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FIN 370 FINAL EXAMINATION/FIN 370 FINAL EXAMINATION
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. Sole proprietorship, general partnership, corporation, limited partnership
c. General partnership, sole proprietorship, limited partnership, corporation
d. Sole proprietorship, general partnership, limited partnership, corporation
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) The true owners of the corporation are the:
a. board of directors of the firm.
b. common stockholders.
c. holders of debt issues of the firm.
d. preferred stockholders.
4) When public corporations decide to raise cash in the capital markets, what type of financing vehicle is most favored?
a. Common stock
b. Retained earnings
c. Preferred stock
d. Corporate bond
5) Money market instruments include:
a. corporate bonds.
b. bankers’ acceptances
c. preferred stock
d. common stock.
6) __________ is a method of offering securities to a limited number of investors.
a. Public offering
b. Initial public offering
c. Private placement
d. Syndicated underwriting
7) According to the agency problem, _________ represent the principals of a corporation.
a. employees
b. shareholders
c. managers
d. suppliers
8) Difficulty in finding profitable projects is due to:
a. ethical dilemmas.
b. social responsibility.
c. competitive markets.
d. opportunity costs.
9) 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
10) The accounting rate of return on stockholders’ investments is measured by:
a. operating income return on investment.
b. return on equity.
c. realized rate of inflation.
d. return on assets.
11) 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
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.
a. 50%
b. 40%
c. 60%
d. 30%
13) 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)?
a. 3.61%
b. 5.02%
c. 4.86%
d. 4.75%
14) 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?
a. $2,525,548
b. $4,085,920
c. $1,025,000
d. $954,719
e. $3,489,097
15) If you are an investor, which of the following would you prefer?
a. Earnings on funds invested would compound monthly.
b. Earnings on funds invested would compound quarterly.
c. Earnings on funds invested would compound annually.
d. Earnings on funds invested would compound daily.
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.
d. inventory.
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) The primary purpose of a cash budget is to:
a. provide a detailed plan of future cash flows.
b. determine the estimated income tax for the year.
c. determine the level of investment in current and fixed assets
d. determine accounts payable.
19) 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. determine the optimal amount of debt financing to use.
c. calculate the minimum price of common stock for certain situations.
d. set appropriate equilibrium thresholds.
20) Which of the following is a non-cash expense?
a. Packaging costs
b. Administrative salaries
c. Depreciation expenses
d. Interest expense
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. if the selling price per unit exceeds the variable cost per unit.
d. to help the local economy.
22) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
a. 7%
b. 8%
c. 6%
d. 5%
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 increase
c. increases as the discount rate increases.
d. is generally larger than the future sum.
24) 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
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. preferred stock.
d. selling equipment.
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?
a. Inventory
b. Operating leases
c. Accounts payable
d. Accounts receivable
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%.
a. $4,337
b. $7,758
c. $2,534
d. $9,337
29) 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.
a. 18%
b. 11%
c. 24%
d. 9%
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
Year 3 = $100
a. 2.88 years
b. 3.17 years
c. 2.6 years
d. 3.43 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 could produce more than one rate of return.
c. It is not useful in accounting for risk in capital budgeting.
d. It fails to properly rank capital projects.
32) Most firms use the payback period as a secondary capital-budgeting technique, which, in a sense, allows them to control for risk.
A. True
B. False
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?
A. 16.73%
B. 10.44%
C. 19.99%
D. 12.62%
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.)
A. $7,621
B. $6,577
C. $1,056
D. $4,568
35) The NPV assumes cash flows are reinvested at the:
A. real rate of return.
B. cost of capital.
C. IRR.
D. NPV.
36) The firm should accept independent projects if:
A. the IRR is positive.
B. the NPV is greater than the discounted payback.
C. the payback is less than the IRR.
D. the profitability index is greater than 1.0.
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. the average cost of the firm’s assets.
C. the coupon rate of debt.
D. a hurdle rate set by the board of directors.
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. beta.
C. the incremental return.
D. the marginal cost of capital.
40) 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%?
A. 25%
B. 18%
C. 10%
D. 8%
41) 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?
A. 10.6%
B. 11.5%
C. 14.0%
D. 9.0%
42) Given the following information, determine the risk-free rate.
Cost of equity = 12%
Beta = 1.50
Market risk premium = 3%
A. 7.0%
B. 6.5%
C. 8.0%
D. 7.5%
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?
A. $2.33
B. $1.67
C. $2.10
D. $2.96
44) 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%?
A. $1.16
B. $2.12
C. $0.88
D. $1.95
45) 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%?
A. $3.25
B. $1.75
C. $4.50
D. $2.00
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.
B. world bond.
C. Eurobond.
D. international capital bond.
47) _________ risk is generally considered only a paper gain or loss.
A. Economic
B. Transaction
C. Financial
D. Translation
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) A spot transaction occurs when one currency is:
A. exchanged for another currency at a specified price.
B. immediately exchanged for another currency.
C. traded for another at an agreed-upon future price.
D. deposited in a foreign bank.
50) 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. balance of payments quantum theory.
C. arbitrage markets theory.
D. purchasing power parity theory.
51) If the quote for a forward exchange contract is greater than the computed price, the forward contract is:
A. a good buy.
B. undervalued.
C. at equilibrium.
D. overvalued.
52) Buying and selling in more than one market to make a riskless profit is called:
A. international trading.
B. arbitrage.
C. cannot be determined from the above information.
D. 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
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