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Financial Management 534 Final Exam Part 2 (Updated 2016)
Question 1
Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
To enable the firm to borrow at a below-market interest rate.
To make it easier to grant stock options to employees.
To help prevent a hostile takeover.
To help retain valued employees.
To increase worker productivity.
Question 2
Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
Targeted share repurchases.
Shareholder rights provisions.
Restricted voting rights.
Poison pills.
Abnormally high executive compensation.
Question 3
Which of the following statements is CORRECT?
Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and it is illegal today.
Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
When a company declares a stock split, the price of the stock typically declines by about 50% after a and this necessarily reduces the total market value of the2-for-1 split equity.
If a firm's stock price is quite high relative to most stocks-say $500 per share-then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low-say $2 per share-then it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share.
When firms are deciding on the size of stock splits-say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
Question 4
The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment?
$100,000
$200,000
$300,000
$400,000
$500,000
Question 5
If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay
no dividends to common stockholders.
dividends only out of funds raised by the sale of new common stock.
dividends only out of funds raised by borrowing money (i.e., issue debt).
dividends only out of funds raised by selling off fixed assets.
no dividends except out of past retained earnings.
Question 6
Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?
$205,000
$500,000
$950,000
$2,550,000
$3,050,000
Question 7
The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?
$122,176
$128,606
$135,375
$142,500
Question 8
Which of the following statements is correct?
If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increae
The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk.
A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. Thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs.
The tax code encourages companies to pay dividends rather than retain earnings.
Question 9
Which of the following statements is correct?
One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
Stock repurchases can be used by a firm that wants to increase its debt ratio.
Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.
Question 10
Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?
An increase in the corporate tax rate.
An increase in the personal tax rate.
The Federal Reserve tightens interest rates in an effort to fight inflation.
The company's stock price hits a new low.
An increase in costs incurred when filing for bankruptcy.
Question 11
Which of the following statements is CORRECT?
The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price.
The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.
The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.
As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.
Question 12
Which of the following statements is CORRECT?
The capital structure that minimizes the interest rate on debt also maximizes the expected EPS.
The capital structure that minimizes the required return on equity also maximizes the stock price.
The capital structure that minimizes the WACC also maximizes the price per share of common stock.
The capital structure that gives the firm the best credit rating also maximizes the stock price.
The capital structure that maximizes expected EPS also maximizes the price per share of common stock.
Question 13
Based on the information below for Benson Corporation, what is the optimal capital structure?
Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.
Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
Question 14
Which of the following statements is CORRECT?
Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC.
Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company's WACC.
Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company's WACC.
Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.
Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC
Question 15
Which of the following is NOT associated with (or does not contribute to) business risk? Recall that business risk is affected by a firm's operations.
Sales price variability.
The extent to which operating costs are fixed.
The extent to which interest rates on the firm's debt fluctuate.
Input price variability.
Demand variability.
Question 16
Which of the following statements is CORRECT?
The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio.
Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company's WACC.
If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.
The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).
Question 17
Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?
Take steps to reduce the DSO.
Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
Sell common stock to retire long-term bonds.
Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
Increase average inventory without increasing sales.
Question 18
Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
Depreciation.
Cumulative cash.
Repurchases of common stock.
Payment for plant construction.
Payments lags.
Question 19
Which of the following items should a company report directly in its monthly cash budget?
Cash proceeds from selling one of its divisions.
Accrued interest on zero coupon bonds that it issued.
New shares issued in a stock split.
New shares issued in a stock dividend.
Its monthly depreciation expense.
Question 20
Which of the following is NOT commonly regarded as being a credit policy variable?
Collection policy.
Credit standards.
Cash discounts.
Payments deferral period.
Credit period.
Question 21
Other things held constant, which of the following would tend to reduce the cash conversion cycle?
Place larger orders for raw materials to take advantage of price breaks.
Take all discounts that are offered.
Continue to take all discounts that are offered and pay on the net date.
Offer longer payment terms to customers.
Carry a constant amount of receivables as sales decline.
Question 22
A lockbox plan is
used to identify inventory safety stocks.
used to slow down the collection of checks our firm writes.
used to speed up the collection of checks received.
used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.
used to protect cash, i.e., to keep it from being stolen.
Question 23
Which of the following is NOT a reason why companies move into international operations?
To develop new markets for the firm's products.
To better serve their primary customers.
Because important raw materials are located abroad.
To increase their inventory levels.
To take advantage of lower production costs in regions where labor costs are relatively low.
Question 24
Suppose it takes 1.82 U.S. dollars today to purchase one British pound in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days?
