0.06 0.09
Which of the following statements is true?

A. Securities A and B are equally desirable if the investor is risk-averse.
B. Securities B and C are of equal relative risk.
C. Security B is relatively less risky than Security C.
D. Security C is more desirable than Security A if the investor is very
risk-averse.
4. In the Capital Asset Pricing Model, the term (Rm - Rf) represents ________.
A. the unsystematic risk premium for a security
B. the market risk premium
C. the expected return of a security
D. the security market line
5. If the expected return on Treasury securities is 7 percent, the expected return

on the market portfolio is 10 percent, and the beta of the Tolliman Lighting
Corp. is 1.25, then the required return on TLC stock is ________.
A. 3%
B. 3.75%
C. 7%
D. 10.75%
6. The Wilde Wood Willow's common stock is currently selling at $3 per share,
its quarterly dividend is 7 cents, and the stock is expected to rise to $3.30 in a
year. What is its expected rate of return?
A. 9.3%
B. 10.0%
C. 11.0%
D. 19.3%
7. The risk-free rate is 5% and the expected return on the market portfolio is 9%.
If a company has a beta of 0.90, what is the stock's expected rate of return
according to CAPM?
8. At present, the risk-free rate is 5% and the expected return on the market
portfolio is 11%. The expected returns for four stocks are given below. On the
basis of these expectations, which stock(s) is(are) overvalued and which
undervalued? Why?
__________________________________________________________________
Stock Expected Return Expected Beta
__________________________________________________________________
1. Dong Peng .200 1.2
2. Hua Wei .125 1.4
3. Bei Nan .100 0.8
4. Dong Xi .116 1.1
Chapter 8
1. Which of the following statements is true?
A. Liquid assets yield a return higher than the return on other assets.
B. A greater margin of safety would be provided by having more current
liabilities and fewer current assets.
C. Over an extended period of time, interest on long-term debt costs more
than interest on short-term debt for the same amount of money
borrowed.
D. For current assets, the higher the proportion of liquid assets to total
assets, the greater the return on investment.
2. Financial data for three firms is presented below. Each differs only with
respect to philosophy on an aggressive vs. a conservative approach to current
asset management.
FIRM A FIRM B FIRM C

Sales $2,000,000 $2,000,000 $2,000,000
EBIT 200,000 200,000 200,000
Current Assets 600,000 500,000 400,000
Fixed Assets 500,000 500,000 500,000
Total Assets 1,100,000 1,000,000 900,000
The firm with the most aggressive philosophy has an asset turnover of
________.
A. 1.82:1
B. 2.22:1
C. 3.33:1
D. 5.00:1
3. A firm adopting a conservative financing policy ________.

A. would have higher financial risk than if it adopted an aggressive
financing policy
B. would be more profitable than a firm adopting an aggressive financing
policy
C. may have to pay interest on debt at times when the funds are not
needed
D. would have to be a public utility
Chapter 9
1. The two most likely motives in explaining why firms hold cash are the
________.
A. transactions motive and the speculative motive
B. speculative motive and the precautionary motive
C. transactions motive and the precautionary motive
D. precautionary motive and the managerial entrenchment motive
2. A good cash management system involves properly managing ________.

A. collections, disbursements, cash balances, and marketable securities
investment
B. only collections and disbursements
C. only collections, disbursements, and cash balances
D. collections, disbursements, cash balances, and capital investment
3. Wisconsin Cheesecurd Brewery has a weekly payroll of $250,000 and

paychecks are issued every Friday. On the average, Cheesecurd's employees
cash their checks according to the following pattern:
Day Checks Clear Percent of

Payroll Account Checks Cleared
Friday 20
Monday 30
Tuesday 40
Wednesday 10
Assuming the company maintains a minimum balance in the account so as not

to break any banking laws, how much should be in the payroll account on
Tuesday morning?
A. $250,000
B. $1125,000
C. $100,000
D. $0
4. Goodmonth Enterprises expects credit sales of $800 million next year. If the
firm can invest funds at the rate of 8% a year, what is the value of collecting
payment one day earlier (use a 365-day year)?
Chapter 10
1. The expression 2/10, net 45 means that customers receive a 10 percent
discount if they pay within 2 days; otherwise they must pay in full in 45 days.
True?
False?
2. An important part of the decision regarding a firm's credit and collection

policies is the impact of alternative policies on the level of accounts
receivable.
True?
False?
3. The economic order quantity (EOQ) is the lot size which minimizes total
carrying costs.
True?
False?
4. The Florenza Furniture Company has credit sales of $600,000 and an average
collection period of 45 days. The firm's level of accounts receivable (using a
360 day year) is ________.
A. $50,000
B. $60,000
C. $75,000
D. $90,000
5. Mary's Auto Parts has annual credit sales of $6 million. Mary is considering
offering a cash discount of 2% for payment within 10 days. If 60% of her
customers (in dollar volume) take advantage of the discount, the cost of the
discount would be ________.
A. $120,000
B. $72,000
C. $60,000
D. $12,000
6. An increase in the firm's receivable turnover ratio means that ________.

A. it is collecting credit sales more quickly than before
B. cash sales have decreased
C. it has initiated more liberal credit terms with no increase in sales
D. inventories have increased
7. The ABC Company wishes to establish an EOQ for a particular item. The
annual usage is 12,000 units, order costs are $20, and the annual carrying cost
is $0.48 per unit. The EOQ equals ________. (EOQ = √2(O)(S)/C )
A. 10 units
B. 100 units
C. 1,000 units
D. 10,000 units
Chapter 11
1. The largest single source of short-term financing for businesses collectively is
________.
A. bank loans
B. commercial paper
C. trade credit
D. trade acceptances
2. If credit terms are 3/10, net 45, what is the approximate cost of foregoing the
cash discount and paying on the final due date? (Use a 365-day year and round
to nearest percent.)
A. 3%
B. 13%
C. 25%
D. 32%
3. What is the approximate cost of not taking the cash discount and paying on the
final due date if credit terms are 1/10, net 30? (Use a 365-day year and round
to the nearest percent.)
A. 10%
B. 18%
C. 22%
D. 30%
4. Suppose a firm has a bimonthly payroll of $250,000 with an average amount

of accrued wages of $125,000. If the firm were to increase its pay period from
bimonthly to monthly, accrued wages would amount to ________.
A. $500,000
B. $375,000
C. $250,000
D. $125,000
5. Suppose a firm establishes a $4 million revolving line of credit with its bank.
As part of its agreement, the firm will pay a commitment fee of 0.5% on the
unused portion of the line. If the average borrowing is $3 million over the
year, the commitment fee will be ________.
A. $5,000
B. $10,000
C. $15,000
D. $50,000
6. When a firm factors its accounts receivable ________.

A. collection costs increase
B. it sells receivables to a financial institution
C. it uses receivables as collateral against borrowing
D. it gives up the ability to borrow from banks

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ACF103 2014 – Week 2 Quiz

3. An investor is considering investing in only one of the following securities:

Which of the following statements is true?

5. If the expected return on Treasury securities is 7 percent, the expected return

FIRM A FIRM B FIRM C

3. A firm adopting a conservative financing policy ________.

2. A good cash management system involves properly managing ________.

3. Wisconsin Cheesecurd Brewery has a weekly payroll of $250,000 and

Day Checks Clear Percent of

Assuming the company maintains a minimum balance in the account so as not

2. An important part of the decision regarding a firm's credit and collection

6. An increase in the firm's receivable turnover ratio means that ________.

4. Suppose a firm has a bimonthly payroll of $250,000 with an average amount

6. When a firm factors its accounts receivable ________.

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