Financial Accounting questions

Problem #1:

A business sells $100 worth of goods to a customer, the customer pays $50 in cash immediately
and will pay the remaining $50 in 30 days.

What is the double entry to record the sale?

Problem #2:

A business has opening payables of $75,000 and closing payables of $65,000. Cash paid to
suppliers was $65,000 and discounts received $3,000. What is the figure for purchases?

Problem #3:

The profit earned by a business in 20X7 was $72,500. The proprietor injected new capital of
$8,000 during the year and withdrew goods for his private use which had cost $2,200. If net
assets at the beginning of 20X7 were $101,700, what were the closing net assets?

Problem #4:

Inventory Data—April 30
May 1 Inventory 100 units @ $4.00
5 Purchase 200 units @ $5.00
6 Sale 250 units

Using the perpetual inventory system, determine the cost of good sold associated with the sale on
May 6 under FIFO method.

Problem #5:

Mario's trial balance includes the following items: non-current assets $50,000, inventory
$15,000, payables $10,000, receivables $5,000, bank $110,000, allowance for receivables
$1,000. What is the figure for current assets?

Problem #6:

Mario's trial balance includes the following items: non-current assets $50,000, inventory
$15,000, payables $10,000, receivables $5,000, bank $110,000, allowance for receivables
$1,000. What is the figure for current assets?

Problem #7:

A business has net assets of $70,000 at the beginning of the year and $80,000 at the end of the
year. Drawings were $25,000 and a lottery win of $5,000 was paid into the business during the
year. What was the profit for the year?

Problem #8:
In the published accounts of XYZ Co, the profit for the period is $3,500,000. The balance of
retained earnings at the beginning of the year is $500,000. If dividends of $2,500,000 were paid,
what is the closing balance of retained earnings?

Problem #9:

What is the double entry to record a credit sale of $50?

Problem #10:

What is the double entry to record a purchase of office chairs for $1,000?

Problem #11:

In a period, sales are $140,000, purchases $75,000 and other expenses $25,000. What is the
figure for net profit to be transferred to the capital account?

Problem #12:

Irrecoverable debts are $5,000. Trade receivables at the year end are $120,000. If an allowance
for receivables of 5% is required, what is the entry for irrecoverable debts and allowance for
receivables in the income statement?

Problem #13:

Mountain sells goods on credit to Hill. Hill receives a 10% trade discount from Mountain and a
further 5% settlement discount if goods are paid for within 14 days. Hill bought goods with a list
price of $200,000 from Mountain.

Problem #14:

Using the following accounts and balances taken from a year-end balance sheet, compute
working capital and the current ratio:

Accounts Payable $ 7,000

Accounts Receivable 10,000
Cash 4,000
Marketable Securities 2,000
Merchandise Inventory 12,000
Notes Payable in Three Years 13,000
Property, Plant, and Equipment 40,000
Owner’s Capital 48,000

Problem #15:

A sole trader had net assets of $19,000 at 30 April 2007. During the year to 30 April 2007, he
introduced $9,800 additional capital into the business. Profits were $8,000, of which he withdrew
$4,200.

What is his capital at 1 May?

Problem #16:
Suppose Austin Sound had sales of $300,000 and sales returns of $45,000. Cost of
goods sold was $152,000. How much gross profit did Austin Sound report?

Problem #17:

Assume Juniper Natural Dyes made Net Sales Revenue of $90,000 and Cost of
Goods Sold totaled $58,000. What was Juniper Natural Dyes’s gross profit percentage
for this period? (Round your answer to the nearest whole percent.)

Problem #18:

The following transactions relate to Rashid’s electricity expense ledger account for the year
ended 30 June 20X9: $ Prepayment brought forward 550 Cash paid 5,400 Accrual carried
forward 650.

What amount should be charged to the statement of profit or loss in the year ended 30 June 20X9
for electricity?

Problem #19:

At 30 June 20X5 a company’s allowance for receivables was $39,000. At 30 June 20X6 trade
receivables totalled $517,000. It was decided to write off debts totalling $37,000 and to adjust
the allowance for receivables to the equivalent of 5% of the trade receivables based on past
events. What figure should appear in the statement of profit or loss for the year ended 30 June
20X6 for receivables expense?

Problem #20:

Prisha has not kept accurate accounting records during the financial year. She had opening
inventory of $6,700 and purchased goods costing $84,000 during the year. At the year end she
had $5,400 left in inventory. All sales are made at a mark up on cost of 20%.

What is Prisha’s gross profit for the year?

Problem #21:

At 31 December 20X4 Q, a limited liability company, owned a building that it had purchased 10
years ago for $800,000. It was being depreciated at two per cent per year on the straight line
basis.
On 1 January 20X5 a revaluation to $1,000,000 was recognised. At this date the building had a
remaining useful life of 40 years. What is the depreciation charge for the year ended 31
December 20X5 and the revaluation surplus balance as at 1 January 20X5?

Problem #22:

Holder Inc acquired 150,000 $1 ordinary shares in Sub Inc on 1 July 20X6 at a cost of $300,000.
Sub Inc's reserves at 1 July 20X6 were $36,000 and its issued ordinary share capital was
$200,000. The fair value of the non-controlling interest at acquisition was $100,000.
At 30 June 20X9 Sub Inc's reserves were $16,000. What is the goodwill arising on
consolidation?
Problem #23:

A bank statement shows a balance of $1,200 in credit. An examination of the statement shows a
$500 cheque paid in per the cash book but not yet on the bank statement and a $1,250 cheque
paid out but not yet on the statement. In addition the cash book shows deposit interest received
of $50 but this is not yet on the statement. What is the balance per the cash book?

Problem #24:

The profit earned by a business in 20X7 was $72,500. The proprietor injected new capital of
$8,000 during the year and withdrew goods for his private use which had cost $2,200. If net
assets at the beginning of 20X7 were $101,700, what were the closing net assets?

Problem #25:

An organisation's inventory at 1 July is 15 units @ $3.00 each. The following movements occur:
• 3 July 20X6 5 units sold at $3.30 each
• 8 July 20X6 10 units bought at $3.50 each
• 12 July 20X6 8 units sold at $4.00 each
What would be the closing inventory at 31 July, using the FIFO method of inventory valuation?

Problem #26:

Your organization uses the weighted average cost method of valuing inventories. During August
20X1, the following inventory details were recorded:
Opening balance 30 units valued at $2 each
5 August purchase of 50 units at $2.40 each
10 August issue of 40 units
18 August purchase of 60 units at $2.50 each
23 August issue of 25 units
What is the value of the inventory at 31 August 20X1?

Problem #27:

A company values its inventory using the first in, first out (FIFO) method. At 1 January 20X5
the company had 800 widgets in inventory, valued at $75 each.
During the year ended 31 December 20X5 the following transactions took place:
20X5
1 February Purchased 500 widgets at $80 each
1 May Sold 400 widgets for $45,000
1 August Purchased 450 widgets at $69 each
15 November Sold 450 widgets for $28,750
What is the value of the company’s closing inventory of widgets at 31 December 20X5?

Problem #28:

Dodger Co’s financial statements show a carrying value of $950,000 for capitalized development
expenditure. Its policy is to amortize development expenditure on a straight line basis at 5% per
annum. Accumulated amortization brought forward is $50,000.
What is the charge in the income statement for the year's amortization?

Problem #29:
At 31 December 20X5 the following require inclusion in a company’s financial statements: (1)
On 1 January 20X5 the company made a loan of $12,000 to an employee, repayable on 1 January
20X6, charging interest at 2% per year. On the due date she repaid the loan and paid the whole of
the interest due on the loan to that date. (2) The company paid an annual insurance premium of
$9,000 in 20X5, covering the year ending 31 August 20X6. (3) In January 20X6 the company
received rent from a tenant of $4,000 covering the six months to 31 December 20X5.

