Question 1.1.The residual income model defines stock price as book value plus the present value of residual income. What is the effect on stock price in a given period if the firm's cost of capital is greater than its return on equity?

Cannot be determined
No effect
Stock price increases
Stock price decreases

Question 2.2.Gupta Corporation has forecasted its need for external funding in the following year. It needs to raise $2M in either debt or equity. It would like to minimize its need for external funding without decreasing its projected growth. Which of the following would reduce its need for additional funding?

An increase in the dividend payout ratio
An increase in days sales outstanding
An increase in accounts payable
A decrease in inventory turnover

Question 3.3.The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are:
50% of sales are made for cash. Simmons expects to receive 25% in the month following the sale and 20% in the second month following the sale. The remaining 5% are expected to be un-collectible. Gross margin is 20%, and purchases are made one month prior to sale. Purchases are paid one month after received

Cash outflows in March for purchases will be:
$240
$220
$200
$176

Question 4.4.Below is selected data for Gertup Corporation as of 12/31/05:

If sales increased by 10% per annum for the next 20 years, sales for year 2025 would be closest to:
$407,000
$124,459
$113,000
$55,500

Question 5.5.What is the correct order of the following steps in preparing a projected balance sheet (not all steps may be shown)?

I. Project future cash

II. Project future accounts receivable

III. Project future accounts payable

IV. Project future property plant and equipment
I, II, IV, III
II, IV, III, I
I, III, II, IV
I, III, IV, II

Question 6.6.The statement of cash flows for Georgey Company for 2004 and 2005 is as follows:
Which of the following statements iscorrect?

Restructuring is a major source of cash for Georgey
Accounts receivable increased in 2005
Depreciation is a major source of cash for Georgey
Major use of cash resulted in decreased leverage

Question 7.7.Hiruit company's sales in December were $5,500. They expect sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is:

Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400.

In March Hiruit should collect how much cash from sales made in March and previous months:
$7,653.25
$6,331.3
$7,030.1
$6,331.3

Question 8.8.Which of the following statements isincorrect?

It is possible for a profitable company to go out of business because of short-term liquidity problems
If a company has a current ratio greater than 2, it will never go out of business because of liquidity problems
The current ratio is always greater than or equal to the quick ratio
The accuracy of a cash flow forecast is inversely related to the forecast horizon

Question 9.9.The reliability of a short-term cash forecast depends most heavily on the quality of:

Cost of goods sold forecast
Current ratio forecast
Sales forecast
Shares outstanding forecast

Question 10.10.Below is selected data for Gertup Corporation as of 12/31/05:
Due to competitive pressures, Gertup has had to increase credit terms to customers to maintain sales. This resulted in Gertup's accounts receivable doubling from 12/31/04 to 12/31/05. The average accounts receivable turnover was 30 days. Without the increased credit terms accounts receivable turnover would have remained at 12/31/04 levels. The impact of the change in credit policy was:

None as sales remained the same
Decrease liquidity, and decrease available cash
Increased current ratio and liquidity of the company
Current ratio stayed the same and liquidity remained constant