1.12
1.63
1.82
2.04
3.64
Question 25
Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
155.5 yen
144.0 yen
133.5 yen
78.0 yen
72.0 yen
Question 26
Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?
$14.79
$63.00
$74.55
$85.88
$147.88
Question 27
Suppose Yates Inc., a U.S. exporter, sold a consignment of antique American muscle-cars to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, Yates agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Yates actually receive after it exchanged yen for U.S. dollars?
$1,075,958
$1,025,000
$1,000,000
$975,610
$929,404
Question 28
Suppose that 1 British pound currently equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross exchange rate between the pound and the franc?
1 British pound equals 3.2400 Swiss francs
1 British pound equals 2.6244 Swiss francs
1 British pound equals 1.8588 Swiss francs
1 British pound equals 1.0000 Swiss francs
1 British pound equals 0.3810 Swiss francs
Question 29
Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?
9.00%
10.20%
11.28%
12.50%
13.57%
Question 30
In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?
The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.
The spot rate equals the 90-day forward rate.
The spot rate equals the 180-day forward rate.
The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
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Which ** *** following ** *** ******** regarded as ***** * **** reason ** establish ** ******
To ****** *** **** ** ****** ** * below-market ******** *****
To **** ** ****** ** ***** ***** options ** **********
** **** ******* * ******* takeover
To **** retain ****** **********
** ******** ****** productivity
Question **
***** ** *** ********* ** *** ******** ******** ** ***** * ******* ** hostile ***********
******** ***** repurchases
*********** ****** provisions
Restricted ****** rights
****** pills
********** **** ********* *************
******** **
Which ** the ********* ********** ** *********
Back before *** SEC *** created ** *** 1930s ********* would declare ******* ****** ** ***** ** boost ***** stock ****** ******* **** *** ********** ** be * ********* ******** *** ** is ******* today
Stock ****** create more ************** problems *** ********* than ***** ********* ********** determining *** tax basis ** their ****** **** **** decide ** sell them ** ***** ***** ********* *** **** far **** ***** than ***** *******
**** * company declares * stock ***** *** ***** ** *** stock ********* ******** ** about 50% ***** * and **** necessarily ******* *** ***** ****** ***** ** ************* split *******
** * ********** ***** ***** ** ***** **** ******** ** most stocks-say **** *** ********** ** *** ******* a ***** split ** *** ******** so as ** bring the price **** ** ********* ***** to $50 Moreover ** *** ***** is relatively ******* ** *** ********** ** *** declare a ************* split" ** *** 1-for-25 so as ** bring the ***** up ** somewhere around *** *** ******
**** ***** *** ******** on *** size ** ***** ********** ******* to ******* * ******* split or * 3-for-1 ***** it ** **** to ******* the ******* one ** **** case *** 2-for-1 ***** ******* **** *** after-split ***** **** ** ****** **** ** *** ******* ***** *** **** used
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********
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$300000
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no dividends ** common *************
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********* **** out ** ***** raised by borrowing ***** *** ***** ******
********* **** *** ** ***** raised ** selling *** ***** *******
** dividends ****** *** ** **** ******** earnings
Question **
****** ******* Inc ** *********** *** to *** its ******** ****** ** has * ******* ****** ** $3000000 The ******* ***** ** maintain a ****** capital structure that ** *** **** and *** ****** *** ******* ********* that *** *** ****** **** **** **** ** $3500000 ** *** company ******* a ******** ******** ****** what will be its ***** dividend *********
$205000
********
********
*********
$3050000
Question **
*** ********* ******* ****** of ******* Corporation is $1000000 *** ****** capital ********* is *** debt *** *** equity *** *** ********** *** ****** ** $550000 ** the ******* follows * ******** dividend ****** what ***** ********* if *** **** ** *** *****
********
********
********
********
Question 8
***** ** *** following ********** ** *********
** * company **** *** ******** ******** ***** ** ********* *** dividend payments ********* ****** **** **** ** ******** whenever *** profitable ********** ************* ********
*** ******** ********** ****** *** ********* ****** ** *** **** likely *** **** is to ***** a strict ******* ** *** residual dividend model
Large ***** *********** ******** ** debt tend to increase earnings per share *** they **** ******** *** ********** ********* risk
* dollar **** *** ** ********** ***** ** ***** at *** same **** ** a dollar **** *** ** dividends **** both companies *** ********* *** indifferent between ************ cash through dividends *** stock ********** *********
*** tax **** ********** ********* to *** ********* rather **** ****** *********
******** **
***** ** the ********* statements ** *********
*** advantage of ******** ************ ***** ** **** **** enable ********* to ******** paying ***** ** the ********* ******** ** ***** ********
Stock *********** *** ** used by * **** that wants ** increase *** **** ******
***** *********** **** sense ** * ******* expects to **** a *** of ********** *** ******** to **** over the **** few ***** ******** ********* *** aware ** ***** ********** **************
*** ********* of ** **** ****** ******** ************ **** is **** it ******** *** equity ******* *** increases *** ****** ************
*** ************ ** ******** ************ ***** ** **** **** increase ************ ***** for ********* *** **** to ******** their ownership ** *** ********
******** 10
***** ** *** ********* would ******** the ********** **** * ******* would increase *** **** ***** ***** ****** **** constant?