For these items, what total figures should be included in the company’s statement of financial
position as Current Assets and Current Liability at 31 December 20X5?

Problem #30:

Gareth, a sales tax registered trader purchased a computer for use in his business. The invoice for
the computer showed the following costs related to the purchase:

Computer 890
Additional memory 95
Delivery 10
Installation 20
Maintenance (1 year) 25
1,040
Sales tax (17.5%) 182
Total 1,222

How much should Gareth capitalize as a non-current asset in relation to the purchase?

Problem #31:

The following bank reconciliation statement has been prepared by a trainee accountant:
Overdraft per bank statement 3,860
Less: Unpresented cheques 9,160
5,300
Add: Outstanding collections 16,690
Cash at bank 21,990

What should be the correct balance per the cash book?

Problem #32:

A company values its inventory using the FIFO method. At 1 May 20X5 the company had 700
engines in inventory, valued at $190 each. During the year ended 30 April 20X6 the following
transactions took place:
20X5
1 July Purchased 500 engines at $220 each
1 November Sold 400 engines for $160,000
20X6
1 February Purchased 300 engines at $230 each
15 April Sold 250 engines for $125,000
What is the value of the company’s closing inventory of engines at 30 April 20X6?

Problem #33:

Amy is a sole trader and had assets of $569,400 and liabilities of $412,840 on 1 January 20X8.
During the year ended 31 December 20X8 she paid $65,000 capital into the business and she
paid herself wages of $800 per month. At 31 December 20X8, Amy had assets of $614,130 and
liabilities of $369,770.

What is Amy’s profit for the year ended 31 December 20X8?

Problem #34:

Patience is trying to work out her cost of sales for the year ended 31 December 20X9.
She has the following details for supplier and inventory balances:

At 1 January 20X9 At 31 December 20X9

Suppliers $15,264 $16,812
Inventory $6,359 $4,919

In the year to 31 December 20X9, Patience’s payments to suppliers totalled $141,324. What was
Patience’s cost of sales for the year to 31 December 20X9?

Problem #35:

Ossie does not keep full accounting records. The last accounts drawn up show that his capital
balance was $51,980. At the year end he calculated that his assets and liabilities at 30 June
20X0 were:

Non-current assets 51,300

Inventory 7,770
Receivables 5,565
Payables 3,994
Bank overdraft 3,537

On reviewing his calculations, you note that there were no entries made in relation to rent for
June 20X0 because the rent for June 20X0 was paid on 1 July 20X0. Rent is $500 per month.
What is the value of Ossie's closing capital?

Problem #36:

Sahara Company’s Cash account shows an ending balance of $650. The bank statement
shows a $29 service charge and an NSF check for $150. A $240 deposit is in transit, and
outstanding checks total $420. What is Sahara’s adjusted cash balance?

Problem #37:

Latté On Demand purchased a coffee drink machine on January 1, 2016, for $44,000.
Expected useful life is 10 years or 100,000 drinks. In 2016, 3,000 drinks were sold, and in
2017, 14,000 drinks were sold. Residual value is $4,000.
Determine the depreciation expense for 2016 and 2017 using the following methods:
Straight-line.

Problem #38:

Latté On Demand purchased a coffee drink machine on January 1, 2016, for $44,000.
Expected useful life is 10 years or 100,000 drinks. In 2016, 3,000 drinks were sold, and in
2017, 14,000 drinks were sold. Residual value is $4,000.

Determine the depreciation expense for 2016 and 2017 using the following methods:
Units-of-production.

Problem #39:

Latté On Demand purchased a coffee drink machine on January 1, 2016, for $44,000.
Expected useful life is 10 years or 100,000 drinks. In 2016, 3,000 drinks were sold, and in
2017, 14,000 drinks were sold. Residual value is $4,000.

Determine the depreciation expense for 2016 and 2017 using the following methods:
Double-declining-balance.

Problem #40:

Mill Creek Golf Club purchased equipment on January 1, 2016, for $31,500.
Suppose Mill Creek Golf Club sold the equipment for $22,000 on December 31,
2018. Accumulated Depreciation as of December 31, 2018, was $21,000. Journalize
the sale of the equipment, assuming straight-line depreciation was used.

Problem #41:

Preparation of Financial Statements.

Below are the accounts of Sunrise Corporation. The company has just completed
its first year of operations ended September 30, 2010.

Accounts Payable $10,500

Accounts Receivable 13,200
Cash 2,600
Delivery Truck Rent Expense 7,200
Equipment $ 6,300
Equipment Rental Expense 2,900
Marketing Expense 1,500
Owner’s Capital (September 30, 2009) 2,000
Service Revenue 82,000
Salaries Expense 56,000
Salaries Payable 700
Supplies 400
Supplies Expense 4,100
Withdrawals 1,000
Prepare the income statement, statement of owner’s equity, and balance sheet for Sunrise
Corporation.

Problem #42:

Consider the overall effects on Global Cleaning Service from selling and performing
services on account for $6,400 and paying expenses totaling $2,500. What is Global
Cleaning Service’s net income or net loss?

Problem #43:

Assume that Global Cleaning Service performed cleaning services for a department
store on account for $180. How would this transaction affect Global Cleaning Service’s
accounting equation?

Problem #44:

At the end of a recent year, Global Cleaning Service, a full-service house and office
cleaning service, had total assets of $3,630 and equity of $2,280. How much were
Global Cleaning Service’s liabilities?
 Financial Statements analysis questions
1. Which of the following are examples of current assets?
A Property, plant and equipment
B Prepayments
C Manufacturing licences
D Retained earnings

2. Which of the following must be disclosed on the face of the statement of profit or loss?
A Tax expense
B Analysis of expenses
C Net profit or loss for the year
D Revenue segmentation

3. How should a prior period error be corrected under IAS 8?

Answer: By adjusting the opening balance of retained earnings

4. How should an asset held for sale be measured?

Answer: At the lower of carrying amount and fair value less costs of disposal

5. Which numerator is used to decide whether potential ordinary shares are dilutive?
Answer: Net profit from continuing operations only

6. Which of the following transactions will have no impact on operating profit margin?
A Increase in selling prices of goods.
B Upward revaluation of property plant and equipment.
C Increase in selling price of services.
D Decrease in administrative expenses.

7. Which of the following is false regarding the transition of not-for-profit entities on the accruals
basis?
A It is expected to result in more relevant and better quality financial reporting
B It is clear that this transition is favorable from the cost-benefit perspective
C It can help compare the cost of providing a service against the same cost in the private sector
D It may assist whether goods and services acquired by not-for-profit entities were most cheaply sourced
8. IAS 37 has, in some part, mitigated use provisions to smooth out net income figures. What kind
of other creative accounting techniques may be used by companies to manipulate financial statements?
A managing pricing of the products
B manipulating cut-offs or accruals
C revaluation of property, plant and equipment
D revaluation of investment property

9. Which of the following financial instruments would most probably cause dilution of earnings per
share?
A Debt instruments
B Share warrants
C Stock options
D Ordinary shares issued

10. Cash receipts from sales of shares or debentures of other entities results in increase of which of
the following?
A Cash from financing activities
B Cash from operating activities
C Cash from investing activities
D Net cash from operating activities

11. Which of the following is not likely to be an advantage of the Current purchasing power (CPP)
accounting?
A It enables better forecasts of future prospects to be made.
B Employs single price index to all non-monetary assets.
C Eliminates approximations in the measurements of value.
D Enhances verification of raw data.

