FIN 370 Final Exam.
1) The true owners of the corporation are the:
A. board of directors of the firm.
B. common stockholders.
C. holders of debt issues of the firm.
D. preferred stockholders.
2) Which of the following best describes the goal of the firm?
A. The maximization of the total market value of the firm's common stock]
B. Profit maximization
C. Risk minimization
D. None of the above
3) 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
4) __________ is a method of offering securities to a limited number of investors.
A. Public offering
B. Syndicated underwriting
C. Initial public offering
D. Private placement
5) Which of the following would increase the need for external equity?
A. A reduction in corporate profits
B. A seasonal reduction in sales revenues
C. Inadequate investment opportunities
D. A slow-down in economic growth
6) Which of the following does NOT involve underwriting by an investment banker?
A. Syndicated purchases
B. Commission basis purchases
C. Competitive bid purchases
D. Negotiated purchases
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. Risk/return tradeoff
B. Incremental cash flow counts
C. Efficient capital markets
D. Profit is king
9) Difficulty in finding profitable projects is due to:
A. social responsibility.
B. competitive markets.
C. ethical dilemmas.
D. opportunity costs.
10) 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.
11) Another name for the acid test ratio is the:
A. current ratio.
B. quick ratio.
C. inventory turnover ratio.
D. average collection period.
12) Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?
A. Current ratio
B. Gross profit margin
C. Quick ratio
D. Return on investment
13) Suppose that you wish to save for your child's college education by opening up an educational IRA. You plan to deposit $100 per month into the IRA for the next 18 years. Assume that you will be able to earn 10%, compounded monthly, on your investment. How much will you have accumulated at the end of 18 years?
14) Northwest Bank pays a quoted annual (nominal) interest rate of 4.75%. However, it pays interest (compouned) daily using a 365-day year. What is the effective annual rate of return (APY)?
15) You have $10,000 to invest. You do not want to take any risk, so you will put the funds in a savings account at the local bank. Of the following choices, which one will produce the largest sum at the end of 22 years?
A. An account that compounds interest annually
B. An account that compounds interest daily
C. An account that compounds interest quarterly
D. An account that compounds interest monthly
16) All of the following are found in the cash budget EXCEPT:
A. a net change in cash for the period.
C. cash disbursements.
D. new financing needed.
17) Which of the following statements about the percent-of-sales method of financial forecasting is true?
A. It is the least commonly used method of financial forecasting.
B. It is a much more precise method of financial forecasting than a cash budget would be.
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) 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.
19) Which of the following is a non-cash expense?
A. Packaging costs
B. Interest expense
C. Administrative salaries
D. Depreciation expenses
20) A plant can remain operating when sales are depressed:
A. in an effort to cover at least some of the variable cost.
B. to help the local economy.
C. unless variable costs are zero when production is zero.
D. if the selling price per unit exceeds the variable cost per unit.
21) The break-even model enables the manager of a firm to:
A. determine the quantity of output that must be sold to cover all operating costs.
B. set appropriate equilibrium thresholds.
C. determine the optimal amount of debt financing to use.
D. calculate the minimum price of common stock for certain situations.
22) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
23) How long will it take $750 to double at 8% compounded annually?
A. 9 years
B. 48 months
C. 12 years
D. 6.5 years
24) The present value of a single future sum:
A. depends upon the number of discount periods.
B. is generally larger than the future sum.
C. increases as the discount rate increases.
D. increases as the number of discount periods increas.
25) Which of the following is NOT considered a permanent source of financing?
A. Preferred stock
B. Common stock
C. Commercial paper
D. Corporate bonds
26) A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with:
A. trade credit.
B. selling equipment.
C. preferred stock.
D. common stock.
27) Which of the following is considered to be a spontaneous source of financing?
B. Accounts receivable
C. Accounts payable
D. Operating leases
28) Your company is considering a project with the following cash flows: Initial outlay = $1,748.80 Cash flows Years 1–6 = $500 Compute the IRR on the project.
