FIN 370 Final Exam
54 QUESTIONS WITH ANSWER
1) 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. Corporation, limited partnership, general partnership, sole proprietorship
C. Sole proprietorship, general partnership, limited partnership, corporation
D. Sole proprietorship, general partnership, corporation, limited partnership
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) Which of the following would increase the need for external equity?
A. Inadequate investment opportunities
B. A reduction in corporate profits
C. A slow-down in economic growth
D. A seasonal reduction in sales revenues
5) __________ is a method of offering securities to a limited number of investors.
A. Initial public offering
B. Private placement
C. Public offering
D. Syndicated underwriting
6) Which of the following does NOT involve underwriting by an investment banker?
A. Competitive bid purchases
B. Negotiated purchases
C. Syndicated purchases
D. Commission basis purchases
7) 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
8) Difficulty in finding profitable projects is due to:
A. social responsibility.
B. competitive markets.
C. ethical dilemmas.
D. opportunity costs.
9) According to the agency problem, _________ represent the principals of a corporation.
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) The accounting rate of return on stockholders’ investments is measured by:
A. return on assets.
B. return on equity.
C. operating income return on investment.
D. realized rate of inflation.
12) Another name for the acid test ratio is the:
A. current ratio.
B. average collection period.
C. inventory turnover ratio.
D. quick ratio.
13) 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?
14) If you are an investor, which of the following would you prefer?
A. Earnings on funds invested would compound annually.
B. Earnings on funds invested would compound quarterly.
C. Earnings on funds invested would compound monthly.
D. Earnings on funds invested would compound daily.
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 indicate the need for future financing.
B. Budgets allow for performance evaluation.
C. Budgets compare historical costs of the firm with its current cost performance.
D. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
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 projects all liabilities as a fixed percentage of sales.
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 is a much more precise method of financial forecasting than a cash budget would be.
18) All of the following are found in the cash budget EXCEPT:
A. a net change in cash for the period.
B. new financing needed.
C. cash disbursements.
19) Which of the following is a non-cash expense?
A. Depreciation expenses
B. Packaging costs
C. Administrative salaries
D. Interest expense
20) A plant can remain operating when sales are depressed:
A. if the selling price per unit exceeds the variable cost per unit.
B. in an effort to cover at least some of the variable cost.
C. unless variable costs are zero when production is zero.
D. to help the local economy.
21) The break-even model enables the manager of a firm to:
A. calculate the minimum price of common stock for certain situations.
B. determine the quantity of output that must be sold to cover all operating costs.
C. determine the optimal amount of debt financing to use.
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) How long will it take $750 to double at 8% compounded annually?
A. 6.5 years
B. 9 years
C. 12 years
D. 48 months
24) The present value of a single future sum:
A. increases as the number of discount periods increas.
B. depends upon the number of discount periods.
C. increases as the discount rate increases.
D. is generally larger than the future sum.
25) Which of the following is NOT considered a permanent source of financing?
A. Corporate bonds
B. Preferred stock
C. Commercial paper
D. Common stock
26) A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with:
A. common stock.
B. selling equipment.
C. preferred stock.
D. trade credit.
27) Which of the following is considered to be a spontaneous source of financing?
A. Operating leases
B. Accounts receivable
C. Accounts payable
28) Dieyard Battery Recyclers is considering a project with the following cash flows: Initial outlay = $13,000
Cash flows:Year 1=$5,000
If the appropriate discount rate is 15%, compute the NPV of this project.
29) Artie’s Soccer Ball Company is considering a project with the following cash flows: Initial outlay = $750,000 Incremental after-tax cash flows from operations Years 1–4 = $250,000 per year Compute the NPV of this project if the company’s discount rate is 12%.
30) 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.
31) Which of the following statements about the MIRR is false?
A. The MIRR has the same reinvestment assumption as the IRR.
B. If a project’s MIRR exceeds the firm’s discount rate, the project is acceptable.
C. A project’s MIRR could be lower than a project’s IRR.
D. The MIRR has the same reinvestment assumption as the NPV.
32) 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?
33) Which of the following is considered to be a deficiency of the IRR?
A. It fails to properly rank capital projects.
B. It could produce more than one rate of return.
C. It is not useful in accounting for risk in capital budgeting.
D. It fails to utilize the time value of money.
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) 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.
38) The most expensive source of capital is:
A. retained earnings.
C. new common stock.
D. preferred stock.
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) 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?
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) Given the following information, determine the risk-free rate.
Cost of equity=12%
Market risk premium=3%
43) 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%?
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) 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?
46) _________ risk is generally considered only a paper gain or loss.
47) 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.
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) 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.
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) 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. purchasing power parity theory.
C. balance of payments quantum theory.
D. interest rate parity theory.
52) One reason for international investment is to reduce:
A. beta risk.
B. portfolio risk.
C. price-earnings (P/E) ratios.
D. advantages in a foreign country.
53) 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.
54) Buying and selling in more than one market to make a riskless profit is called:
A. cannot be determined from the above information.
B. profit maximization.
D. international trading.
In terms of organizational costs, which of the following sequences is correct, moving from lowest