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Harvard Finance Pretest Help

Q1. Which of the following is not a use of funds in a statement of sources and uses?

  • Increase in long-term debt
  • Increase in the cash account
  • Reduction in accounts payable
  • Increase in accounts receivable

Q2. Beta is a relative measure of risk for a stock.

Q3. A share repurchase is financially equivalent to a dividend.

Q4. The debt to equity ratio is generally less than or equal to the debt to asset ratio.

Q5. High inventory turnover may signal poor efficiency or overstocking

Q6. The cash cycle measures the days required to produce finished goods or delivered services.

Q7. A project’s internal rate of return (IRR) depends on it riskiness.

Q8. Which of the following common ratios measures leverage?

  • Current ratio
  • Times interest earned
  • Receivables turnover
  • None of the above

Q9. According to the CAPM, a company’s beta is one determinant of its cost of equity.

Q10. Calculate the weighted average cost of capital (WACC) where

– debt is 40% of the capital structure;
– cost of debt is 8%;
– cost of equity is 11%; and
– tax rate is 35%.

  • 7.5%
  • 8.7%
  • 9.0%
  • 9.8%

Q11. In general, the reduction of an asset is a source of funds.

Q12. The Pecking Order Theory of capital structure rests on an assumption of

  • agency costs
  • barriers to entry.
  • asymmetric information.
  • tax shields and cost of financial distress

Q13. How is the cash conversion cycle calculated?

  • Days in Inventory + Collection Period
  • Days in Inventory – Payables Period
  • Days in Inventory + Collection Period + Payables Period
  • None of the above

Q14. The cash conversion cycle as conventionally computed must be a number greater than or equal to zero

Q15. The owner of Grandma’s Applesauce is planning to retire after the coming year. She has to repay a loan $50,000 plus 8 percent interest and must rely on cash flow from operations to do so. Cash flow from operations is uncertain; there is a 70% probability it will equal $65,000, and a 30% probability it will equal $45,000. Assuming a tax rate of 0%, what is the owner’s expected cash flow after debt service?

  • $9,000
  • $5,000
  • $11,000
  • $7,700

Q16. The cost of debt is generally lower than the cost of equity.

Q17. What are pro forma statements?

  • Summaries of historical financial statements
  • Government-mandated analyses of financial statements
  • Projected statements used in financial planning
  • Estimated tax liabilities

Q18. A compound average growth rate (CAGR) takes volatility into account.

Q19. A firm has current assets of $36,000, cash of $5,000, current liabilities of $20,000, total assets of $80,000 and total liabilities of $45,000. What is its net working capital?

  • $16,000
  • $28,000
  • $35,000
  • $44,000

Q20. The _________ states that the value of the firm is determined solely by the value of its assets.

  • Static Tradeoff Model
  • M&M proposition I
  • The Pecking Order Model
  • Agency Theory

Q21. Which of the following is true?

I. Ignoring taxes, share repurchases and dividend payouts are equivalent.
II. Share repurchases usually follow economic fluctuations.
III. Dividend payouts and share repurchases lower share prices.
IV. Dividends tend to be smoothed over time.

  • I and III
  • II and IV
  • II, III and IV
  • I, II and IV

Q22. The amount by which a project increases the value of the firm is given by the project’s ______

  • accounting rate of return
  • net present value (NPV).
  • internal rate of return (IRR).
  • present value.

Q23. What is the present value of a perpetuity of $100 given a discount rate of 5%?

  • $2,000
  • $3,000
  • $1,500
  • $500

Q24. What is the optimal growth rate for a company with access to external capital?

  • internal growth rate
  • External growth rate
  • Sustainable growth rate
  • Cannot be determined

Q25. M&M’s Proposition I states that a company’s value depends on its capital structure.

Q26. Scenario analysis is a way of testing forecasts by changing one assumption at a time.

Q27. Which of the following are equivalent under M&M proposition I?

  • Maximizing firm value and maximizing firm profit
  • Maximizing firm value and minimizing the cost of capital
  • Minimizing firm’s cost of capital and minimizing firm’s debt burden
  • Maximizing profit and minimizing taxes

Q28. What is the five-year discount factor given a 15% annual discount rate?

