Investment banking firm contracts

Question

Question 1:  The difference between total receipts and total payments referred to as

• cumulative cash flow.
• beginning cash flow.
• net cash flow.
• cash balance.

Question 2: In developing the pro forma income statement we follow four important steps:

- 1) compute other expenses,
- 2) determine a production schedule,
- 3) establish a sales projection,
- 4) determine profit by completing the actual pro forma statement.

What is the correct order for these four steps?

• 1,2,3,4
• 4,3,2,1
• 2,1,3,4
• 3,2,1,4

Question 3: A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 2/20, net 90. What change might be expected on the balance sheets of its customers?

• Decreased receivables and increased bank loans
• Increased receivables and increased bank loans
• Increased payables and decreased bank loans
• Increased payables and increased bank loans

Question 4: In determining the cost of bank financing, which is the important factor?

• Prime rate
• Nominal rate
• Effective rate
• Discount rate

Question 5: Financial leverage is concerned with the relation between

• changes in volume and changes in EPS.
• changes in volume and changes in EBIT.
• changes in EBIT and changes in EPS.
• changes in EBIT and changes in operating income.

Question 6: Under normal conditions (70% probability), Financing Plan A will produce $24,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $40,000 less than Plan B. What is the expected value of return for Plan A over Plan B?

• $28,800
• $4,000
• $4,800
• $35,200

Question 7: Mr. Jones borrows $2,000 for 90 days and pays $35 interest. What is his effective rate of interest? 9.3%

• 7.0%
• 11.7%
• None of the above

Question 8: Dr. J. wants to buy an IBM personal computer which will cost $2,788 four years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 7% annual return. How much should he set aside?

• $697.00
• $627.93
• $823.15
• $531.81

Question 9: A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given that information, how much will your annual benefits be?

• $3,671
• $3,965
• $8,043
• $13,216

Question 10: In using the internal rate of return method, it is assumed that cash flows can be reinvested at

• the cost of equity.
• the cost of capital.
• the internal rate of return.
• the prevailing interest rate.

Question 11: As the cost of capital increases,

• fewer projects are accepted
• more projects are accepted
• project selection remains unchanged
• none of the above

Question 12. If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is $3.00 per unit and fixed costs are $60,000, what will the firm's net income be at sales of 30,000 units?

• $90,000
• $30,000
• $15,000
• $45,000

Question 13: A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true?

• A has a lower break-even point than B, but A's profit grows faster after the break-even.
• A has a higher break-even point than B, but A's profit grows slower after the break-even.
• B has a lower break-even point than A, but A's profit grows faster after break-even.
• B has a lower break-even point than A, and profit grows the same rate for both companies after the breakeven point.

Question 14: A call provision, which allows the corporation to force an early maturity on a bond issue, usually contains all but which of the following characteristics?

• Most bonds must be outstanding at least 5 years before being called.
• After the call date, the call premium tends to decline over time.
• The provision typically calls for debt conversion into common stock.
• The corporation will pay a premium over par for the bonds.

Question 15: When an investment banking firm contracts to perform on a "best efforts" basis, it tries to

• buy stock for clients
• buy stock for itself
• sell a company's stock to the public
• none of the above

Question 16: Which of the following are advantages of leasing?

• A lease obligation may be substantially less restrictive than the provisions of a bond indenture.
• There may be no down payment as in a purchase.
• The negative effects of obsolescence may be eliminated.
• All of the above.

Question 17: Long-term financing leases currently

• show up on the balance sheet.
• appear in the footnotes to the annual report.
• appear on the company's statement of retained earnings.
• do not appear on any financial statements.