1. When preparing pro forma financial statement, the income statement must be prepared first because the projected retained earnings balance on the balance sheet is based on the expected net income.

a. True

b. False

2. Which of the following is a disadvantage of the use of current liabilities?

a. greater risk of illiquidity

b. less flexibility

c. higher interest costs

d. the hedging principle

3. Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. What will be the annual percentage rate, or APR, for this financing?

a. 10.00%

b. 12.12%

c. 10.67%

d. 13.33%

4. The risk-return trade-off in managing a firm's working capital involves which of the following?

a. a trade-off between liquidity and activity

b. a trade-off between debt and equity

c. a trade-off between the firm's liquidity and its profitability

d. none of the above

5. A floating lien, chattel mortgage, or terminal warehouse receipt have which of the following in common?

a. They all pledge accounts receivables as security.

b. They have nothing in common.

c. They are all unsecured forms of financing.

d. They all use inventory to secure a loan.

6. Mountain Snow Sports, Inc. is trying to determine the optimal order quantity for snow boards for the next twelve months. Annual sales are expected to be 1,000,000 units at a retail price of $400 each. The cost of carrying snow boards is $80 per year. Studies show that it costs Mountain Snow $250 to prepare and receive an order. What is the EOQ?

a. 2,750

b. 2,500

c. 2,000

d. 1,850

7. The PMI, Inc. processes an estimated 200,000 checks per year from its customers. Total revenue collected by check is $40,000,000. The average float time until the funds are credited to PMI's checking account is 6 days. For an extra cost of $ .06/check, PMI's bank will install a lock-box system that will reduce float time from 6 days to 2.5 days. If PMI earns 3.5% on its checking account, how much per check will PMI make if it uses the lock-box system?

a. $.005

b. $.006

c. $.007

d. $.008

8. Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.

a. True

b. False

9. A currency swap is the exchange of principal and interest in one currency for the same in another currency for an agreed period of time.

a. True

b. False