MULTIPLE CHOICE. Choose the one alternative that BEST completes the statement or answers the question. Explain your choice.

Bob makes the following statements to his supervisor regarding the basic principles of capital budgeting:

Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project.

Statement 2: Capital budgeting decisions should be based on the expected net income produced by the capital project.

Which statement is most accurate?

Statement 1 is correct. Statement 2 is incorrect.

Statement 1 is incorrect. Statement 2 is correct.

Statement 1 and 2 are both correct.

Statement 1 and 2 are both incorrect.

Cant tell.

Which of the following is most likely an indicator of a firms liquidity?

Net working capital as a percentage of assets

Amount of long-term debt

Amount of accounts receivables

Both A and C

All above

Based on following financial information from annual report:

Annual revenue: $387,542 million

Accounts receivable (on average): $19,639 million

3-Find firms receivables turnover. Assuming number of days per year is 365.

19.70

19.72

18.51

18.53

None of above

4-(Continued) Using information in Question 3. Assuming industry average days of sales outstanding is 29 days. An analyst would most likely conclude that:

The firm has better credit controls than its peers.

The firm may have credit policies that are too strict.

Cant tell because we lack information of its peers.

Cant tell because we need more information of the firm such as cost of sales.

Both C and D

5-Based on following financial information of Book Forever, Inc.:

Current assets: 2

Current liabilities: 1

Inventories: 1.2

No prepaid expenses or other current assets

Find Book Forever. Inc.s current ratio and quick ratio:

Current ratio is 2 and quick ratio is 1.2.

Current ratio is 1.2 and quick ratio is 2.

Current ratio is 0.5 and quick ratio is 0.83.

Current ratio is 0.83 and quick ratio is 0.5.

None of above.

6-(Continued) Using information in Question 5. Book Forever issues short-term debt of 1 to buy inventory. What is the effect of these transactions on the current ratio and the quick ratio?

Both ratios will decrease.

Neither ratios will decrease.

Quick ratio will decrease.

Quick ratio will decrease.

Cant tell.

7-The wealth of the owners of a corporation is represented by:

Profits

Earnings per share (net income per share)

Share value

Cash flow

None of above

8-Firms can obtain external sources:

Through financial institutions

From central bank (or Fed) directly

By issuing treasury bonds

Both A and C

All above