** ******** in *** ********* *** *****
** increase ** *** personal *** *****
*** ******* ******* ******** ******** ***** ** an effort to ***** inflation
*** ************* ***** ***** **** a *** low
** ******** ** costs ******** **** filing *** bankruptcy
Question ***
***** ** the following ********** ** *********
*** ******* ******* structure ************** ********* *** *** minimizes the WACC
The optimal ******* ********* minimizes *** cost of equity ***** is * ********* ********* *** maximizing the ***** ******
The ******* ******* ********* ************** minimizes *** **** ** **** *** **** ** equity *** *** WACC
The optimal capital ********* simultaneously maximizes ***** price and ********* the *****
** * **** the ******* ******* ********* ** ***** ** determining *** debt-equity *** **** ********* ******** ****
******** 12
***** ** the following statements ** *********
*** capital structure **** minimizes the interest **** ** **** **** maximizes the ******** ****
*** capital ********* **** ********* *** required ****** ** ****** also maximizes *** ***** ******
*** ******* ********* **** minimizes *** WACC also ********* *** ***** *** ***** of common ******
*** ******* ********* **** ***** *** **** the **** ****** ****** **** ********* the ***** ******
The ******* ********* that ********* expected EPS also ********* the ***** per ***** of common ******
Question 13
***** ** the *********** ***** for ****** Corporation **** ** *** optimal ******* ***********
Debt = **** ****** * **** EPS * ***** ***** ***** * ******
**** * **** ****** = **** *** * $318; ***** price * ******
Debt * **** ****** * 20%; *** = ***** ***** ***** * ******
Debt = **** ****** * **** *** = $331; Stock ***** * ******
**** * **** ****** = **** EPS * ***** ***** ***** * ******
******** ***
Which ** *** ********* ********** ** *********
Since **** ********* ** ******* **** ****** ********* ******* * ************* **** ***** **** ****** ****** its *****
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********** * ************* **** ***** will ********* increase *** ******** **** ** both **** *** ****** financing ******* **** action ***** may ***** *** ************* WACC
***** a ********** **** *********** ** not ******** ** *** *** of ********* leverage ******** **** *** ****** the **** ** *******
***** **** ********* ****** *** ********** ********* risk ********** a ************* **** ratio **** always ******** *** WACC
******** ***
***** ** the ********* ** NOT ********** **** *** **** not ********** *** business risk? ****** **** business risk ** ******** by * firm's ***********
***** ***** ************
The ****** ** ***** operating ***** *** fixed
*** ****** ** which interest rates ** *** ********** debt **********
***** price ************
****** ************
******** ***
***** ** *** ********* ********** ** CORRECT?
*** capital structure **** maximizes the stock ***** ** **** *** ******* ********* **** ********* ******** *** ******
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********** a ************* debt ***** **** ********* ****** *** ******** ***** of **** debt *** equity financing; ******* **** still *** ***** *** company's *****
** Congress were ** **** *********** that ********* the ******** *** rate *** ********* *** ********* *** **** **** ***** encourage ********* ** ******** ***** debt *******
*** ******* ********* **** ********* the ***** ***** ** also *** ******* structure that minimizes *** ******** average **** ** ******* (WACC)
******** ***
Which ** the following ******* ****** ***** Windows **** if ** ***** to ****** *** cash ********** *******
