FIN 370 Final Exam
54 QUESTIONS WITH ANSWERS
1) In terms of organizational costs, which of the following sequences is correct, moving from lowest to highest cost?
A. Corporation, limited partnership, general partnership, sole proprietorship
B. General partnership, sole proprietorship, limited partnership, corporation
C. Sole proprietorship, general partnership, corporation, limited partnership
D. Sole proprietorship, general partnership, limited partnership, corporation
2) The true owners of the corporation are the:
A. board of directors of the firm.
B. holders of debt issues of the firm.
C. common stockholders.
D. preferred stockholders.
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. Initial public offering
C. Syndicated underwriting
D. Private placement
5) Which of the following does NOT involve underwriting by an investment banker?
A. Syndicated purchases
B. Negotiated purchases
C. Commission basis purchases
D. Competitive bid purchases
6) When public corporations decide to raise cash in the capital markets, what type of financing vehicle is most favored?
A. Common stock
B. Preferred stock
C. Corporate bonds
D. Retained earnings
7) Which of the following is NOT a principle of basic financial management?
A. Efficient capital markets
B. Incremental cash flow counts
C. Profit is king
D. Risk/return tradeoff
8) Difficulty in finding profitable projects is due to:
A. ethical dilemmas.
B. competitive markets.
C. opportunity costs.
D. social responsibility.
9) According to the agency problem, _________ represent the principals of a corporation.
10) Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management?
A. Quick ratio
B. Gross profit margin
C. Return on investment
D. Current ratio
11) Another name for the acid test ratio is the:
A. inventory turnover ratio.
B. average collection period.
C. current ratio.
D. quick ratio.
12) 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.
13) 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?
14) 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 quarterly
B. An account that compounds interest monthly
C. An account that compounds interest annually
D. An account that compounds interest daily
15) 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?
16) All of the following are found in the cash budget EXCEPT:
A. cash disbursements.
B. new financing needed.
C. a net change in cash for the period.
17) Which of the following is NOT a basic function of a budget?
A. Budgets compare historical costs of the firm with its current cost performance.
B. Budgets allow for performance evaluation.
C. Budgets indicate the need for future financing.
D. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
18) Which of the following statements about the percent-of-sales method of financial forecasting is true?
A. It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues.
B. It projects all liabilities as a fixed percentage of sales.
C. It is the least commonly used method of financial forecasting.
D. It is a much more precise method of financial forecasting than a cash budget would be.
19) Which of the following is a non-cash expense?
A. Packaging costs
B. Depreciation expenses
C. Interest expense
D. Administrative salaries
20) 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. calculate the minimum price of common stock for certain situations.
C. set appropriate equilibrium thresholds.
D. determine the optimal amount of debt financing to use.
21) A plant can remain operating when sales are depressed:
A. in an effort to cover at least some of the variable cost.
B. if the selling price per unit exceeds the variable cost per unit.
C. to help the local economy.
D. unless variable costs are zero when production is zero.
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 = (1+i)/P
D. FVn = P(1+i)-n
23) The present value of a single future sum:
A. depends upon the number of discount periods.
B. increases as the number of discount periods increas.
C. is generally larger than the future sum.
D. increases as the discount rate increases.
24) How long will it take $750 to double at 8% compounded annually?
A. 9 years
B. 6.5 years
C. 48 months
D. 12 years
25) A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with:
A. trade credit.
B. common stock.
C. selling equipment.
D. preferred stock.
26) Which of the following is NOT considered a permanent source of financing?
A. Preferred stock
B. Corporate bonds
C. Commercial paper
D. Common stock
27) Which of the following is considered to be a spontaneous source of financing?
B. Operating leases
C. Accounts payable
D. Accounts receivable
28) Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%.
Initial outlay = $450
Year 1=$ 65
A. 2.88 years
B. 3.43 years
C. 2.6 years
D. 3.17 years
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. less than zero, greater than the required return
C. greater than zero, less than one
D. greater than zero, greater than one
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. multiplying the IRR by the cost of capital.
C. multiplying the cash inflow by the IRR.
D. dividing the present value of the annual after-tax cash flows by the cost of capital.
31) You have been asked to analyze a capital investment proposal. The project’s cost is $2,775,000. Cash inflows are projected to be $925,000 in Year 1; $1,000,000 in Year 2; $1,000,000 in Year 3; $1,000,000 in Year 4; and $1,225,000 in Year 5. Assume that your firm discounts capital projects at 15.5%. What is the project’s MIRR?
32) Most firms use the payback period as a secondary capital-budgeting technique, which, in a sense, allows them to control for risk.
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) The NPV assumes cash flows are reinvested at the:
A. real rate of return.
C. cost of capital.
35) The firm should accept independent projects if:
A. the IRR is positive.
B. the profitability index is greater than 1.0.
C. the NPV is greater than the discounted payback.
D. the payback is less than the IRR.
36) 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.)
37) Cost of capital is:
A. the rate of return that must be earned on additional investment if firm value is to remain unchanged.
B. a hurdle rate set by the board of directors.
C. the average cost of the firm’s assets.
D. the coupon rate of debt.
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) The average cost associated with each additional dollar of financing for investment projects is:
A. risk-free rate.
B. the marginal cost of capital.
D. the incremental return.
40) The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital?
41) 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?
42) The expected dividend is $2.50 for a share of stock priced at $25. What is the cost of retained earnings if the long-term growth in dividends is projected to be 8%?
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 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) 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%?
46) 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.
47) 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.
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):
A. floating bond.
C. world bond.
D. international capital 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. interest rate parity theory.
B. arbitrage markets theory.
C. purchasing power parity theory.
D. balance of payments quantum theory.
50) If the quote for a forward exchange contract is greater than the computed price, the forward contract is:
A. a good buy.
B. at equilibrium.
51) A spot transaction occurs when one currency is:
A. exchanged for another currency at a specified price.
B. traded for another at an agreed-upon future price.
C. deposited in a foreign bank.
D. immediately exchanged for another currency.
52) Buying and selling in more than one market to make a riskless profit is called:
A. international trading.
B. cannot be determined from the above information.
C. profit maximization.
53) One reason for international investment is to reduce:
A. advantages in a foreign country.
B. beta risk.
C. portfolio risk.
D. price-earnings (P/E) ratios.
54) 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.
In terms of organizational costs, which of the following sequences is correct, moving from lowe