21. A commercial bank will loan you $7,500 for two years to buy a car. The loan must be repaid in 24 equal monthly payments. The annual interest rate on the loan is 12% of the unpaid balance. What is the amount of the monthly payments?
a. $282.43
b. $390.52
c. $369.82
d. $353.05
22. Gina Dare, who wants to be a millionaire, plans to retire at the end of 40 years. Gina’s plan is to invest her money by depositing into an IRA at the end of every year. What is the amount that she needs to deposit annually in order to accumulate $1,000,000? Assume that the account will earn an annual rate of 11.5%. Round off to the nearest $1.
a. $1,497
b. $5,281
c. $75
d. $3,622
23. The break-even model enables the manager of the firm to:
a. calculate the minimum price of common stock for certain situations.
b. set appropriate equilibrium thresholds.
c. determine the quantity of output that must be sold to cover all operating costs.
d. determine the optimal amount of debt financing to use.
24. Financial leverage means financing some of a firm’s assets with:
a. commercial paper.
b. preferred stock.
c. corporate bonds.
d. all of the above.
25. In general, as the level of sales rises above the break-even point, the degree of operating leverage:
a. increases.
b. decreases.
c. remains constant.
d. none of the above.
26. Due to a technical breakthrough, the fixed costs for a firm drop by 25%. Prior to this breakthrough, fixed costs were $100,000 and unit contribution margin was and remains at $5.00. The new amount of break-even units will be:
a. 25,000.
b. 20,000.
c. 15,000.
d. 10,000.
27. The firm should accept independent projects if:
a. the payback is less than the IRR.
b. the profitability index is greater than 1.0.
c. the IRR is positive.
d. the NPV is greater than the discounted payback.
28. The NPV method:
a. is consistent with the goal of shareholder wealth maximization.
b. recognizes the time value of money.
c. uses cash flows.
d. all of the above.
29. ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.)
a. $1,056
b. $4,568
c. $7,621
d. $6,577
30. Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,520.
Year Net Cash Flow
1 $1,000
2 $1,500
3 $ 500
a. 48%
b. 40%
c. 32%
d. 28%
31. An increase in ___________ would increase net working capital.
a. plant and equipment
b. accounts payable
c. accounts receivable
d. both b and c
32. Which of the following is most likely to be a temporary source of financing?
a. Commercial paper
b. Preferred stock
c. Long-term debt
d. All of the above
33. In order to maximize firm value, management should invest in new assets when the internal rate of return is:
a. greater or equal to the firm’s marginal cost of capital.
b. greater than the cost of debt financing.
c. less than or equal to the accounting rate of return.
d. less than or equal to the firm’s marginal cost of capital.
34. In the basic model, the optimal inventory level is the point at which:
a. total cost is minimized.
b. total revenue is maximized.
c. carrying costs are minimized.
d. ordering costs are minimized.
35. The management of inventory is important because:
a. carrying too much inventory can result in a loss of efficiency and profitability.
b. carrying excessive inventory can result in a loss of sales.
c. carrying too little inventory can decrease the average collection period.
d. carrying too little inventory will adversely affect the firm’s CAPM.
36. An operating lease usually:
a. is for a shorter length of time than a financial lease.
b. is for high-tech equipment that might become obsolete rapidly.
c. has the income tax advantage that the entire lease payment is a deductible expense.
d. both a and c.
e. all the above.
37. If a lease is extended for a length of time that is equal to the entire useful life of the equipment, the lease:
a. is referred to as an operating lease.
b. carries no income tax deduction.
c. is a financial lease.
d. will be terminated by the IRS.
38. Which of the following would decrease free cash flows? A decrease in:
a. depreciation expense.
b. interest expense.
c. incremental sales.
d. both a & c.
e. all of the above.
39. An increase in the ____________ is likely to encourage a corporation to increase its debt ratio.
a. corporate tax rate
b. personal tax rate
c. company’s degree of operating leverage
d. expected cost of bankruptcy
40. A merger that is driven by the potentially large reduction in the staffing of overlapping functions and the integration of the two companies’ strong similar product lines is referred to as a:
a. conglomerate merger.
b. vertical merger.
c. horizontal merger.
d. diversification merger.
