FIN 370 Final Exam.
1. Which of the following reasons is most responsible for corporations being the most important form of business organization in the United States?
a. Corporations have limited life.
b. Stockholders have unlimited liability.
c. Corporations are subject to less government regulation than the other forms of business organization.
d. Corporations have the ability to raise larger sums of capital than the other forms of business organization.
2. Which of the following is NOT an advantage of a private placement (as compared to a public offering)?
a. Greater financing flexibility
b. Lower flotation costs
c. Lower interest costs
d. Quicker availability of funds
3. 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.
4. Which of the following is included in the denominator of the times-interest-earned ratio?
a. Lease payments
b. Principal payments
c. Interest expense
d. Gross profit
5. Which of the following statements is true?
a. The future value of an annuity would be greater if funds are invested at the beginning of each period instead of at the end of each period.
b. An annuity is a series of equal payments that are made, or received, forever.
c. The effective annual rate (APR) of a loan is higher the less frequently payments are made.
d. The future value of an annuity would be greater if funds are invested at the end of each period rather than at the beginning of each period.
6. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?
d. None of the above
7. Potential applications of the break-even model include:
a. replacement for time-adjusted capital budgeting techniques.
b. pricing policy.
c. optimizing the cash-marketable securities position of a firm.
d. none of these
8. If you invest $750 every six months at 8% compounded semi-annually, how much would you accumulate at the end of 10 years?
9. According to the hedging principle, permanent assets should be financed with _______ liabilities.
10. Consider a project with the following cash flows: After-Tax After-Tax Accounting Cash Flow Year Profits from Operations 1 $799 $ 750 2 $150 $1,000 3 $200 $1,200 Initial outlay = $1,500 Terminal cash flow = 0 Compute the profitability index if the company’s discount rate is 10%.
11. Aroma Candles, Inc. is evaluating a project with the following cash flows. Calculate the IRR of the project. (Round to the nearest whole percentage.) Year Cash Flows 0 ($120,000) 1 $ 30,000 2 $ 70,000 3 $ 90,000
12. 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.)
13. When calculating the average cost of capital, which of the following has to be adjusted for taxes?
a. Common stock
b. Retained earnings
d. Preferred stock
14. Armadillo Mfg. Co. has a target capital structure of 50% debt and 50% equity. They are planning to invest in a project which will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds. No new outside equity will be issued. If the required rate of return on the firm’s stock is 15% and its marginal tax rate is 40%, compute the firm’s cost of capital.
d. 0 11.1%
15. Lever Brothers has a debt ratio (debt to assets) of 60%. Management is wondering if its current capital structure is too aggressive. Lever Brothers’s present EBIT is $3 million, and profits available to common shareholders are $1,440,000, with 228,571 shares of common stock outstanding. If the firm were to instead have a debt ratio of 20%, reduced interest expense would cause profits available to stockholders to increase to $1,680,000, but 457,143 common shares would be outstanding. What is the difference in EPS at a debt ratio of 20% versus 60%?
17. I. T. Canwait, Inc., a U.S.-based multinational, has just sold cans to a Japanese company, I. C. Spots, Inc. Spots will pay for the order in 60 days. I. T. Canwait is now exposed to which kind of risk?
18. The rate that a subsidiary or parent of the multinational corporation charges other divisions of the firm for its products is called a(n):
a. forward price.
b. transaction price.
c. transfer price.
d. exchange price.
19. A wide bid/ask spread could indicate which of the following?
a. The presence of arbitrageurs
b. Large-volume transactions are taking place
c. Frequent trading of a currency
d. Infrequent trading of a currency
A wide bid/ask spread could indicate which of