FIN 370 Final Exam.
1) Which of the following categories of owners have limited liability?
A. General partners
B. Sole proprietors
C. Shareholders of a corporation
D. Both a and b
2) The true owners of the corporation are the:
A. holders of debt issues of the firm.
B. preferred stockholders.
C. board of directors of the firm.
D. common stockholders.
3) In terms of organizational costs, which of the following sequences is correct, moving from lowest to highest cost?
A. General partnership, sole proprietorship, limited partnership, corporation
B. Sole proprietorship, general partnership, limited partnership, corporation
C. Corporation, limited partnership, general partnership, sole proprietorship
D. Sole proprietorship, general partnership, corporation, limited partnership
4) Which of the following would increase the need for external equity?
A. Inadequate investment opportunities
B. A slow-down in economic growth
C. A reduction in corporate profits
D. A seasonal reduction in sales revenues
5) When public corporations decide to raise cash in the capital markets, what type of financing vehicle is most favored?
A. Retained earnings
B. Preferred stock
C. Common stock
D. Corporate bonds
6) __________ is a method of offering securities to a limited number of investors.
A. Public offering
B. Initial public offering
C. Syndicated underwriting
D. Private placement
7) According to the agency problem, _________ represent the principals of a corporation.
8) Which of the following is NOT a principle of basic financial management?
A. Efficient capital markets
B. Risk/return tradeoff
C. Profit is king
D. Incremental cash flow counts
9) Difficulty in finding profitable projects is due to:
A. ethical dilemmas.
B. social responsibility.
C. opportunity costs.
D. competitive markets.
10) Another name for the acid test ratio is the:
A. inventory turnover ratio.
B. current ratio.
C. average collection period.
D. quick ratio.
11) Marshall Networks, Inc. has a total asset turnover of 2.5% and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall’s debt ratio.
12) The accounting rate of return on stockholders’ investments is measured by:
A. operating income return on investment.
B. return on assets.
C. realized rate of inflation.
D. return on equity.
13) If you are an investor, which of the following would you prefer?
A. Earnings on funds invested would compound daily.
B. Earnings on funds invested would compound annually.
C. Earnings on funds invested would compound monthly.
D. Earnings on funds invested would compound quarterly.
14) When George Washington was president of the United States in 1797, his salary was $25,000. If you assume an annual rate of inflation of 2.5%, how much would his salary have been in 1997?
15) Edward Johnson decided to open up a Roth IRA. He will invest $1,800 per year for the next 35 years. Deposits to the Roth IRA will be made via a $150 payroll deduction at the end of each month. Assume that Edward will earn 8.75% over the life of the IRA. How much will he have at the end of 35 years?
16) Which of the following is NOT a basic function of a budget?
A. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
B. Budgets indicate the need for future financing.
C. Budgets compare historical costs of the firm with its current cost performance.
D. Budgets allow for performance evaluation.
17) Which of the following statements about the percent-of-sales method of financial forecasting is true?
A. It is a much more precise method of financial forecasting than a cash budget would be.
B. It is the least commonly used method of financial forecasting.
C. It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues.
D. It projects all liabilities as a fixed percentage of sales.
18) All of the following are found in the cash budget EXCEPT:
A. new financing needed.
B. a net change in cash for the period.
C. cash disbursements.
19) Which of the following is a non-cash expense?
A. Administrative salaries
B. Depreciation expenses
C. Packaging costs
D. Interest expense
20) A plant can remain operating when sales are depressed:
A. unless variable costs are zero when production is zero.
B. if the selling price per unit exceeds the variable cost per unit.
C. in an effort to cover at least some of the variable cost.
D. to help the local economy.
21) The break-even model enables the manager of a firm to:
A. determine the optimal amount of debt financing to use.
B. calculate the minimum price of common stock for certain situations.
C. determine the quantity of output that must be sold to cover all operating costs.
D. set appropriate equilibrium thresholds.
22) Which of the following is the formula for compound value?
A. FVn = P(1+i)-n
B. FVn = P(1+i)n
C. FVn = P/(1+i)n
D. FVn = (1+i)/P
23) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
24) How long will it take $750 to double at 8% compounded annually?
A. 12 years
B. 6.5 years
C. 9 years
D. 48 months
25) A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with:
A. selling equipment.
B. trade credit.
C. common stock.
D. preferred stock.
26) Which of the following is considered to be a spontaneous source of financing?
A. Accounts receivable
C. Operating leases
D. Accounts payable
27) Which of the following is NOT considered a permanent source of financing?
A. Common stock
B. Preferred stock
C. Corporate bonds
D. Commercial paper
28) Dieyard Battery Recyclers is considering a project with the following cash flows: Initial outlay = $13,000 Cash flows: Year 1 = $5,000 Year 2 = $3,000 Year 3 = $9,000 If the appropriate discount rate is 15%, compute the NPV of this project.