12. Which of the following is least likely to offer a type of comparison in financial statement
analysis?
A Past ratios and figures
B Industry averages
C Statistics of competitors
D Data on complimentary goods or services
13. For which of the following industries a quick and large rise in inventories would be the least
worrisome?
A Financial
B Retailers
C Manufacturing
D Airlines

14. Identify a false statement. A change in accounting estimate…

A Is applied prospectively.
B Is applied retrospectively.
C May be applied either prospectively or retrospectively.
D Applied retrospectively but only to the comparative periods presented in the current financial
statements.

15. Which of the following statements is true in relation to measurement of assets held for sale?
A Depreciation is charged on these assets
B These assets are mainly measured at historical cost
C Impairment on these assets is recognized in the statement of profit or loss
D These assets are measured at higher of the fair value less cost of disposal or the value in use

16. Which pair of ratios would provide the most useful information to gauge the competitive position
of a company?
A Asset turnover and ratio of expenses to sales
B Gearing and interest cover
C ROCE and gross profit margin
D Return on equity and EPS

17. Which of the following actions can help in reducing operating cycle?
A Increasing time taken to produce goods
B Decreasing the period of credit taken from suppliers
C Increasing sales without substantial increase in inventories
D Increasing the receivables collection period

18. Which of these statements is true for not-for-profit organizations?

A Their revenues arise from contributions (donations or membership dues) and sales of goods and
services to third parties
B Their assets are acquired to deliver services with intention of earning return
C They are generally characterized by the presence of defined ownership interests which can be sold,
transferred or redeemed
D Their objective is to provide goods and services to various recipients and not to make a profit

19. Which of the following is least probable to be one of the functions performed by the notes to
financial statements?
A Present information about the basis on which the financial statements were prepared
B Present any information, not shown elsewhere in the financial statements, which is required by other
standards
C Provide for discussion of industry trends and company’s competitive positioning.
D Show any additional information that is relevant to understanding which is not shown elsewhere in the
financial statements.

20. Finish the sentence. Based on IAS 8, a change in accounting policy ___________________
A Is applied prospectively.
B Is applied retrospectively.
C May be applied either prospectively or retrospectively.
D Applied retrospectively but only to the comparative periods presented in the current financial
statements.

21. Company A made a $10mln bond issue in 20X1 which is expected to mature in 20X9. Its fiscal
year ends on 31 December. The bond indenture specifies that the company is obliged to repay all of the
issue if its earnings coverage ratio drops below 2. In December 20X3 company’s earnings coverage ratio
dropped to 1.5 and trustee to the bond issue has initiated a meeting with major bondholders to discuss
further actions along with this the trustee has informed the Company A that it has breached its indenture
and will have to repay all of the issue in the next 6 months. However, on 10 January 20X4, during the
meeting with major bondholders company management has ensured investors that drop in earnings
coverage ratio is a result of temporary issues which will be resolved and bondholders agreed to hold the
bonds till maturity.
How should the company present the bond issue in its financial statements ending 31 December 20X3?
A As a provision among non-current liabilities
B As a current liability
C As a noncurrent liability
D As part of owners’ equity
22. Certain disclosures are needed when a change in accounting policy has a material effect on the
current period or any prior period presented, or when it may have a material effect in subsequent periods.
Which one of the below items is not of those needed disclosures?
A Reasons for the change/nature of change
B The fact that comparative information should not be restated
C Amount of the adjustment for the current period and for each period presented
D Amount of the adjustment relating to periods prior to those included in the comparative information

23. On 1 December 20X3, a company became committed to a plan to sell a manufacturing facility
and has already found a potential buyer. The company does not intend to discontinue the operations
currently carried out in the facility. At 31 December 20X3 there is a backlog of uncompleted customer
orders. The company will not be able to transfer the facility to the buyer until after it ceases to operate the
facility and has eliminated the backlog of uncompleted customer orders. Can the manufacturing facility
be classified as 'held for sale' at 31 December 20X3?
A It depends on when they plan to finish uncompleted customer orders and
B Yes, definitely
C No, they cannot classify it as 'held for sale' because they have to identify
D Return on equity and EPS

24. Which of the following statements is correct regarding reporting foreign currency transactions at
subsequent year ends?
A Report non-monetary items which are carried at fair value in a foreign currency using the exchange
rates that existed when the values were measured.
B Report foreign currency non-monetary items using the closing rate
C Report non-monetary items which are carried at historical cost in a foreign currency using the average
exchange rate during any subsequent period.
D Report foreign currency non-monetary items using the exchange rate at the date of the acquisition

25. Robinhood Co had 3 million equity shares in issue throughout the year ended 31 December 20X6.
On 30 June 20X7 it made a 1 for 2 bonus issue. Profit after tax for the year ended 31 December 20X7 was
$4.8 million, out of which an equity dividend of 30c per share was paid. The financial statements for the
year ended 31 December 20X6 showed EPS of $0.95.
What is the EPS for the year ended 31 December 20X7 and the restated EPS for the year ended 31
December 20X6??

26. Armstrong Co has produced the following net profit figures for the years ending 31 December.

$m
20X1 1.2
20X2 0.6
20X3 2.1
On 1 January 20X2 the number of shares outstanding was 600,000. During 20X2 the company announced
a rights issue with the following details.
Rights: 1 new share for each 4 outstanding
Exercise price: $7.00
Last date to exercise rights: 1 May 20X2
The market (fair) value of one share in Armstrong immediately prior to exercise on 1 May 20X2 =
$10.00.
Required:
Calculate the (a) EPS restated for rights issue for 20X1, (b) EPS for 20X2 and (c) EPS for 20X3.

Show your calculations otherwise the answer will not be considered.

27. Robinson Co has 5,000,000 ordinary shares of 50 cents each in issue, and also had in issue in
20X2:
(a) $600,000 of 12% convertible loan stock, convertible in three years' time at the rate of two shares per
$14 of stock
(b) $1,000,000 of 10% convertible loan stock, convertible in one year's time at the rate of three shares per
$2 of stock
The total earnings in 20X2 were $3,500,000.
The rate of income tax is 25%.
Required
Calculate the basic EPS and diluted EPS. Show your calculations otherwise the answer will not be
considered
28. Which of the following conditions would most probably lead to recognition of a current asset?
A An asset is expected to be realized in, or is held for sale or consumption in, the normal course of the
entity's operating cycle
B An asset is held primarily for trading purposes or for the short-term and expected to be realized within
2 years of the end of the reporting period
C Is cash or a cash equivalent asset which is restricted in its use
D An asset is held primarily for trading purposes or for the short-term and expected to be realized within
3 years of the end of the reporting period

29. Which of the following is most probably the advantage of “function of expense/cost of sales”
over the “nature of expense” method for presentation of a profit or loss statement?
A This statement is easier in preparation
B Gives more relevant information for users
C Requires additional information disclosure
D Is more straightforward and transparent

30. Which of the following is false regarding the assets held for sale and discontinued operations?
A It may be a subsidiary acquired exclusively with a view to resale
B We disclose the net cash flows attributable to the operating, investing and financing activities of
discontinued operations, but only in the notes to financial statements.
C We don’t show details of performance of these items in full in the profit or loss statement
D Gains and losses on the remeasurement of a disposal group that is not a discontinued operation but is
held for sale should be included in profit or loss from continuing operations

31. US company buys a consignment of goods from a supplier in Germany. The order is placed on 1
May and the agreed price is €100,000. At the time of delivery the rate of foreign exchange was €2 to $1.
Choose a false statement regarding this case
A This is an example of potential conversion difference
B If the rate of exchange has changed to €3 to $1 then the US company would report profit on conversion
C If the rate of exchange has changed to €1.5 to $1 then the US company would report loss on conversion
D This is an example of potential translation difference

