University of Phoenix FIN 370 Final Exam 2014
1) The true owners of the corporation are the:
A. board of directors of the firm. B. preferred stockholders.
C. common stockholders.
D. holders of debt issues of the firm.
2) 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
3) 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
4) Which of the following would increase the need for external equity?
A. A reduction in corporate profits
B. A slow-down in economic growth
C. A seasonal reduction in sales revenues
D. Inadequate investment opportunities
5) Which of the following does NOT involve underwriting by an investment banker?
A. Syndicated purchases
B. Negotiated purchases
C. Commission basis purchases
D. Competitive bid purchases
6) is a method of offering securities to a limited number of investors.
B. Private placement
C. Syndicated underwriting
D. Initial public offering
7) Difficulty in finding profitable projects is due to:
A. ethical dilemmas.
B. competitive markets. C. opportunity costs.
D. social responsibility.
8) According to the agency problem, represent the principals of a corporation.
A. employees B. managers C. suppliers
9) Which of the following is NOT a principle of basic financial management?
A. Profit is king
B. Efficient capital markets
C. Incremental cash flow counts
D. Risk/return tradeoff
10) Another name for the acid test ratio is the:
A. average collection period. B. inventory turnover ratio.
C. quick ratio.
D. current ratio.
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.
C. 40% D. 30%
12) The accounting rate of return on stockholders’ investments is measured by:
A. realized rate of inflation.
B. operating income return on investment. C. return on equity.
D. return on assets.
13) Northwest Bank pays a quoted annual (nominal) interest rate of 4.75%. However, it pays interest (compounded) daily using a 365-day year. What is the effective annual rate of return (APY)?
B. 3.61% C. 5.02% D. 4.75%
14) 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 monthly
B. An account that compounds interest quarterly
C. An account that compounds interest daily
D. An account that compounds interest annually
15) 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?
16) Which of the following is NOT a basic function of a budget?
A. Budgets allow for performance evaluation.
B. Budgets compare historical costs of the firm with its current cost performance.
C. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
D. Budgets indicate the need for future financing.
17) The primary purpose of a cash budget is to:
A. determine the estimated income tax for the year. B. provide a detailed plan of future cash flows.
C. determine accounts payable.
D. determine the level of investment in current and fixed assets.
18) All of the following are found in the cash budget EXCEPT:
A. new financing needed. B. cash disbursements.
D. a net change in cash for the period.
19) Which of the following is a non-cash expense? A. Administrative salaries
A. Administrative salaries
C. Interest expense
D. Depreciation expenses
20) The break-even model enables the manager of a firm to:
A. determine the optimal amount of debt financing to use.
B. calculate the minimum price of common stock for certain situations.
C. determine the quantity of output that must be sold to cover all operating costs. D. set appropriate equilibrium thresholds.
21) A plant can remain operating when sales are depressed:
A. unless variable costs are zero when production is zero.
B. if the selling price per unit exceeds the variable cost per unit. C. in an effort to cover at least some of the variable cost.
D. to help the local economy.
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) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
A. 8% B. 6%
C. 7% D. 5%
24) The present value of a single future sum:
A. increases as the discount rate increases.
B. increases as the number of discount periods increase. C. depends upon the number of discount periods.
D. is generally larger than the future sum.
25) Which of the following is considered to be a spontaneous source of financing?
A. Accounts payable
B. Operating leases
D. Accounts receivable
26) A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with:
A. preferred stock. B. common stock.
C. trade credit.
D. selling equipment.
27) Which of the following is NOT considered a permanent source of financing?
A. Commercial paper
B. Corporate bonds C. Preferred stock D. Common stock
28) 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. greater than zero, less than one
B. less than zero, greater than the required return
C. greater than one, greater than zero
D. greater than zero, greater than one
29) We compute the profitability index of a capital-budgeting proposal by:
A. multiplying the cash inflow by the IRR.
B. dividing the present value of the annual after-tax cash flows by the cost of capital. C. multiplying the IRR by the cost of capital.
D. dividing the present value of the annual after-tax cash flows by the cost of the project.
30) Dieyard Battery Recyclers is considering a project with the following cash flows: Initial outlay = $13,000
Year 1 = $5,000
Year 1 = $3,000
Year 3 = $9,000
If the appropriate discount rate is 15%, compute the NPV of this project.
31) Which of the following statements about the MIRR is false?
A. A project’s MIRR could be lower than a project’s IRR.
B. If a project’s MIRR exceeds the firm’s discount rate, the project is acceptable.
C. The MIRR has the same reinvestment assumption as the IRR. D. The MIRR has the same reinvestment assumption as the NPV.
32) Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of 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?
B. 10.44% C. 12.62% D. 16.73%
34) The NPV assumes cash flows are reinvested at the:
A. cost of capital.
B. NPV. C. IRR.
D. real rate of return.
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 firm should accept independent projects if:
A. the NPV is greater than the discounted payback. B. the profitability index is greater than 1.0.
C. the payback is less than the IRR. D. the IRR is positive.
37) The average cost associated with each additional dollar of financing for investment projects is:
B. the marginal cost of capital. C. the incremental return.
D. risk-free rate.
38) Cost of capital is:
A. the average cost of the firm’s assets.
B. a hurdle rate set by the board of directors. C. the coupon rate of debt.
D. the rate of return that must be earned on additional investment if firm value is to remain unchanged.
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) J & B, Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently, the
yield to maturity on these bonds is 14%. If the firm’s tax rate is 40%, what is the cost of debt to J
A. 5.6% B. 14.0% C. 12.0%
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?
A. 14.2% B. 13.0%
C. 18.0% D. 10.0%
42) 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%?
B. 8% C. 10% D. 25%
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) 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.
47) 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):
B. floating bond. C. world bond.
D. international capital bond.
48) 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.
49) If the quote for a forward exchange contract is greater than the computed price, the forward contract is:
A. at equilibrium. B. a good buy.
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. arbitrage markets theory. B. interest rate parity theory.
C. purchasing power parity theory.
D. balance of payments quantum theory.
51) A spot transaction occurs when one currency is:
A. traded for another at an agreed-upon future price.
B. exchanged for another currency at a specified price. C. deposited in a foreign bank.
D. immediately exchanged for another currency.
52) Buying and selling in more than one market to make a riskless profit is called:
A. cannot be determined from the above information. B. international trading.
C. profit maximization. D. arbitrage.
53) One reason for international investment is to reduce:
A. beta risk.
B. advantages in a foreign country. 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.