FIN 370 Final Exam
54 QUESTIONS WITH ANSWERS
1) 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
2) The true owners of the corporation are the:
A. holders of debt issues of the firm.
B. board of directors of the firm.
C. common stockholders.
D. preferred stockholders.
3) 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, corporation, limited partnership
D. Sole proprietorship, general partnership, limited partnership, corporation
4) When public corporations decide to raise cash in the capital markets, what type of financing vehicle is most favored?
A. Retained earnings
B. Common stock
C. Corporate bonds
D. Preferred stock
5) __________ is a method of offering securities to a limited number of investors.
A. Initial public offering
B. Syndicated underwriting
C. Public offering
D. Private placement
6) Which of the following would increase the need for external equity?
A. Inadequate investment opportunities
B. A seasonal reduction in sales revenues
C. A reduction in corporate profits
D. A slow-down in economic growth
7) Difficulty in finding profitable projects is due to:
A. social responsibility.
B. opportunity costs.
C. ethical dilemmas.
D. competitive markets.
8) Which of the following is NOT a principle of basic financial management?
A. Risk/return tradeoff
B. Profit is king
C. Efficient capital markets
D. Incremental cash flow counts
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. Current ratio
B. Return on investment
C. Quick ratio
D. Gross profit margin
11) 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.
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) 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
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 daily.
C. Earnings on funds invested would compound monthly.
D. Earnings on funds invested would compound quarterly.
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 provide the basis for corrective action when actual figures differ from the budgeted figures.
C. Budgets compare historical costs of the firm with its current cost performance.
D. Budgets allow for performance evaluation.
17) 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.
18) 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.
19) The break-even model enables the manager of a firm to:
A. calculate the minimum price of common stock for certain situations.
B. set appropriate equilibrium thresholds.
C. determine the quantity of output that must be sold to cover all operating costs.
D. determine the optimal amount of debt financing to use.
20) A plant can remain operating when sales are depressed:
A. if the selling price per unit exceeds the variable cost per unit.
B. to help the local economy.
C. in an effort to cover at least some of the variable cost.
D. unless variable costs are zero when production is zero.
21) Which of the following is a non-cash expense?
A. Depreciation expenses
B. Packaging costs
C. Administrative salaries
D. Interest expense
22) 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
23) 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
24) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
25) A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with:
A. common stock.
B. trade credit.
C. preferred stock.
D. selling equipment.
26) Which of the following is considered to be a spontaneous source of financing?
A. Operating leases
C. Accounts payable
D. Accounts receivable
27) Which of the following is NOT considered a permanent source of financing?
A. Corporate bonds
B. Preferred stock
C. Commercial paper
D. Common stock
28) 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%.
29) 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.
30) 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. less than zero, greater than the required return
B. greater than one, greater than zero
C. greater than zero, less than one
D. greater than zero, greater than one
31) Which of the following is considered to be a deficiency of the IRR?
A. It fails to properly rank capital projects.
B. It fails to utilize the time value of money.
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) Which of the following statements about the MIRR is false?
A. The MIRR has the same reinvestment assumption as the IRR.
B. The MIRR has the same reinvestment assumption as the NPV.
C. A project’s MIRR could be lower than a project’s IRR.
D. If a project’s MIRR exceeds the firm’s discount rate, the project is acceptable.
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 NPV assumes cash flows are reinvested at the:
B. real rate of return.
C. cost of capital.
36) The firm should accept independent projects if:
A. the payback is less than the IRR.
B. the IRR is positive.
C. the NPV is greater than the discounted payback.
D. the profitability index is greater than 1.0.
37) The marginal cost of preferred stock is equal to:
A. the preferred stock dividend divided by market price.
B. (1 - tax rate) times the preferred stock dividend divided by net price.
C. the preferred stock dividend divided by the net market price.
D. the preferred stock dividend divided by its par value.
38) The average cost associated with each additional dollar of financing for investment projects is:
A. the incremental return.
C. the marginal cost of capital.
D. risk-free rate.
39) 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.
40) 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?
41) 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%?
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. world bond.
C. international capital bond.
D. floating bond.
47) _________ risk is generally considered only a paper gain or loss.
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. purchasing power parity theory.
B. balance of payments quantum theory.
C. interest rate parity theory.
D. arbitrage markets theory.
50) If the quote for a forward exchange contract is greater than the computed price, the forward contract is:
C. a good buy.
D. at equilibrium.
51) A spot transaction occurs when one currency is:
A. deposited in a foreign bank.
B. immediately exchanged for another currency.
C. exchanged for another currency at a specified price.
D. traded for another at an agreed-upon future 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) One reason for international investment is to reduce:
A. portfolio risk.
B. price-earnings (P/E) ratios.
C. advantages in a foreign country.
D. beta risk.
54) Buying and selling in more than one market to make a riskless profit is called:
A. profit maximization.
C. international trading.
D. cannot be determined from the above information.
uying and selling in more than one market to make a riskless p