32. Rand Co, whose year-end is 31 December, buys some goods from Fuji Co of Japan on 30
September. The invoice value is JPY80,000 and is due for settlement in equal instalments on 30
November and 31 January. The exchange rate moved as follow:
JPY = $1
30 September 180
30 November 160
31 December 195
31 January 175

State the accounting entries in the books of Seattle Co that will be made on 30 September (purchase) 30
November (first payment), 31 December (year-end), 31 January (2nd payment). Make sure to account for
any translation differences in your calculations. Show your calculations otherwise the answer will not be
considered.
33. Robinson Co has 4,000,000 ordinary shares of $1 each in issue, and also had in issue in 20X2:
(a) $1,000,000 of 25% convertible loan stock, convertible in three years' time at the rate of three shares
per $10 of stock
(b) $8,000,000 of 18% convertible loan stock, convertible in one year's time at the rate of one share per
$5 of stock
The total earnings in 20X2 were $4,000,000.
The rate of income tax is 25%.
Required
Calculate the basic EPS and diluted EPS. Show your calculations otherwise the answer will not be
considered.
34. Which of the below is not among the rules imposed by IAS 33 in situation when an entity decides
to present alternative EPS figures?
A The entity should use the weighted average number of shares as calculated under IAS 33
B The entity must reconcile if necessary between the component of profit used in the alternative EPS and
the line item for profit reported in the statement of profit or loss and other comprehensive income
C Basic and diluted EPS must be shown with equal prominence
D The entity should follow industry norms and requirements in calculating its after tax profits and EPS

35. Lunapark Co had 3 million equity shares in issue throughout the year ended 31 December 20X6.
On 30 June 20X7 it made a 1 for 5 bonus issue. Profit after tax for the year ended 31 December 20X7 was
$3.0 million, out of which an equity dividend of 25c per share was paid. The financial statements for the
year ended 31 December 20X6 showed EPS of $1.20.
What is the EPS for the year ended 31 December 20X7 and the restated EPS for the year ended 31
December 20X6??
Answer:
36. Which of the following statements is correct regarding reporting foreign currency transactions at
subsequent year ends?
A Report non-monetary items which are carried at fair value in a foreign currency using the exchange
rates that existed when the values were measured.
B Report foreign currency non-monetary items using the closing rate
C Report non-monetary items which are carried at historical cost in a foreign currency using the average
exchange rate during any subsequent period.
D Report foreign currency non-monetary items using the exchange rate at the date of the acquisition

37. When public sector entities deal with outside contractors, based on the Value For Money
principle which of the following conditions is least likely to be considered?
A Challenging why, how and by whom a service is provided
B Comparing performance against other foreign authorities
C Consulting service users, the local community etc
D Using fair Competition to secure efficient and effective services
38. Which of the following current year events would explain a rise in a company’s operating profit
margin compared to the previous year?
A Decrease in borrowing leading to higher interest costs.
B Reduction in the irrecoverable debt.
C Decision to value inventory on the average cost basis from the first in first out (FIFO) basis. Unit prices
of inventory had risen during the current year.
D A change from the amortization of development costs being included in cost of sales to being included
in administrative expenses.

39. In the year ended 31 December 2022, Fuji company declares an interim ordinary dividend of 55c
(cents) per share and a final ordinary dividend of $1 per share. Assuming an ex div share price of $16,
what is the dividend yield?
A 9.69%
B 6.25%
C 3.44%
D 2.81%

40. Analysis of the financial statements of Capricorn at 31 December 20X8 yields the following
information.
Gross profit margin 25%
Current ratio 2.46
ROCE 18.5%
Asset turnover 2.24
Inventory turnover 5.4
What is the net profit margin?
A 8.26%
B 4.63%
C 3.43%
D 11.16%
 Statistics questions
1. A study that involves no researcher intervention is called
a. An experimental study.
b. A noninvolvement study.
c. An observational study.
d. A quasi-experimental study.
e. none of the correct

2. What is the midpoint for class 8.6–8.8?

a. 8.65
b. 8.5
c. 8.7
d. 8.55–8.85
e. 8.6 - 8.8

3. What is the value of the mode when all values in the data set are different?
a. unimodal
b. 1
c. There is no mode
d. It cannot be determined unless the data values are
given.
e. multimodal

4. P50 corresponds to

a. Q2
b. D6
c. IQR
d. Midrange
e. none of them
5. The value that occurs most often in a data set is called

a. Mean
c. Mode
b. Median
d. Midrange
e. Mid point

6. Find a median for the following data 2, 7, 1, 3, 3, 4:

a. 1
b. 7
c. 3,5
d. 3
e. 0

7. Find a mean for the following data 110, 76, 29, 38, 105, 31:

a. 63,8
b.76,5
c. 64,8
d. 76
e. Not enough information

8. The probability that an event happens is 0.65. What is the probability that the event won’t
happen?

a. 0.35
b. 0
c. 0.7
d. 1
e. 0.5

9. The sample space for tossing 3 coins consists of how many outcomes?
a. 3
b. 2
c. 6
d. 8
e. 9

10. What is nP0?

a. 0
b. 1
c. n
d. It cannot be determined.
e. 2

11. What is 0!?

a. 0
b. 1
c. 36
d. 120
e. It cannot be determined.

12. The sum of the probabilities of the events in the sample

space is
a. 100
b. 1
c. 0
d. chance
e. fixed

13. When two events cannot occur at the same time, they are said to be
a. mutually exclusive
b. not mutually exclusive
c. sample space
d. chance
e. dependent events

14. How many outcomes are there in a binomial experiment?

a. 1
b. 2
c. 0
d. 6
e. It varies

15. What are the properties of the t distribution?

a. based on the concept of degrees of freedom, which is related to sample size
b. The mean, median, and mode are equal to 1
c. The variance is less than 1
d. The curve never touches the Y axis.
e. None of the above

16. Approximately what percentage of normally distributed data values will fall within 2 standard
deviations above or below the mean?
a. 68%
b. 95%
c. 99.7%
d. Variable
e. 100%

17. Which is a property of the standard normal distribution?

a. It’s symmetric about the mean.
b. It’s bell-shaped.
c. It’s unimodal.
d. The area under the graph is equal to 1
e. All of the above
18. What distribution must be used when computing confidence intervals for variances and standard
deviations?
a. Z
b. T
c. F
d. Chi-square
e. None of them

19. Properties of a Good Estimator to estimate population measures

a. unbiased estimator
b. consistent estimator,
c. relatively efficient estimator
d. All of the above
e. None of the above

20. When the population standard deviation is known and the sample size is more than 30, what table
value should be used in computing a confidence interval for a mean?
a. Z table
b. T table
c. F table
d. k table
e. None of them

21. The three confidence intervals used most often are the ________%, ____%, _____%

a. 90%, 95%, 97%

b. 1%, 0%, 0,5%
c. 90%,91%,93%
d. 90%, 95%, 99%
e. None of them correct
22. When a 90% confidence interval is calculated instead of a 95% confidence interval with n being
the same, the margin of error will be ______________.
a. Smaller
b. Larger
c. The same
d. It cannot be determined
e. 0

23. For a specific confidence interval, the larger the sample size, the margin of error will
be_______________.

a. larger
b. smaller
c. 0
d. Doubled
e. None of the above

24. The normal distribution can be used to approximate the binomial distribution when n * p and n *
q are both greater than or equal to ______
a. 100
b. 1
c. 5
d. 7
e. 0,5

25. The difference between a sample mean and a population mean is due to _____

a. population mean
b. sample mean
c. None of the above
d. Sampling error
e. normal distribution
 1. Data such as blood types (A, B, AB, O) can be organized into what kind of frequency
distribution?