**** steps ** ****** *** ****
***** ****** its ***** sooner ***** ***** reduce *** ******* accounts ******* *** *** ****** ******
Sell ****** ***** ** ****** long-term ******
**** ** issue of long-term ***** *** use *** ******** ** buy **** **** ** *** ****** ******
Increase ******* inventory without ********** sales
******** ***
***** of *** following is *** ******** ********* ** *** cash ****** ** * **** **** is ** *** **** tax bracket?
*************
Cumulative *****
Repurchases of ****** ******
******* *** plant *************
******** *****
******** ***
***** ** *** ********* ***** should * ******* ****** ******** ** *** ******* **** ********
Cash ******** **** selling *** ** *** **********
Accrued ******** ** **** coupon ***** **** it issued
New ****** ****** ** * ***** ******
New ****** ****** ** * stock dividend
Its monthly ************ ********
******** 20
***** ** *** ********* is *** ******** ******** ** ***** * credit ****** **********
********** policy
****** **********
**** discounts
******** ******** period
Credit *******
******** ***
***** ****** **** constant ***** of *** following would **** ** ****** *** **** ********** *******
Place ****** orders *** raw materials ** **** ********* ** ***** breaks
**** *** ********* that *** ********
******** ** **** *** ********* that *** ******* *** pay ** *** *** *****
***** ****** ******* ***** ** **********
Carry a ******** amount of *********** ** ***** ********
******** 22
* ******* **** is
used ** ******** inventory ****** stocks
**** ** **** down *** ********** ** checks our firm *******
**** ** ***** up *** ********** ** ****** *********
used ********* by firms where ******** ** **** frequently ** ************ **** ** **** **** *********** *** less ********** ** firms that ******* payments ** *******
used ** protect **** ** ** **** ** **** being *******
******** ***
Which of *** ********* is *** * ****** why ********* **** into ************* operations?
** ******* *** ******* for *** firm's *********
** better ***** ***** primary **********
Because ********* *** ********* *** ******* *******
** ******** their ********* *******
** **** ********* of ***** production ***** ** ******* where ***** ***** *** ********** low
******** ***
Suppose ** ***** *** US ******* today to ******** *** ******* ***** in *** ******* ******** ****** *** currency *********** predict **** *** ** ****** **** ********** by **** ******* *** ***** **** *** **** ** **** *** many ******* **** a pound *** ** ** ******
112
163
****
****
****
******** ***
Suppose *** US dollar *** ******** 144 *** today in *** ******* ******** ****** If *** *** *********** by *** ******** how many *** ***** *** US ****** buy **********
**** yen
1440 yen
**** yen
780 ****
720 ****
******** ***
******* * ****** of ****** pucks **** in Canada *** *** Canadian ******* *** * ******** dollar ****** *** ** dollars If ********** ***** ****** ***** ***** **** is the ***** ** ****** ***** ** the ****** States?
******
******
******
$8588
*******
******** ***
Suppose ***** *** * ** exporter sold * *********** ** ******* ******** muscle-cars to * Japanese ******** ** * ***** of 1435 ******* yen **** the ******** **** *** 140 *** *** ****** ** order to ***** *** sale ***** ****** ** **** *** **** ******* ** *** **** agreeing to **** **** ******** **** **** *** *** *********** *** ***** **** net 6 ****** ** *** *** **** ******* *** ****** **** **** *** dollar ***** *** 1544 yen **** *** ******* was paid what dollar ****** would ***** actually ******* ***** it exchanged *** *** ** *********
*********
*********
$1000000
********
********
******** ***
******* **** 1 British ***** ********* ****** 162 US dollars *** 1 ** ****** ****** *** ***** ****** **** ** the cross ******** **** ******* the ***** *** *** *******
1 British ***** equals ***** Swiss francs
1 ******* pound ****** ***** ***** *******
1 British pound ****** ***** Swiss francs
* British ***** ****** ***** ***** *******
1 British ***** ****** ***** Swiss *******
******** ***
Suppose * foreign ******** who ***** ********** ********* ****** ** is considering investing ** an equivalent-risk domestic **** ** * ******* **** * *** *********** *** ** ******** **** ** ********** ** 9% after-tax ** the ************** required return what ********** **** would the ******** **** **** ** *** ** ******* *** ******** ********* ********
*****
******
******
1250%
******
******** ***
** ***** ****** ********** **** * 4% ********** return *** ******* ********** have * ** ********** ****** In the ****** ****** ****** securities **** * ** ********** ****** *** ******* securities have ** annualized ****** ** *** *** ********** *** ** ***** **** and Japanese ********** *** *********** ** ***** ** the ******** *** ******** **** ******** **** ****** ***** ** *** markets which ** *** following ********** is **** *********
*** ********** **** ******** **** equals *** yen-dollar exchange **** ** the ******* ******* market
The ********** exchange rate in *** 90-day ******* market ****** *** yen-dollar ******** rate ** the 180-day ******* *******
The **** **** ****** *** ****** ******* *****
The spot **** ****** *** 180-day forward *****
*** yen-dollar **** exchange **** ****** *** ********** ******** **** ** *** ****** ******* ******
