FIN 370 Final Exam
54 QUESTIONS WITH ANSWERS
1) 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
2) The true owners of the corporation are the:
A. preferred stockholders.
B. common stockholders.
C. holders of debt issues of the firm.
D. board of directors of the firm.
3) In terms of organizational costs, which of the following sequences is correct, moving from lowest to highest cost?
A. Sole proprietorship, general partnership, limited partnership, corporation
B. Sole proprietorship, general partnership, corporation, limited partnership
C. General partnership, sole proprietorship, limited partnership, corporation
D. Corporation, limited partnership, general partnership, sole proprietorship
4) Which of the following would increase the need for external equity?
A. A slow-down in economic growth
B. A seasonal reduction in sales revenues
C. Inadequate investment opportunities
D. A reduction in corporate profits
5) When public corporations decide to raise cash in the capital markets, what type of financing vehicle is most favored?
A. Preferred stock
B. Corporate bonds
C. Retained earnings
D. Common stock
6) Money market instruments include:
A. preferred stock.
B. common stock.
C. bankers’ acceptances.
D. corporate bonds.
7) Which of the following is NOT a principle of basic financial management?
A. Incremental cash flow counts
B. Risk/return tradeoff
C. Efficient capital markets
D. Profit is king
8) According to the agency problem, _________ represent the principals of a corporation.
9) Difficulty in finding profitable projects is due to:
A. competitive markets.
B. social responsibility.
C. ethical dilemmas.
D. opportunity costs.
10) Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management?
A. Gross profit margin
B. Current ratio
C. Quick ratio
D. Return on investment
11) The accounting rate of return on stockholders’ investments is measured by:
A. return on equity.
B. return on assets.
C. operating income return on investment.
D. realized rate of inflation.
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) 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 daily
B. An account that compounds interest quarterly
C. An account that compounds interest annually
D. An account that compounds interest monthly
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) 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?
16) All of the following are found in the cash budget EXCEPT:
B. cash disbursements.
C. a net change in cash for the period.
D. new financing needed.
17) The primary purpose of a cash budget is to:
A. determine accounts payable.
B. provide a detailed plan of future cash flows.
C. determine the level of investment in current and fixed assets.
D. determine the estimated income tax for the year.
18) 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 involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues.
C. It is the least commonly used method of financial forecasting.
D. It projects all liabilities as a fixed percentage of sales.
19) The break-even model enables the manager of a firm to:
A. set appropriate equilibrium thresholds.
B. determine the quantity of output that must be sold to cover all operating costs.
C. calculate the minimum price of common stock for certain situations.
D. determine the optimal amount of debt financing to use.
20) Which of the following is a non-cash expense?
A. Packaging costs
B. Administrative salaries
C. Interest expense
D. Depreciation expenses
21) A plant can remain operating when sales are depressed:
A. in an effort to cover at least some of the variable cost.
B. unless variable costs are zero when production is zero.
C. to help the local economy.
D. if the selling price per unit exceeds the variable cost per unit.
22) If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years?
23) The present value of a single future sum:
A. depends upon the number of discount periods.
B. increases as the discount rate increases.
C. is generally larger than the future sum.
D. increases as the number of discount periods increas.
24) How long will it take $750 to double at 8% compounded annually?
A. 9 years
B. 12 years
C. 48 months
D. 6.5 years
25) Which of the following is considered to be a spontaneous source of financing?
B. Accounts payable
C. Accounts receivable
D. Operating leases
26) Which of the following is NOT considered a permanent source of financing?
A. Preferred stock
B. Commercial paper
C. Common stock
D. Corporate bonds
27) 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. preferred stock.
D. selling equipment.
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) Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%. Initial outlay = $450
Cash flows:Year 1=$325
Year 2=$ 65
A. 2.88 years
B. 3.43 years
C. 2.6 years
D. 3.17 years
31) Which of the following is considered to be a deficiency of the IRR?
A. It fails to utilize the time value of money.
B. It fails to properly rank capital projects.
C. It is not useful in accounting for risk in capital budgeting.
D. It could produce more than one rate of return.
32) Most firms use the payback period as a secondary capital-budgeting technique, which, in a sense, allows them to control for risk.
33) 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?
34) The firm should accept independent projects if:
A. the IRR is positive.
B. the payback is less than the IRR.
C. the NPV is greater than the discounted payback.
D. the profitability index is greater than 1.0.
35) 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.)
36) The NPV assumes cash flows are reinvested at the:
A. real rate of return.
C. cost of capital.
37) The most expensive source of capital is:
B. new common stock.
C. retained earnings.
D. preferred stock.
38) The marginal cost of preferred stock is equal to:
A. (1 - tax rate) times the preferred stock dividend divided by net price.
B. the preferred stock dividend divided by its par value.
C. the preferred stock dividend divided by the net market price.
D. the preferred stock dividend divided by market price.
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) 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 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%?
44) 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?
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) 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. international capital bond.
D. world bond.
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) 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.
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. balance of payments quantum theory.
D. purchasing power parity theory.
50) 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. immediately exchanged for another currency.
D. deposited in a foreign bank.
51) If the quote for a forward exchange contract is greater than the computed price, the forward contract is:
A. a good buy.
D. at equilibrium.
52) One reason for international investment is to reduce:
A. advantages in a foreign country.
B. portfolio risk.
C. price-earnings (P/E) ratios.
D. beta risk.
53) Buying and selling in more than one market to make a riskless profit is called:
A. international trading.
B. profit maximization.
D. cannot be determined from the above information.
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.
Which of the following best describes the goal of the