a. Categorical
b. Grouped
c. Ungrouped
d. Pareto chart
e. Pie chart

2. What are the boundaries for 5.6–5.8?

a. 5–6
b. 5.5–5.9
c. 5.6 - 5.8
d. 5.65–5.75
e. 5.55–5.85

3. What graph should be used to plot data collected over a period of time?
a. Histogram
b. Pie graph
c. box plot
d. Ogive
e. Frequency polygon

4. What is the midpoint of the class 32 - 38?

a. 34
b. 34.5
c. 35
d. 37
e. 38
 5. What is the value of the mode when all values in the data set are different?
a. 0
b. 1
c. There is no mode.
d. It cannot be determined unless the data values are given.
e. Equal to the number of values in the data set

6. When data are categorized as, for example, places of residence (rural, suburban, urban), the most
appropriate measure of central tendency is the

a. Mean
c. Mode
b. Median
d. Midrange
e. Mid point

7. Which is not part of the five-number summary?

a. Q1
b. Q3
c. The median
d. The smallest and the largest data values
e.The mean

8. A statistic that tells the number of standard deviations a data value is above or below the mean is
called

a. A quartile
b. A percentile
c. A coefficient of variation
d. A z score
e. standard deviation

9. When three dice are rolled, the sample space consists of how many events?
a. 6
b. 12
c. 36
d. 54
e. 216

10. What is nP0?

a. 0
b. 1
c. n
d. It cannot be determined.
e. 2

11. The complement of guessing 5 incorrect answers on a 5-question true/false exam is

a. Guessing 5 incorrect answers

b. Guessing at least 1 incorrect answer
c. Guessing at least 1 correct answer
d. Guessing no incorrect answers
e. Guessing 4 correct answers

12. The sample space for tossing 4 coins consists of how many outcomes?
a. 2
b. 4
c. 6
d. 8
e. 16
 13. What is the sum of the probabilities of all outcomes in a probability distribution?
a. 0
b. 1/2
c. 1
d. It cannot be determined.
e. 2

14. How many outcomes are there in a binomial experiment?

a. 0
c. 2
b. 1
d. It varies.
e. 3

15. The number of trials for a binomial experiment

a. Can be infinite
b. Is unchanged
c. Is unlimited
d. Must be fixed
e. Must be always equal to 2

16. The mean for a binomial variable can be found by using the formula
a. n*p2
b. n*p
c. p*q
d. n*q
e. n*q2

17. The standard deviation of all possible sample means equals

a. The population standard deviation
b. The population standard deviation divided by the
c. The population standard deviation divided by the square root of the sample size
d. The square root of the population standard deviation

18. Approximately what percentage of normally distributed data values will fall within 2 standard
deviations above or below the mean?
a. 68%
b. 95%
c. 99.7%
d. Variable

e. 100%

19. Which is not a property of the standard normal distribution?

a. It’s symmetric about the mean.
b. The area under the graph is equal to 1
c. It’s bell-shaped.
d. It’s unimodal.
e. It’s uniform.

20. When a distribution is negatively skewed, the relationship of the mean, median, and mode from
left to right will be
a. Mean, median, mode
b. Mode, median, mean
c. Median, mode, mean
d. Mean, mode, median
e. Mode, mean, median

21. When a 99% confidence interval is calculated instead of a 95% confidence interval with n being
the same, the margin of error will be
a. Smaller
b. Larger
c. The same
d. It cannot be determined.
e. Two times more

22. The best point estimate of the population mean is

a. The sample mean
b. The sample median
c. The sample mode
d. The sample midrange
e. The sample standard deviation

23. When the population standard deviation is unknown and the sample size is less than 30, what
table value should be used in computing a confidence interval for a mean?
a. z
b. t
c. Chi-square
d. None of the above
e. F

24. For a specific confidence interval, the larger the sample size, the smaller the margin of error will
be.
a. Decreases
b. Increases
c. The same
d. Sample size does not affect
e. Doubles

25. When the population standard deviation 𝜎 is given, one should use ___ for population mean 𝜇
hypothesis testing .
a. F test
b. t test
c. chi - square test
d. z test and t test
e. z test

26. When the value of 𝛼 is decreased, the probability of committing a type I error is
a. Decreased
b. Increased
c. The same
d. None of the above
e. Doubled

27. If you wish to test the claim that the mean of the population is greater than 100, the appropriate
alternative hypothesis is
a. X(bar) =100
b. X(bar) <100
c. ≥ 100
d. ≤ 100
e. 𝜇 = 100

28. The degrees of freedom for the t test for population mean 𝜇 are
a. 1
b. n
c. n -1
d. None of the above
e. 2*n

29. To test the equality of two variances, you would use a (n)____ test.
a. Z
b. t
c. Chi-square
d. F
e. Compute the test value

30. To test the equality of two proportions, you would use ____ a(n) test.
a. z
b. t
c. Chi-square
d. F
e. State the hypothesis

31. The mean value of the F is approximately equal to

a. 0
b. 0.5
c. 1
d. It cannot be determined.
e. 2

32. What test can be used to test the difference between two sample means when the population
variances are known?
a. z
b. t
c. Chi-square
d. F
e. Find the critical value(s)

33. When is the right - tailed hypothesis testing used?

a. When the claim states that the parameter is smaller
b. When the claim states that the parameter did not change
c. When the claim states that the parameter is bigger
d. There is no such thing as right - tailed hypothesis testing
e. When the claim states that the parameter is decreased twice
 34. . The coefficient of determination in regression analysis is
a. r
b. r 2
c. a
d. b
e. sest

35. The x variable is called the___ variable

a. dependent
b. coefficient
c. determination
d. significance level
e. independent

36. The range of r, the strength of the linear relationship between two quantitative variables, is from
______ to _____ .
a. -∞ , +∞
b. 0, +∞
c. -∞, 0
d. -1, +1
e. -0.5, +0.5
37. The sign of r (the strength of the linear relationship between two quantitative variables) and
_____ will always be the same.
a. dependent variable
b. determination coefficient
c. b (slope) or coefficient
d. significance level
e. independent variable

38. Analysis of variance uses the _____ test.

a. z
b. t
c. chi-square
d. F
e. z and t

39. The null hypothesis in ANOVA is that all the means are ____.
a. Equal
b. Unequal
c. Variable
d. One more than another
e. None of the above

40. When you conduct an F test, ____ estimates of the population variance are compared.
a. Two
b. Three
c. Four
d. Any number of
e. No
 Corporate Finance questions
1. A type of classified stock owned by the firm's founders, generally have more votes per share than
the other classes of common stock is called:
A) Preferred stock
B) Founders' shares
C) Call option
D) Class A stock
E) Class B stock
2. The firm should accept the project if IRR is:
A) greater than 1
B) higher than WACC
C) less than WACC
D) positive
E) higher than NPV

3. The stock is considered to be undervalued if:

A) the market price is below the stock’s intrinsic value
B) the market price is above the stock’s intrinsic value
C) the market price is equal to the stock’s intrinsic value
D) Company is financed purely with debt
E) Company is financed purely by equity

4. Floatation costs should be considered while estimating:

A) Operating Leverage
B) Financial Leverage
C) Cost of new common stock
D) Cost of retain earning
E) Cost of debt
5. Projects where if one project is accepted, the other must be rejected is called:
A) Mutually exclusive
B) Independent
C) Co-dependent
D) Mutually inclusive
E) Social
6. Assume that Kish Inc hired you as a consultant to help estimate its cost of capital. You have
obtained the following data: D0 = $1; P0 = $47.50; and g = 7.00% (constant). Based on the DCF
approach, what is the cost of equity from retained earnings?
A) 9.25%
B) 10.38%
C) 10.02%
D) 8.03%
E) 9.03%

