FIN 370 Final Exam.
1. The owners of a corporation enjoy unlimited liability.
2. Which of the following is a characteristic of an efficient market?
a. Small number of individuals.
b. Opportunities exist for investors to profit from publicly available information.
c. Security prices reflect fair value of the firm.
d. Immediate response occurs for new public information.
3. According to the DuPont Analysis, an increase in net profit margin will decrease return on assets.
4. The lower the average collection period ratio, the more efficient is the firm in managing its investment in accounts receivable.
5. Which of the following is not a reason why financial analysts use ratio analysis?
a. Ratios help to pinpoint a firm’s strengths.
b. Ratios restate accounting data in relative terms.
c. Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices.
d. Some of a firm’s weaknesses can be identified through the usage of ratios.
6. A new issue of common stock is considered a primary market transaction in the money market.
7. Activities of the investment banker include:
a. assuming the risk of selling a security issue.
b. selling new securities to the ultimate investors.
c. providing advice to firms issuing securities.
d. all of the above.
8. The percentages used in the percent-of-sales method comes from pro forma financial statements.
9. The primary purpose of a cash budget is to:
a. determine the level of investment in current and fixed assets.
b. determine accounts payable.
c. provide a detailed plan of future cash flows.
d. determine the estimated income tax for the year.
10. The present value of the future sum of money is inversely related to both the number of years until payment is received and the opportunity rate.
11. Assuming two investments have equal lives, a high discount rate tends to favor:
a. the investment with large cash flow early.
b. the investment with large cash flow late.
c. the investment with even cash flow.
d. neither investment since they have equal lives.
12. The degree of operating leverage applies to:
b. net income.
c. earnings per share.
d. all of the above.
13. Financing a portion of a firm’s assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to:
a. business risk.
b. financial leverage.
c. operating leverage.
d. all of the above.
14. The percent of sales method of forecasting assumes that fixed assets vary proportionately with sales.
15. If profit margins increase as sales increase, the need for external finance is reduced.
16. Whenever the IRR on a project equals that project’s required rate of return, the NPV equals zero.
17. A machine costs $1,000, has a three-year life, and has an estimated salvage value of $100. It will generate after-tax annual cash flows (ACF) of $600 a year, starting next year. If your required rate of return for the project is 10%, what is the NPV of this investment? (Round your answerwer to the nearest $10.)
18. Working capital refers to investment in current assets, while net working capital is the difference between current assets and current liabilities.
19. Which of the following best describes commercial paper?
a. Long-term promissory notes of large corporations that maintain high credit ratings
b. Short-term promissory notes of large corporations that maintain high credit ratings
c. Preferred stock of large corporations that maintain high credit ratings
d. All of the above
e. None of the above
20. Which of the following does not have an important direct effect on cash flow?
a. The payment patterns of customers
b. The time it takes for suppliers to process payments made by check
c. The ability of the banking system to process checks efficiently
d. The general direction of the Federal Reserve Board’s interest rate policy
21. Which of the following is not a good reason for holding cash rather than marketable securities? Cash is held:
a. to meet daily business transaction needs.
b. to provide the CEO with a travel slush fund.
c. when yields on marketable securities are so low that brokerage costs would nearly eat up the entire yield.
d. to make the balance sheet look good.
22. As inflation increases, the cost of carrying inventory decreases.
23. The main reason that firms lease is to provide them with a source of off-balance sheet financing.
24. Which of the following is not an advantage of leasing for the lessee?
a. The lessor must bear the risk that the equipment will be obsolete even before it is returned at the end of the lease.
b. A lease usually has no restrictive financial covenants on the lessee; the primary duty is to make the lease payments on time.
c. The lessee must dispose of the equipment at the end of the lease.
d. An operating lease can lead to an income tax deduction of the entire lease payment.
25. Common stockholders bear more risk than debtholders but less risk than preferred stockholders.
26. Which of the following provisions is unique to preferred stockholders and usually not available to common stockholders?
a. Cumulative dividends feature
b. Voting rights
c. Fixed dividend
d. Both a & c
27. Since depreciation is a sunk cost, it is not necessary to consider depreciation in estimating cash flows for a new capital project.
28. NPV and IRR can provide ranking inconsistencies when projects have unequal lives.
29. Which of the following would decrease free cash flows? A decrease in:
a. depreciation expense.
b. interest expense.
c. incremental sales.
d. both a & c.
e. all of the above.
30. The average cost of capital is the appropriate rate to use when evaluating new investments, even though the new investments might be in a higher risk class.
31. As the tax rate increases, the weighted average cost of capital decreases.
32. Cost of capital is:
a. the coupon rate of debt.
b. a hurdle rate set by the board of directors.
c. the rate of return that must be earned on additional investment if firm value is to remain unchanged.
d. the average cost of the firm’s assets.
33. The objective of capital structure management is to maximize the market value of the firm’s equity.
34. Financial leverage is distinct from operating leverage since it accounts for the use of:
b. fixed operating costs.
c. preferred stock.
d. both a and c.
e. all of the above.
35. What price must a company typically pay to buy another company? The price will:
a. include some premium over the current market value of the target’s equity.
b. be the market value of the target’s equity.
c. be the book value of the target’s equity.
d. include some discount relative to the current market value of the target’s equity.
36. A merger that is driven by the potentially large reduction in the staffing of overlapping functions and the integration of the two companies’ strong similar product lines is referred to as a:
a. conglomerate merger.
b. vertical merger.
c. horizontal merger.
d. diversification merger.
37. The major advantage of the forward market is risk reduction.
38. Multinational corporations can have lower cost of capital and more continuous access to external finance compared to a domestic firm.
39. A multinational corporation exposes the firm to the least amount of political risk with the use of:
a. import/export licenses.
b. licensing agreements.
c. joint ventures with foreign companies.
d. wholly-owned foreign subsidiaries.
40. The optimal capital structure involves
a. maximizing the cost of all funds
b. minimizing the cost of all funds
c. using no financial leverage
d. minimizing the weighted average of the cost of funds