  • 0.497
  • 0.750
  • 0.625
  • 0.250

Q29. You are saving money for a down payment on a house. Suppose you want to have total savings of $20,000 in 10 years time, and you currently have $5,000. What annual interest rate do you need to earn on your initial investment, assuming you contribute no additional savings?

  • 10%
  • 18.5%
  • 12.5%
  • 15%

Q30. In the CAPM, what does the parameter beta measure?

  • non-systematic (diversifiable) risk
  • systematic (non-diversifiable) risk
  • total risk
  • risk-adjusted stock returns

Q31. The payback period calculation ignores the time value of money.

Q32. The CAPM implies a simple relationship between equilibrium asset prices and their corresponding expected returns

Q33. Shareholders prefer high risk projects when facing a high probability of bankruptcy because

  • high risk projects usually bring high rewards.
  • shareholders have the residual claim on a company.
  • creditors have the residual claim on a company, and therefore bear the risk.
  • there is a good chance the government will rescue them in bankruptcy.

Q34. Which of the following isolated events will NOT change the quick ratio for a manufacturer?

  • Repayment of short-term debt
  • The cash purchase of new machinery
  • The credit sale of finished goods
  • A customer’s cash payment of an outstanding receivable

Q35. Which components should Enterprise Free Cash Flows include?

I. Capital expenditures
II. Financing costs
III. Taxes
IV. Working capital requirements

  • I and IV
  • I, II and IV
  • I , III and IV
  • I, II, III, IV

Q36. Which of the following is commonly used in preparing pro forma statements?

  • Historical financial statements
  • Projected sales
  • Efficiency ratios
  • All of the above

Q37. “Real” activities create cash for a business, while “financial” activities distribute cash within the company.

Q38. Analysis of a company’s financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer the following question.

Harvard finance pretest q38

If sales in 2003 were $10,000, what is the compounded average growth rate?

  • 8.6
  • 6.7
  • 6.3
  • Not enough information available

Q39. A company has net income of $20,000 and a tax rate of 35 percent. Its total debt is $25,000, with principal payments of $5,000 due at the end of each year and an annual interest rate of 8%. What will be the company’s interest tax shield in the upcoming year?

  • $8,750
  • $700
  • $9,450
  • $2,450

Q40. A higher level of leverage generally reduces managerial discretion.

Q41. According to the Static Tradeoff Model of capital structure, the uniqueness of the optimum capital structure is due to ______.

  • interest tax shields
  • information effects
  • requirements of bankruptcy law
  • costs of financial distress

Q42. Selecting investment projects according to rules based either on project NPV or IRR results in maximizing firm value.

Q43. A firm has $100 of average inventory, operating profit of $500 and sales of $1,500. What will be its days in inventory?

  • 36.5 days
  • 24.3 days
  • 73.0 days
  • Not enough information

Q44. Which graph best represents patterns of risk and return for all possible combinations of two risky stocks in a portfolio? The two stocks are represented by A and B and their returns are not perfectly correlated.

exam_graphs

  • A
  • B
  • C
  • D

Q45. According to the CAPM, what determines the risk premium for an individual stock?

  • The risk-free rate of interest and the stock’s beta
  • The risk-free rate and the expected return on the stock
  • The stock’s beta and the equity market risk premium
  • The risk-free rate and the equity market risk premium

Q46. Which of the following liabilities form part of a company’s “real” activities?

I. Short-term debt
II. Accounts payable
III. Accrued operating expenses
IV. Long-term debt

  • III only
  • II and III
  • I and IV
  • I only

Q47. What is the annual depreciation tax shield provided by a piece of equipment that costs $150,000 and is depreciated on a straight-line basis over 10 years? Assume a tax rate of 35%

  • $15,000
  • $1,500
  • $5,250
  • $9,750

Q48. Analysis of a company’s financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer the following question.

All the customers of Toys by Tom, Inc. take advantage of credit offered. On average, they take ______ days to pay outstanding bills.

Harvard finance pretest q38

  • 76
  • 30
  • 228
  • 45

Q49. Which of the following common base items are used to create common-size income statements and balance sheets, respectively?

  • Sales and total assets
  • Sales and total liabilities
  • Operating income and total assets
  • Net income and total equity

Q50. Which of the following is not an assumption underlying M&M proposition I?

  • No arbitrage
  • No taxes
  • Corporate investments are risk-free
  • Symmetric information

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