7. CAPM (Capital Asset Pricing Model) is commonly used to estimate:

A) Cost of common equity
B) Cost of debt
C) NPV
D) IRR
E) Cross-over rate

8. A share of common stock just paid a dividend of $5.00. If the expected long-run growth rate for
this stock is 5.4%, and if investors' required rate of return is 14.2%, then what is the stock price?
A) $12.70
B) $51.98
C) $54.61
D) $40.66
E) $59.89

9. Warnock Inc. is considering a project that has the following cash flow and WACC data. What is
the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC: 10.00%
Year 0 1 2 3
Cash flows -$1,050 $500 $400 $500
A) -$47.38
B) -$39.09
C) -$40.27
D) 110.78
E) -$29.61
10. If you have 2 independent projects, then
A) You should invest in both if NPV is positive.
B) You must choose one with highest NPV even if it is negative
C) You must choose one with lower IRR
D) You must choose one with highest NPV if it is greater than 0.
E) You should invest in both if NPV is negative.
11. Mansi Inc is considering a project that has the following cash flow data. What is the project's
payback?
Year 0 1 2 3
Cash flows -$600 $300 $325 $350
A) 1.62 years
B) 1.49 years
C) 1.58 years
D) 1.28 years
E) 1.92 years
12. The firms capital structure is the following: 30% Equity, 70% Debt. Cost of equity is 25%, after-
tax cost of debt is 10%. Calculate the WACC.
A) 25%
B) 5%
C) 11,5%
D) 14,5%
E) 10%
13. You were hired as a consultant to Giambono Company, whose target capital structure is 40%
debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is
7.50%, and the cost of retained earnings is 20.00%. The firm will not be issuing any new stock. What is
its WACC?
A) 20%
B) 7.5%
C) 12.53%
D) 10.59%
E) 9.69%

14. Suppose a firm that has been earning $4 per share and paying a dividend of $1.00. How much is
divident payout ratio?
A) 0,5
B) 1
C) 2
D) 3
E) 0.25
15. Find future value of $1000 invested today at 15% annually for 5 years. Round to the closest
natural number.
A) $5000
B) $1762
C) $1600
D) $1120
E) $2011
16. You are investing $100 today in a savings account at your local bank. Which one of the following
terms refers to the value of this investment one year from now?
A) future value
B) present value
C) principal amounts
D) discounted value
E. invested principal

17. “The Bal” Company's last dividend was $4.00. The dividend growth rate is expected to be
constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The
firm's required return (rs) is 12.0%. What is the best estimate of the current stock price? Do not round
intermediate calculations.
A) $87.00
B) $95.61
C) $89.87
D) $80.31
E) $104.21
18. A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for
this stock is 5.4%, and if investors' required rate of return is 14.2%, then what is the stock price?
A) $12.70
B) $11.98
C) $14.61
D) $10.66
E) $12.10
19. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is
rs = 10.5%, and the expected constant growth rate is g = 8.2%. What is the stock's current price?
A) $27.39
B) $29.02
C) $32.61
D) $38.80
E) $27.07
20. Based on the corporate valuation model, Gray Entertainment's total corporate value is $1,150
million. The company's balance sheet shows $120 million of notes payable, $300 million of long-term
debt, $50 million of preferred stock, $180 million of retained earnings, and $800 million of total common
equity. If the company has 30 million shares of stock outstanding, what is the best estimate of its price per
share?
A) $22.44
B) $17.68
C) $22.67
D) $18.81
E) $26.07
21. Goode Inc's stock has a required rate of return of 11.50%, and it sells for $29.00 per share.
Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?
A) $0.95
B) $1.38
C) $1.37
D) $1.22
E) $1.06
22. If a given investor believes that a stock's expected return exceeds its required return, then the
investor most likely believes that
A) the stock is experiencing supernormal growth.
B) the stock should be sold.
C) the stock is a good buy.
D) management is probably not trying to maximize the price per share.
E) dividends are not likely to be declared.
23. Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $100,000, and
FCF is expected to grow at a constant rate of 6.5%. Assume the firm has zero non-operating assets. If
the company's weighted average cost of capital is 11.5%, then what is the firm's total corporate value?
A) $1,560,000
B) $1,900,000
C) $2,000,000
D) $1,980,000
E) $1,920,000
24. Which of the following statements is CORRECT?
A) A major disadvantage of financing with preferred stock is that preferred stockholders typically have
supernormal voting rights.
B) Preferred stock is normally expected to provide steadier, more reliable income to investors than the
same firm's common stock. As a result, the expected after-tax yield on the preferred is lower than the
after-tax expected return on the common stock.
C) The preemptive right is a provision in all corporate charters that gives preferred stockholders the right
to purchase (on a pro rata basis) new issues of preferred stock.
D) One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends
received represent taxable income to the corporate recipient, whereas interest income earned on bonds is
tax free.
E) One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax
deductible to the issuer.

25. You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry
Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is
expected to be $70.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the
future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares
of common stock outstanding. Assume the firm has zero non-operating assets. What is the firm's
estimated intrinsic value per share of common stock? Do not round intermediate calculations.
A) $48.80
B) $34.40
C) $36.80
D) $49.60
E) $40.00
26. Butcher Timber Company hired your consulting firm to help them estimate the cost of equity.
The yield on the firm's bonds is 6.75%, and your firm's economists believe that the cost of equity can be
estimated using a risk premium of 3.85% over a firm's own cost of debt. What is an estimate of the firm's
cost of equity from retained earnings?
A) 10.60%
B) 9.54%
C) 12.19%
D) 12.51%
E) 7.95%
27. A company's perpetual preferred stock currently sells for $102.50 per share, and it pays an $8.00
annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of
5.00% of the issue price. What is the firm's cost of preferred stock?
A) 8.22%
B) 9.28%
C) 6.90%
D) 9.53%
E) 7.97%
28. Assume that Kish InC) hired you as a consultant to help estimate its cost of capital. You have
obtained the following data: D0 = $0.90; P0 = $47.50; and g = 7.00% (constant). Based on the DCF
approach, what is the cost of equity from retained earnings? Do not round your intermediate calculations.
A) 8.85%
B) 10.38%
C) 10.02%
D) 8.03%
E) 9.03%

29. Other things held constant, which of the following events would be most likely to encourage a
firm to increase the amount of debt in its capital structure?
A) The firm decides to automate its factory with specialized equipment and thus increase its use of
operating leverage.
B) Its sales are projected to become less stable in the future.
C) Management believes that the firm's stock is currently overvalued.
D) The corporate tax rate is increased.
E) The bankruptcy laws are changed in a way that would make bankruptcy more costly to the firm and its
stockholders.

30. You have been hired by a new firm that is just being started. The CFO wants to finance with 60%
debt, but the president thinks it would be better to hold the percentage of debt in the capital structure (wd)
to only 10%. Other things held constant, and based on the data below, if the firm uses more debt, by how
much would the ROE change, i.e., what is ROEHigher - ROELower? Do not round your intermediate
calculations.

