Juan is a limited partner in Pet Food and Fun, Limited Partnership. Juan visited Chow, Inc., a local
supplier of dog food claiming to be a "partner" in the partnership and negotiated a distribution contract
between the supplier and limited partnership on behalf of the partnership.
As a result of these actions, Juan:

• A. None of the above.
• B. Has full personal liability to all creditors.
• C. Has limited liability as a limited partner in reference to all creditors.
• D. Has limited liability as a limited partner to all creditors except Chow, Inc.

What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to
evaluate the performance of investment center managers?

• A. ROI does not necessarily reflect the company's cost of capital.
• B. ROI may lead to rejecting projects that yield positive cash flows.
• C. ROI is a percentage, while RI is a dollar amount.
• D. ROI does not reflect all economic gains.

In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally
agreed that they would work full time for the partnership and would distribute profits based on their capital
contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended
December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During
1 994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved.
In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership.
Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH
Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the
partnership and the individual partners.

• A. Ace Automobile Co. would win a suit brought against ACH Associates because Hook's authority
  continues during dissolution.
• B. Ace Automobile Co. would lose a suit brought against ACH Associates because Hook, as a general
  partner, has no authority to bind the partnership.

Hedgehog International has a receivable valued at 500,000 local currency units from its foreign customer
due in 90 days. The current spot rate of the local currency unit is $.60. Hedgehog purchases a put option
to sell the local currency unit in 90 days for $.61 for a premium of $.005. The exchange rate for the local
currency increases to $.63 in 90 days. What will Hedgehog do on the receivable's settlement date?

• A. Hedgehog will exercise its option and sell the proceeds of its accounts receivable collection under the
  provisions of the option contract at a gain.
• B. Hedgehog will be indifferent as to whether it exercises the option or not.
• C. Hedgehog will not exercise the option and sell local currency units collected from its receivable at the
  spot rate.
• D. Hedgehog will sell the option at the settlement date and combine its proceeds along with local currency
  units purchased at the spot rate to maximize its revenue.

A company uses the following formula in determining its optimal level of cash.

Where: b = Fixed cost per transaction i = Interest rate on marketable securities T = Total demand for cash
over a period of time
This formula is a modification of the Economic Order Quantity (EOQ) formula used for inventory
management. Assume that the fixed cost of selling marketable securities is $10 per transaction, and the
interest rate on marketable securities is 6 percent per year. The company estimates that it will make cash
payments of $12,000 over a one-month perioD. What is the average cash balance (rounded to the
nearest dollar)?

• A. $3,464
• B. $2,000
• C. $1,000
• D. $6,928