# Grand FIn650/ FIn650 Module 3 Exam - 95981

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Question

1. Cyberhost Corporation's sales were \$225 million last year. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

A. \$271.74

B. \$286.05

C. \$301.10

D. \$316.16

E. \$331.96

N         5

I/YR    6.0%

PV       \$225.00

PMT    \$0.00

FV       \$301.00

2. Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

A. A project’s IRR increases as the WACC declines.

B. A project’s NPV increases as the WACC declines.

C. A project’s MIRR is unaffected by changes in the WACC.

D. A project’s regular payback increases as the WACC declines.

3. A project’s discounted payback increase Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?

A. The company’s operating income declined.

B. The company’s expenditures on fixed assets declined.

C. The company’s cost of goods sold increased.

D. The company’s depreciation and amortization expenses declined.

4. Which of the following statements is CORRECT?

A. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.

B. If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.

C. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase.

D. There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.

E. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

5. Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue \$500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?

A. The company’s taxable income would fall.

B. The company’s interest expense would remain constant.

C. The company would have less common equity than before.

D. The company’s net income would increase.

E. The company would have to pay less taxes.

6. One drawback of switching from a partnership to the corporate form of organization is the following:

A. It subjects the firm to additional regulations.

B. It cannot affect the amount of the firm's operating income that goes to taxes.

C. It makes it more difficult for the firm to raise additional capital.

D. It makes the firm’s investors subject to greater potential personal liabilities.

E. It makes it more difficult for the firm’s investors to transfer their ownership interests.

7. JG Asset Services is recommending that you invest \$1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

A. \$1,781.53

B. \$1,870.61

C. \$1,964.14

D. \$2,062.34

E. \$2,165.46

N                     5

I/YR    3.5%

PV       \$1,500

PMT    \$0

FV       \$1,781.53

8. Which of the following statements is CORRECT?

A. The maximum federal tax rate on personal income in 2010 was 50%.

B. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.

C. Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, which in 2010 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.

D. The maximum federal tax rate on corporate income in 2010 was 50%.

E. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.

9. Collins Inc. is investigating whether to develop a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?

A. The company will produce the new product in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce another of the firm’s products.

B. The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment.

C. The company has spent and expensed for tax purposes \$3 million on research related to the new detergent. These funds cannot be recovered, but the research may bene