# Davenport FINC620/ FINC620 final exam 2016 - 95724

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Question 1

The interest tax shield is a key reason why:

A. the required rate of return on assets rises when debt is added to the capital structure.

B. the value of an unlevered firm is equal to the value of a levered firm.

C. the net cost of debt to a firm is generally less than the cost of equity.

D. the cost of debt is equal to the cost of equity for a levered firm.

E. firms prefer equity financing over debt financing.

4 points

Question 2

Rosita's has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratio is .60 and the tax rate is .34. What is Rosita's unlevered cost of capital?

A. 8.83%

B. 12.30%

C. 13.97%

D. 14.08%

E. 14.60%

Question 3

Juanita's Steak House has \$12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?

A. \$2,823

B. \$2,887

C. \$4,080

D. \$4,500

E. \$4,633

Question 4

The Backwoods Lumber Co. has a debt-equity ratio of .80. The firm's required return on assets is 12% and its cost of equity is 15.68%. What is the pre-tax cost of debt based on MM Proposition II with no taxes?

A. 6.76%

B. 7.00%

C. 7.25%

D. 7.40%

E. 7.50%

Question 5

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:

A. the capital market line which shows that all investors will only invest in the riskless asset.

B. the capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.

C. the security market line which shows that all investors will invest in the riskless asset only.

D. the security market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.

E. None of these.

Question 6

A stock with an actual return that lies above the security market line:

A. has more systematic risk than the overall market.

B. has more risk than warranted based on the realized rate of return.

C. has yielded a higher return than expected for the level of risk assumed.

D. has less systematic risk than the overall market.

E. has yielded a return equivalent to the level of risk assumed.

Question 7

The primary purpose of portfolio diversification is to:

A. increase returns and risks.

B. eliminate all risks.

C. eliminate asset-specific risk.

D. eliminate systematic risk.

E. lower both returns and risks.

Question 8

A portfolio contains two assets. The first asset comprises 40% of the portfolio and has a beta of 1.2. The other asset has a beta of 1.5. The portfolio beta is:

A. 1.35

B. 1.38

C. 1.42

D. 1.50

E. 1.55

Question 9

Payback is frequently used to analyze independent projects because:

A. it considers the time value of money.

B. all relevant cash flows are included in the analysis.

C. it is easy and quick to calculate.

D. it is the most desirable of all the available analytical methods from a financial perspective.

E. it produces better decisions than those made using either NPV or IRR.

Question 10

A project has an initial cost of \$2,100. The cash inflows are \$0, \$500, \$900, and \$700 over the next four years, respectively. What is the payback period?

A. 1 years

B. 2 years

C. 3 years

D. 4 years

E. never

Question 11

The payback period rule accepts all investment projects in which the payback