Operating Data Other Data

Capital $4,000 Higher wd 60%
ROIC = EBIT(1 - T)/Capital 17.00% Higher interest rate 13%
Tax rate 35% Lower wd 10%
Lower interest rate 9%

A) 10.43%
B) 10.31%
C) 10.54%
D) 9.15%
E) 11.59%
31. Harry's InC is considering a project that has the following cash flow and WACC data. What is
the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

WACC: 9.50%
Year 0 1 2 3 4
Cash flows -$1,000 $300 $300 $300 $300
A) 135.20
B) 133.68
C) 120.01
D) 179.26
E) -38.66

32. Dividend payout ratio is defined as

A) Dividends/Retained Earning
B) Dividends/ NI
C) Dividends/ Sales
D) Dividentd/Common Stock
E) Dividentd/ Total Equity

33. Van Den Borsh Corp. has annual sales of $68,735,000, an average inventory level of
$15,012,000, and average accounts receivable of $10,008,000. The firm's cost of goods sold is 85% of
sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now
plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes
that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and
accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a
365-day year? Do not round intermediate calculations. Round to the nearest whole day.
A) -31 days
B) -27 days
C) -25 days
D) -32 days
E)-34 days

34. Preferred stock :

A) Is a hybrid-a cross between a common stock and a bond
B) Is a debt source of financing
C) Pay coupon payments
D) Pays dividend which size depends on the companies NI in the given period
E) Has voting rights

35. As a firm increases the operating leverage used to produce a given quantity of output, this:
A) normally leads to a reduction in its fixed assets turnover ratio.
B) normally leads to a decrease in the standard deviation of its expected EBIT.
C) normally leads to an increase in its fixed assets turnover ratio.
D) normally leads to a decrease in its business risk.
E)normally leads to a decrease in the variability of its expected EPS.

36. The "break point"

A) refers to the point where the firm has raised so much capital that it is simply unable to borrow any
more money.
B) refers to the point where the firm has raised so much capital that it has exhausted its supply of
additions to retained earnings and thus must raise equity by issuing stock.
C) refers to the point where the firm is taking on investments that are so risky the firm is in serious
danger of going bankrupt if things do not go exactly as planned.
D) refers to the point where the firm has exhausted its supply of additions to retained earnings and thus
must begin to finance with preferred stock.
E) refers to the point where the firm's tax rate increases.

37. You were hired as a consultant to Giambono Company, whose target capital structure is 40%
debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is
7.50%, and the cost of retained earnings is 12.00%. The firm will not be issuing any new stock. What is
its WACC?
A) 6.96%
B) 8.93%
C) 7.68%
D) 7.59%
E)6.69%

38. Mansi Inc is considering a project that has the following cash flow data. What is the project's
payback?
Year 0 1 2 3
Cash flows -$500 $300 $325 $350
A) 1.62 years
B) 1.49 years
C) 1.58 years
D) 1.28 years
E) 1.83 years

39. A "reverse split":

A) reduces the number of shares outstanding.

B) Decreases the stock price
C) increses the number of shares outstanding.
D) Is prohibited by Federal Law
E) Reduction in dividend payments

40. Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend
model, what will its dividend payout ratio be?

Capital budget $5,800

% Debt 40%
Net income (NI) $8,000
A) 68.93%
B) 46.90%
C) 44.07%
D) 55.37%
E)56.50%
41. Preemptive right is:
A) the clause which allow to have more voting rights than a regular stock has.
B) a right to call for a meeting to vote to replace the management.
C) a right of existing shareholders in a corporation to purchase newly issued stock before it is offered
to others.
D) the tool which is used to reduce top management’s compensation
E) the clause which allow to exchange your stock for bond and vice-a-versa.
42. If you have 2 mutually exclusive projects, then
A) You should invest in both if NPV is positive.
B) You must choose one with highest NPV even if it is negative
C) You must choose one with lower IRR
D) You must choose one with highest NPV if it is greater than 0.
E) You should invest in both if NPV is negative.

43. The firms capital structure is the following: 30% Equity, 70% Debt. Cost of equity is 15%, cost of
debt after tax is 10%. Calculate the WACC.
A) 25%
B) 5%
C) 11,5%
D) 15%
E) 10%

44. Tuttle Enterprises is considering a project that has the following cash flow and WACC data What
is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

WACC: 11.50%
Year 0 1 2 3 4
Cash flows -$1,000 $350 $350 $350 $350
A) 74.36
B) 59.49
C) 84.03
D) 64.70
E)82.54

45. Four of the following statements are truly disadvantages of the regular payback method, but one
is not a disadvantage of this method. Which one is NOT a disadvantage of the payback method?
A) Does not take account of differences in size among projects.
B) Lacks an objective, market-determined benchmark for making decisions.
C) Ignores cash flows beyond the payback period.
D) Does not provide any indication regarding a project's liquidity or risk.
E) Does not directly account for the time value of money.

46. Which of the following is not equity valuation method?

A) Discounted Dividend Model
B) Capital Asset Pricing Model
C) Corporate Valuation Model
D) Discounted Cash Flow Model
E) Market Multipliers Method

47. To discount projected Free Cash Flow and value the company it is reasonable to use:
A) Required rate of return on equity (CAMP)
B) Weighted average cost of capital
C) Return on debt
D) Risk free rate
E) LIBOR

48. You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company
is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after
the split?

A) You will have 100 shares of stock, and the stock will trade at or near $60 a share.
B) You will have 200 shares of stock, and the stock will trade at or near $120 a share.
C) You will have 200 shares of stock, and the stock will trade at or near $60 a share.
D) You will have 50 shares of stock, and the stock will trade at or near $600 a share.
E)You will have 50 shares of stock, and the stock will trade at or near $120 a share.
49. Suppose a firm that has been earning $2 per share and paying a dividend of $1.00. How much is
divident payout ratio?
F) 0,5
G) 1
H) 2
I) 3
J) 4
50. You were hired as a consultant to Giambono Company, whose target capital structure is 40%
debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is
7.50%, and the cost of retained earnings is 12.00%. The firm will not be issuing any new stock. What is
its WACC?
A) 6.96%
B) 8.93%
C) 7.68%
D) 7.59%
E)6.69%

51. A firm is considering a new project whose risk is greater than the risk of the firm's average
project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for
management to do which of the following?
A) Increase the estimated NPV of the project to reflect its greater risk.
B) Increase the estimated IRR of the project to reflect its greater risk.
C) Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.
D) Ignore the risk differential if the project would amount to only a small fraction of the firm's total
assets.
E)Reject the project, since its acceptance would increase the firm's risk.

52. Which of the following statements is CORRECT?

A) The NPV method automatically deals correctly with externalities, even if the externalities are not
specifically identified, but the IRR method does not. This is another reason to favor the NPV.
B) Identifying an externality can never lead to an increase in the calculated NPV.
C) An example of an externality is a situation where a bank opens a new office, and that new office
causes deposits in the bank's other offices to decline.
D) An externality is a situation where a project would have an adverse effect on some other part of the
firm's overall operations. If the project would have a favorable effect on other operations, then this is not
an externality.
E) Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not
specifically identified. However, the payback method does not.
53. Which of the following statements is CORRECT, holding other things constant?
A) If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely
lead to lower debt ratios for corporations.
B) An increase in the company's degree of operating leverage would tend to encourage the firm to use
more debt in its capital structure so as to keep its total risk unchangeD)
C) Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend
to use relatively little debt.
D) An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
E)An increase in the corporate tax rate would in theory encourage companies to use more debt in their
capital structures.

54. Dyson InC currently finances with 20.0% debt (i.E), wd = 20%), but its new CFO is considering
changing the capital structure so wd = 36.0% by issuing additional bonds and using the proceeds to
repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1
- wD) Given the data shown below, by how much would this recapitalization change the firm's cost of
equity? Do not round your intermediate calculations. (Hint: You must unlever the current beta and then
use the unlevered beta to solve the problem.)

Risk-free rate, rRF 5.00% Tax rate, T 40%

Market risk prem, RPM 6.00% Current wd 20%
Current beta, bL1 1.65 Target wd 36.0%

A) 1.68%
B) 1.61%
C) 1.24%
D) 1.69%
E)1.66%

55. A major contribution of the Miller model is that it demonstrates, other things held constant, that
A) taxes lower the value of using corporate debt.
B) taxes have no effect on the value of using corporate debt.
C) financial distress and agency costs reduce the value of using corporate debt.
D) taxes increase the value of using corporate debt.
E) debt costs increase with financial leverage.
56. Which of the following statements is CORRECT?
A) The cost of capital used to evaluate a project should be the cost of the specific type of financing used
to fund that project, i.E, it is the after-tax cost of debt if debt is to be used to finance the project or the cost
of equity if the project will be financed with equity.

