1. Which of the following statements is CORRECT?

If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase.

There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.

A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.

2. The firm's target capital structure should be consistent with which of the following statements?

Minimize the cost of debt (rd).

Obtain the highest possible bond rating.

Minimize the cost of equity (rs).

Minimize the weighted average cost of capital (WACC).

3. Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Increase the number of years over which fixed assets are depreciated for tax purposes.

Pay down the accounts payables.

Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.

Pay workers more frequently to decrease the accrued wages balance.

4. Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?

The costs that would be incurred in the event of bankruptcy increase.

Management believes that the firm's stock has become overvalued.

Its degree of operating leverage increases.

The corporate tax rate increases.

5. In the real world, dividends

are usually more stable than earnings.

fluctuate more widely than earnings.

tend to be a lower percentage of earnings for mature firms.

are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.

6. You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?

You will have 200 shares of stock, and the stock will trade at or near $120 a share.

You will have 200 shares of stock, and the stock will trade at or near $60 a share.

You will have 100 shares of stock, and the stock will trade at or near $60 a share.

You will have 50 shares of stock, and the stock will trade at or near $120 a share.

7. Which of the following should NOT influence a firm's dividend policy decision?

The firm's ability to accelerate or delay investment projects.

Constraints imposed by the firm's bond indenture.

The fact that much of the firm's equipment has been leased rather than bought and owned.

The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.

8. Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Its earnings become more stable.

Its access to the capital markets increases.

Its R&D efforts pay off, and it now has more high-return investment opportunities.

Its accounts receivable decrease due to a change in its credit policy

9. Trenton Publishing follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

The firm's net income increases.

The company increases the percentage of equity in its target capital structure.

The number of profitable potential projects increases.

Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed.

10. If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay

no dividends except out of past retained earnings.

no dividends to common stockholders.

dividends only out of funds raised by the sale of new common stock.

dividends only out of funds raised by selling off fixed assets.