UNIVERSITY OF LA VERNE ECBU 500D – BUSINESS FINANCE FINAL EXAM DECEMBER 3, 2019 “STUDENT NAME” A key difference between replacement and expansion project analyses is that with replacement, the incremental cash flows are measured as the net difference between projected cash flows from the current productive assets and cash flows of the proposed new productive assets. True / False The weighted average cost of capital increases if the total funds required call for an amount of equity in excess of what can be obtained as retained earnings. True / False Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta which is greater than 1.0. True / False Other things held constant, an increase in financial leverage will increase a firm's market risk as measured by its beta coefficient. True / False The post-audit is a simple process in which actual results are compared to forecasted results and any discrepancy indicates a change in factors that are completely under management's control. True / False Short-term financing might be riskier than long-term financing because, during periods of tight credit, the firm might not be able to rollover (renew) its debt. True / False Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed. True / False Since the degree of total leverage is equal to the degree of operating leverage times the degree of financial leverage, the degree of total leverage must always be greater than or equal to positive 1.0. True / False If the information content, or signaling, hypothesis is correct, then changes in dividend policy can be important with respect to firm value and capital costs. True / False A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process. The main objective of such a system is to reduce carrying costs. True / False The best and most comprehensive picture of a firm's liquidity position is obtained by examining its cash budget. True / False A firm’s goal should be to lengthen the cash conversion cycle since shorter cash conversion cycles leads firms to increase their dependence on costly external financing. True / False Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV. True / False The primary goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e., runs out of an inventory item). True / False The ex-dividend date is the date on which a firm actually mails (funds) divid ...

1. UNIVERSITY OF LA VERNE
ECBU 500D – BUSINESS FINANCE
FINAL EXAM
DECEMBER 3, 2019
“STUDENT NAME”
A key difference between replacement and expansion project
analyses is that with replacement, the incremental cash flows
are measured as the net difference between projected cash flows
from the current productive assets and cash flows of the
proposed new productive assets.
True / False
The weighted average cost of capital increases if the total funds
required call for an amount of equity in excess of what can be
obtained as retained earnings.
True / False
Market risk refers to the tendency of a stock to move with the
general stock market. A stock with above-average market risk
will tend to be more volatile than an average stock, and it will
have a beta which is greater than 1.0.
True / False
Other things held constant, an increase in financial leverage
will increase a firm's market risk as measured by its beta
coefficient.
True / False
The post-audit is a simple process in which actual results are
compared to forecasted results and any discrepancy indicates a
change in factors that are completely under management's
control.
True / False

2. Short-term financing might be riskier than long-term financing
because, during periods of tight credit, the firm might not be
able to rollover (renew) its debt.
True / False
Effective capital budgeting can improve the timing of asset
acquisition and the quality of assets purchased, thereby
providing an opportunity to purchase and install assets before
they are needed.
True / False
Since the degree of total leverage is equal to the degree of
operating leverage times the degree of financial leverage, the
degree of total leverage must always be greater than or equal to
positive 1.0.
True / False
If the information content, or signaling, hypothesis is correct,
then changes in dividend policy can be important with respect
to firm value and capital costs.
True / False
A just-in-time system of inventory control requires that
manufacturers coordinate production with suppliers so that raw
materials or components arrive just as they are needed in the
production process. The main objective of such a system is to
reduce carrying costs.
True / False
The best and most comprehensive picture of a firm's liquidity
position is obtained by examining its cash budget.
True / False
A firm’s goal should be to lengthen the cash conversion cycle
since shorter cash conversion cycles leads firms to increase
their dependence on costly external financing.
True / False

3. Conflicts between two mutually exclusive projects, where the
NPV method chooses one project but the IRR method chooses
the other, should generally be resolved in favor of the project
with the higher NPV.
True / False
The primary goal of inventory management is to provide
sufficient incentives to ensure that the firm never suffers a
stock-out (i.e., runs out of an inventory item).
True / False
The ex-dividend date is the date on which a firm actually mails
(funds) dividends.
True / False
The optimal capital structure is that capital structure that strikes
a balance between risk and return such that the firm’s stock
price is maximized.
True / False
The benefits of a sound cash management program are not
sensitive to interest rates.
True / False
Although the exact relationship between a firm's degree of
financial leverage and its beta is difficult to estimate, it has
been shown both theoretically and empirically that a firm's beta
increases with its degree of financial leverage.
True / False
Inventory management is largely self-contained; that is, only
minimum coordination among other departments such as sales,
purchasing, and production is required for successful inventory
management.
True / False