29) We compute the profitability index of a capital-budgeting proposal by:
A. dividing the present value of the annual after-tax cash flows by the cost of capital.
B. dividing the present value of the annual after-tax cash flows by the cost of the project.
C. multiplying the IRR by the cost of capital.
D. multiplying the cash inflow by the IRR.
30) For the NPV criteria, a project is acceptable if the NPV is __________, while for the profitability index, a project is acceptable if the profitability index is __________.
A. greater than zero, greater than one
B. greater than one, greater than zero
C. less than zero, greater than the required return
D. greater than zero, less than one
31) Which of the following is considered to be a deficiency of the IRR?
A. It is not useful in accounting for risk in capital budgeting.
B. It could produce more than one rate of return.
C. It fails to properly rank capital projects.
D. It fails to utilize the time value of money.
32) Which of the following statements about the MIRR is false?
A. A project’s MIRR could be lower than a project’s IRR.
B. If a project’s MIRR exceeds the firm’s discount rate, the project is acceptable.
C. The MIRR has the same reinvestment assumption as the IRR.
D. The MIRR has the same reinvestment assumption as the NPV.
33) Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk.
34) ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.)
35) The firm should accept independent projects if:
A. the NPV is greater than the discounted payback.
B. the profitability index is greater than 1.0.
C. the payback is less than the IRR.
D. the IRR is positive.
36) The NPV assumes cash flows are reinvested at the:
A. cost of capital.
D. real rate of return.
37) Cost of capital is:
A. the average cost of the firm’s assets.
B. a hurdle rate set by the board of directors.
C. the coupon rate of debt.
D. the rate of return that must be earned on additional investment if firm value is to remain unchanged.
38) The marginal cost of preferred stock is equal to:
A. the preferred stock dividend divided by the net market price.
B. the preferred stock dividend divided by its par value.
C. the preferred stock dividend divided by market price.
D. (1 - tax rate) times the preferred stock dividend divided by net price.
39) The average cost associated with each additional dollar of financing for investment projects is:
A. the marginal cost of capital.
B. risk-free rate.
D. the incremental return.
40) Given the following information, determine the risk-free rate. Cost of equity = 12% Beta = 1.50 Market risk premium = 3%
41) J & B, Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently, the yield to maturity on these bonds is 14%. If the firm’s tax rate is 40%, what is the cost of debt to J & B?
42) Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt–10%; preferred stock–11%; and common stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?
43) Zybeck Corp. projects operating income of $4 million next year. The firm’s income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will projected EPS be next year?
44) Lever Brothers has a debt ratio (debt to assets) of 20%. Management is wondering if its current capital structure is too conservative. Lever Brothers’s present EBIT is $3 million, and profits available to common shareholders are $1,680,000, with 457,143 shares of common stock outstanding. If the firm were to instead have a debt ratio of 40%, additional interest expense would cause profits available to stockholders to decline to $1,560,000, but only 342,857 common shares would be outstanding. What is the difference in EPS at a debt ratio of 40% versus 20%?
45) Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Lever Brothers’s present EBIT is $3 million, and profits available to common shareholders are $1,560,000, with 342,857 shares of common stock outstanding. If the firm were to instead have a debt ratio of 60%, additional interest expense would cause profits available to stockholders to decline to $1,440,000, but only 228,571 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%?
46) _________ risk is generally considered only a paper gain or loss.
47) Capital markets in foreign countries:
A. offer lower returns than those obtainable in the domestic capital markets.
B. provide international diversification.
C. in general are becoming less integrated due to the widespread availability of interest rate and currency swaps.
D. all of the choices.
48) A bond sold simultaneously in several different foreign capital markets, but denominated in a currency different from the country in which the bond is issued, is called a(n):
B. international capital bond.
C. world bond.
D. floating bond.
49) The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the:
A. arbitrage markets theory.
B. balance of payments quantum theory.
C. purchasing power parity theory.
D. interest rate parity theory.
50) If the quote for a forward exchange contract is greater than the computed price, the forward contract is:
A. at equilibrium.
D. a good buy.
51) A spot transaction occurs when one currency is:
A. traded for another at an agreed-upon future price.
B. immediately exchanged for another currency.
C. deposited in a foreign bank.
D. exchanged for another currency at a specified price.
52) An important (additional) consideration for a direct foreign investment is:
A. political risk.
B. maximizing the firm’s profits.
C. attaining a high international P/E ratio.
D. all of the above.
53) One reason for international investment is to reduce:
A. price-earnings (P/E) ratios.
B. advantages in a foreign country.
C. beta risk.
D. portfolio risk.
54) Buying and selling in more than one market to make a riskless profit is called:
B. international trading.
C. cannot be determined from the above information.
D. profit maximization.
Buying and selling in more than one market to make a