B) The after-tax cost of debt that should be used as the component cost when calculating the WACC is
the average after-tax cost of all the firm's outstanding debt.

C) The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for
estimating a firm's cost of equity capital.

D) Suppose some of a publicly-traded firm's stockholders are not diversified; they hold only the one
firm's stock. In this case, the CAPM approach will result in an estimated cost of equity that is too low in
the sense that if it is used in capital budgeting, projects will be accepted that will reduce the firm's
intrinsic value.

E) The cost of equity is generally harder to measure than the cost of debt because there is no stated,
contractual cost number on which to base the cost of equity.

57. Which of the following statements is NOT CORRECT?

A) The cash budget is useful to help estimate future financing needs, especially the need for short-term
working capital loans.
B) A company may hold a relatively large amount of cash and marketable securities if it is uncertain
about its volume of sales, profits, and cash flows during the coming year.
C) Credit policy has an impact on working capital because it influences both sales and the time before
receivables are collecteD)
D) If a firm wants to generate more cash flow from operations in the next month or two, it could change
its credit policy from 2/10, net 30 to net 60.
E)Managing working capital is important because it influences financing decisions and the firm's
profitability.

58. Which of the following statements is CORRECT?

A) As computer technology advances, simulation analysis becomes increasingly obsolete and thus less
likely to be used than sensitivity analysis.
B) The primary advantage of simulation analysis over scenario analysis is that scenario analysis requires
a relatively powerful computer, coupled with an efficient financial planning software package, whereas
simulation analysis can be done efficiently using a PC with a spreadsheet program or even with just a
calculator.
 C) In comparing two projects using sensitivity analysis, the one with the steeper lines would be
considered less risky, because a small error in estimating a variable such as unit sales would produce only
a small error in the project's NPV.
D) Sensitivity analysis as it is generally employed is incomplete in that it fails to consider the probability
of occurrence of the key input variables.
F) Sensitivity analysis is a type of risk analysis that considers both the sensitivity of NPV to changes in
key input variables and the probability of occurrence of these variables' values.

59. You must estimate the intrinsic value of Noe Technologies' stock. The end-of-year free cash flow
(FCF1) is expected to be $24.50 million, and it is expected to grow at a constant rate of 7.0% a year
thereafter. The company's WACC is 10.0%, it has $125.0 million of long-term debt plus preferred stock
outstanding, and there are 15.0 million shares of common stock outstanding. Assume the firm has zero
non-operating assets. What is the firm's estimated intrinsic value per share of common stock? Do not
round intermediate calculations.

A) $40.12
B) $34.58
C) $38.27
D) $47.96
E) $46.11

60. Which of the following should be considered when a company estimates the cash flows used to
analyze a proposed project?
A) The company has spent and expensed $1 million on research and development costs associated with
the new project.
B) The new project is expected to reduce sales of one of the company's existing products by 5%.
C) Since the firm's director of capital budgeting spent some of her time last year to evaluate the new
project, a portion of her salary for that year should be charged to the project's initial cost.
D) The company spent and expensed $10 million on a marketing study before its current analysis
regarding whether to accept or reject the project.
E) The firm would borrow all the money used to finance the new project, and the interest on this debt
would be $1.5 million per year.

61. Companies HD and LD have identical tax rates, total assets, total investor-supplied capital, and
returns on investors' capital (ROIC), and their ROICs exceed their after-tax costs of debt, rd(1 - T).
However, Company HD has a higher debt ratio and thus more interest expense than Company LD.
Which of the following statements is CORRECT?

A) Company HD has a lower ROE than Company LD.

B) The two companies have the same ROE.
C) The two companies have the same ROA.
D) Company HD has a lower ROA than Company LD.
E) Company HD has a higher net income than Company LD.

62. Reddick Enterprises' stock currently sells for $24.50 per share. The dividend is projected to
increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What
is the stock's expected price 3 years from today?
A) $24.45
B) $31.65
C) $28.77
D) $33.66
E)$26.76

63. Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts, and it
typically pays on time, 60 days after the invoice date. Net purchases amount to $500,000 per year. On
average, how much "free" trade credit does the firm receive during the year? (Assume a 365-day year,
and note that purchases are net of discounts.)
A) $24,863
B) $16,644
C) $18,699
D) $19,315
E)$20,548

64. For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and
assume that the firm operates at its target capital structure.
A) re> WACC > rd
B) WACC > re> rd
C) WACC > rd> re
D) re> rd> WACC
E) rd> re> WACC)

65. Dalrymple InC is considering production of a new product. In evaluating whether to go ahead
with the project, which of the following items should NOT be explicitly considered when cash flows are
estimated?
A) The project will utilize some equipment the company currently owns but is not now using. A used
equipment dealer has offered to buy the equipment.
B) The new product will cut into sales of some of the firm's other products.
C) The company will produce the new product in a vacant building that was used to produce another
product until last year. The building could be sold, leased to another company, or used in the future to
produce another of the firm's products.
D) The company has spent and expensed for tax purposes $3 million on research related to the new
product. These funds cannot be recovered, but the research may benefit other projects that might be
proposed in the future.
E)If the project is accepted, the company must invest an additional $2 million in net operating working
capital. However, all of these funds will be recovered at the end of the project's life.

66. Which of the following statements is CORRECT?

A) The capital structure that maximizes expected EPS also maximizes the price per share of common
stock.
B) The capital structure that minimizes the interest rate on debt also maximizes the expected EPS.
C) The capital structure that minimizes the required return on equity also maximizes the stock price.
D) The capital structure that gives the firm the best bond rating also maximizes the stock price.
E)The capital structure that minimizes the WACC also maximizes the price per share of common stock.

67. Which of the following statements is CORRECT?

A) The discounted cash flow method of estimating the cost of equity cannot be used unless the growth
rate, g, is expected to be constant forever.
B) An advantage shared by both the DCF and CAPM methods when they are used to estimate the cost of
equity is that they are both "objective" as opposed to "subjective," hence little or no judgment is required.
C) Beta measures market risk, which is, theoretically, the most relevant risk measure for a publicly-
owned firm that seeks to maximize its intrinsic valuE) This is true even if not all of the firm's
stockholders are well diversified.
D) The specific risk premium used in the CAPM is the same as the risk premium used in the bond-yield-
plus-risk-premium approach.
E) If the calculated beta underestimates the firm's true investment risk-i.e., if the forward-looking beta
that investors think exists exceeds the historical beta-then the CAPM method based on the historical beta
will produce an estimate of rs and thus WACC that is too high.

68. Tuttle Enterprises is considering a project that has the following cash flow and WACC data What
is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

WACC: 11.50%
Year 0 1 2 3 4
Cash flows -$1,000 $350 $350 $350 $350
A) 74.36
B) 59.49
C) 84.03
D) 64.70
E)82.54
69. Which of the following is NOT a capital component when calculating the weighted average cost
of capital (WACC) for use in capital budgeting?
A) Preferred stock.
B) Retained earnings.
C) Long-term debt.
D) Accounts payable.
E) Common stock.

70. Lasik Vision Inc recently analyzed the project whose cash flows are shown below. However,
before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest
rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how
much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected
NPV can be negative, in which case it should be rejected.
Old WACC: 8.00% New WACC: 9.75%
Year 0 1 2 3
Cash flows -$1,000 $410 $410 $410
A) -$34.12
B) -$28.60
C) -$30.55
D) -$32.50
E)-$29.25