29) 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 one, greater than zero
B. greater than zero, greater than one
C. greater than zero, less than one
D. less than zero, greater than the required return
30) 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 the project.
B. dividing the present value of the annual after-tax cash flows by the cost of capital.
C. multiplying the cash inflow by the IRR.
D. multiplying the IRR by the cost of capital.
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 fails to utilize the time value of money.
C. It could produce more than one rate of return.
D. It fails to properly rank capital projects.
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. The MIRR has the same reinvestment assumption as the NPV.
C. If a project's MIRR exceeds the firm's discount rate, the project is acceptable.
D. The MIRR has the same reinvestment assumption as the IRR.
33) What deficiency of the IRR does the MIRR overcome?
A. The ranking problem
B. The fact that the IRR does not take the time-value of money into consideration
C. The possibility of arriving at multiple solutions
D. The fact that the IRR fails to consider 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 IRR is positive.
C. the profitability index is greater than 1.0.
D. the payback is less than the IRR.
36) The NPV assumes cash flows are reinvested at the:
A. cost of capital.
B. real rate of return.
37) The marginal cost of preferred stock is equal to:
A. the preferred stock dividend divided by the net market price.
B. (1 - tax rate) times the preferred stock dividend divided by net price.
C. the preferred stock dividend divided by its par value.
D. the preferred stock dividend divided by market price.
38) PepsiCo uses 30-year Treasury bonds to measure the risk-free rate because:
A. these bonds are essentially free of business risk.
B. they capture the long-term inflation expectations of investors associated with investments in long-term assets.
C. these bonds are essentially free of interest rate risk.
D. none of the above.
39) Cost of capital is:
A. the average cost of the firm's assets.
B. the rate of return that must be earned on additional investment if firm value is to remain unchanged.
C. a hurdle rate set by the board of directors.
D. the coupon rate of debt.
40) 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?
41) Given the following information, determine the risk-free rate. Cost of equity = 12% Beta = 1.50 Market risk premium = 3%
42) Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually. Investors are expected to pay $918 for the 10-year bond. Bender will have to pay $33 per bond in flotation costs. What is the cost of debt if the firm is in the 34% tax bracket?
43) Farar, Inc. projects operating income of $4 million next year. The firm's income tax rate is 40%. Farar presently has 750,000 shares of common stock, no preferred stock, and no debt. The firm is considering the issuance of $6 million of 10% bonds to finance a new product that is not expected to generate an increase in income for two years. If Farar issues the bonds this year, what will projected EPS be next year?
44) 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%?
45) Castle Corp. generated $2 million in operating income from sales of $20 million during the latest fiscal year. The firm's interest expense was $500,000, and the corporate income tax rate was 40%. Investors require a rate of return of 18%. Using the dependence hypothesis approach to valuation, what is the market value of Castle?
A. $8.3 million
B. $9.6 million
C. $5.1 million
D. $7.2 million
E. $6.5 million
46) Which of the following statements about exchange rates is true?
A. Exchange rates were fixed prior to establishing a floating-rate international currency system, and all countries set a specific parity rate for their currency relative either to the Canadian or to the U.S. dollar.
B. Day-to-day fluctuations in exchange rates currently are caused by changes in parity rates.
C. A floating-rate international currency system has been operating since 1973.
D. All of the choices.
47) _________ risk is generally considered only a paper gain or loss.
48) 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.
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. balance of payments quantum theory.
B. purchasing power parity theory.
C. arbitrage markets 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:
C. at equilibrium.
D. a good buy.
51) A spot transaction occurs when one currency is:
A. immediately exchanged for another currency.
B. deposited in a foreign bank.
C. traded for another at an agreed-upon future price.
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) The purchasing power parity theory states that currency exchange rates tend to vary ____________ with their respective purchasing powers in order to provide _________ purchasing powers.
A. directly; similar
B. inversely; similar
C. directly; greater
D. inversely; greater
54) One reason for international investment is to reduce:
A. price-earnings (P/E) ratios.
B. portfolio risk.
C. beta risk.
D. advantages in a foreign country.
One reason for international investment