4. On a 2-for-1 stock split, the shares outstanding are doubled, and
the stock's par value is halved.
True / False
Superior analytical techniques, such as NPV, used in
combination with adjustments to the average required rate of
return, can always overcome the problem of poor cash flow
estimation in decision making.
True / False
Synchronization of cash flows is an important cash management
technique and effective synchronization can actually increase a
firm's profitability.
True / False
If a firm is considering purchasing an asset whose beta is
greater than the current beta of the firm, it should use a
discount rate (rate of return) less than the firm's average
required rate of return to evaluate the possible investment.
True / False
Managers, on average, do not raise dividends unless they
believe future earnings will be able to sustain the higher level
dividends.
True / False
(2 Points) The present value of the expected net cash inflows
for a project will most likely exceed the present value of the
expected net profit after tax for the same project because
a.
Income is reduced by taxes paid, but cash flow is not.
b.
There is a greater probability of realizing the projected cash
flow than the forecasted income.
c.
Income is reduced by dividends paid, but cash flow is not.
d.

5. Income is reduced by depreciation charges, but cash flow is not.
e.
Cash flow reflects any change in net working capital, but sales
do not.
(2 Points) The average length of time required to convert raw
materials into finished products and sell that produce is called
the ___________.
a.
cash conversion cycle
b.
inventory conversion period
c.
receivables collection period
d.
payables deferral period
e.
days sales outstanding
Which of the following influences dividend policy?
a.
Constraints on dividend payments such as debt contract
restrictions (covenants)
b.
Investment opportunities
c.
Alternate sources of capital
d.
Cash availability
e.
All of these exert an influence on dividend policy
A report showing how long accounts receivable have been
outstanding is called what?
a.
Time line.
b.
Preauthorized debit system.

6. c.
Aging schedule.
d.
Cash discount.
e.
Credit period.
(2 Points) If a firm is operating at its optimal capital structure,
then its weighted average cost of capital must be __________
and its value must be __________.
a.
maximized; maximized
b.
minimized; minimized
c.
maximized; minimized
d.
minimized; maximized
(2 Points) Which of the following is not one of the four primary
factors that influence capital structure decisions?
a.
The firm's business risk.
b.
The firm's tax position.
c.
The firm's financial flexibility.
d.
The firm's inventory valuation method.
e.
The firm's managerial attitude.
(2 Points) Which of the following statements related to
Financial Statement Forecasting is correct?
a.

7. One of the key steps in the development of pro forma financial
statements is to identify those assets and liabilities which
increase spontaneously with net income.
b.
The first, and most critical, step in constructing a set of pro
forma financial statements is establishing the sales forecast.
c.
Pro forma financial statements as discussed in the text are used
primarily to assess a firm's historical performance.
d.
All else equal, if a firm operates at full capacity, the greater its
payout ratio, the less additional funds that will be needed for a
particular growth in sales.
e.
The projected balance sheet forecasting method produces
accurate results when fixed assets are lumpy and when
economies of scale are present.
Analyzing days sales outstanding (DSO) and the aging schedule
are two common methods for monitoring receivables. However,
they can provide erroneous signals to credit managers when
a.
Customers' payments patterns are changing.
b.
Sales fluctuate seasonally.
c.
Some customers take the discount and others do not.
d.
Sales are relatively constant, either seasonally or cyclically.
e.
None of the above.
(2 Points) Which of the following statements related to Capital
Budgeting Techniques is correct?
a.
Because discounted payback takes account of the required rate
of return, a project's discounted payback is normally shorter

8. than its regular payback.
b.
The NPV and IRR methods use the same basic equation, but in
the NPV method the discount rate is specified and the equation
is solved for NPV, while in the IRR method the NPV is set
equal to zero and the discount rate is found.
c.
If the required rate of return is less than the crossover rate for
two mutually exclusive projects' NPV profiles, a NPV/IRR
conflict will not occur.
d.
If you are choosing between two projects which have the same
life, and if their NPV profiles cross, then the smaller project
will probably be the one with the steeper NPV profile.
e.
If the required rate of return is relatively high, this will favor
larger, longer-term projects over smaller, shorter-term
alternatives because it is good to earn high rates on larger
amounts over longer periods.
(8 Points) Trident Food Corporation generated the following
income statement for the most recent fiscal year, which ended
December 31, 2018:
Sales revenues
$150,000
Variable cost of sales
(112,500)
Gross profit
37,500
Fixed operating costs
(24,000)
Net operating income (EBIT)
13,500
Interest

9. (10,000)
Earnings before taxes
3,500
Taxes (40%)
(1,400)
Net income
2,100
Each item of inventory Trident Foods produces has a selling
price of $20.
What is the degree of total leverage for Trident Foods?
a.
42.86
b.
10.71
c.
14.43
d.
11.86
e.
6.43
(2 Points) The firm's weighted average cost of capital (WACC)
is
a.
set by the board of directors of the firm because it is the
benchmark they use to evaluate upper management.
b.
regulated by the Internal Revenue Service (IRS) because tax-
deductible debt is included in the computation.
c.
determined by the financial markets because investors
(including creditors) provide the funds used by firms and these
funds have costs, which are the returns demanded by investors.
d.

10. the same as the firm's internal rate of return (IRR).
e.
the total net present value (NPV) of all the capital budgeting
projects in which the firm invests in any year.
(4 Points) Allyson, who is the CFO of Mundane Minerals &
Mining (MMM), is trying to decide whether to issue debt or
common stock to finance the capital budgeting projects she has
evaluated as acceptable (that is, the projects have positive net
present values, NPV). Because MMM is a relatively small
company, Allyson believes that the type of capital she uses to
finance the projects will send a signal to investors. As a result,
which of the following actions would you recommend Allyson
take?
a.
Issue equity, because investing in positive NPV projects is not
in the best interests of the firm, and the existing stockholders
will want to share such "bad news" with new stockholders.
b.
Issue equity so as to dilute ownership and share the increase in
wealth that results from investing in positive NPV projects with
new stockholders.
c.
Issue debt, because debt is riskier than common stock, thus the
value of existing stockholders' stock will increase more than if
new equity is issued.
d.
Issue debt, because investing in positive NPV projects increases
the value of the firm, and the existing stockholders probably
prefer not to share such good fortune with new stockholders.
e.
Investors do not care which source of funds the firm uses as
long as the funds are invested in positive NPV projects;
therefore, it shouldn't matter which type of capital is used.

11. (8 Points) You work for the CEO of a new company that plans
to manufacture and sell a new type of laptop computer. The
issue now is how to finance the company, with only equity or
with a mix of debt and equity. Expected operating income is
$690,000. Other data for the firm are shown below. How much
higher or lower will the firm's expected EPS be if it uses some
debt rather than only equity, i.e., what is EPSL - EPSU?
0% Debt, U
60% Debt, L
Oper. income (EBIT)
$690,000
$690,000
Required investment
$2,500,000
$2,500,000
% Debt
0.0%
60.0%
$ of Debt
$0.00
$1,500,000
$ of Common equity
$2,500,000
$1,000,000
Shares issued, $10/share
250,000

12. 100,000
Interest rate
NA
10.00%
Tax rate
35%
35%
a.
$1.29
b.
$1.97
c.
$2.23
d.
$1.72
e.
$1.63
(4 Points) The cash conversion cycle is the length of time from
the __________ raw materials to manufacture a product until
the __________ of accounts receivable associated with the sale
of the product.
a.
ordering of; creation
b.
receipt of; collection
c.
payment for; creation
d.

13. payment for; collection
e.
none of the above
Which of the following is not a common type of short term
financing?
a.
Commercial paper.
b.
Accruals.
c.
Trade credit.
d.
Corporate bonds.
e.
Bank loans.
(12 Points) Compare and contrast the different dividend
theories. Define and discuss the factors/constraints that firms
must consider in the selection and implementation of their
dividend policy. Also, talk about the mechanics of when a
dividend is declared and paid, and its potential impact on value.
Finally, why a firm would enter into a stock repurchase program
as another way to increase value to shareholders.
(12 Points) Define and discuss, including their relative
strengths and weaknesses, of the NPV, IRR and Payback
methods of evaluating capital projects.
(12 Points) Define (1) what is the Cash Conversion Cycle and

14. (2) how the Cash Conversion Cycle is calculated. Also, define
how it is calculated, by component. Identify ways, by
component, that an organization can improve its Cash
Conversion Cycle.
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