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BUSN 379 Final Exam
1. (TCO 4) Which of the following is true regarding the evaluation of projects? (Points : 4)
sunk costs should be included
erosion effects should not be considered
financing costs need to be included
opportunity costs are relevant
2. (TCO 4) Which of the following investment ranking methods does not consider the time value of money? (Points : 4)
net present value method
internal rate of return method
all of these are time-adjusted methods
3. (TCO 3 and 4) A net present value of zero implies that an investment: (Points : 4)
has no initial cost.
has an expected return that is less than the required return.
should be rejected even if the discount rate is lowered.
never pays back its initial cost.
is earning a return that exactly matches the requirement.
4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 15 percent?
(Points : 4)
5. (TCO 4) Leward Manufacturing is spending $115,000 to update its equipment. This is necessary if the firm wishes to be competitive in the marketplace and provide a wide array of product models. The company estimates that these updates will improve its cash inflows by $27,500 a year, for eight years. What is the payback period? (Points : 4)
This project never pays back
6. (TCO 4) The postponement of a project until conditions are more favorable: (Points : 4)
is a valuable option.
is referred to as the option to extend.
could not cause a negative net present value project to become a positive net present value project.
will generally cause the internal rate of return for a project to decline.
7. (TCO 4) ___________, occurs when a firm cannot raise financing for a project under any circumstances. (Points : 4)
8. (TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points : 4)
The net present value of the project is approximately $10,000
This project should be accepted because it has a positive net present value
This project’s payback period is 10 years or more
None of the above is true
9. (TCO 4) Assume Company X plans to invest $60,000 in new computers. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the second year depreciation amount under MACRS? (Points : 4)
None of the above
10. (TCO 1 and 4) Assume a corporation has earnings before depreciation, and taxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company? (Points : 4)
none of these
11. (TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4)
is the total risk associated with surprise events
it is measured by beta
it is measured by standard deviation
12. (TCO 8) Which statement is true regarding risk? (Points : 4)
the expected return is usually the same as the actual return
a key to assess risk is determining how much risk an investment adds to a portfolio
risks can always be decreased or mitigated by the financial manager
the higher the risk, the lower the return investors require for the investment
13. (TCO 8) The stock of Hobby Town has an expected return of 8.8 percent. Given the information below, what is the expected return on this stock if the economy is normal?
State of Economy
Probability of State of Economy
Rate of Return
(Points : 4)
14. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock B? (Points : 4)
15. (TCO 8) You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. The one stock has a beta of .80. What does the beta of the second stock have to be if you want the portfolio risk to equal that of the overall market? (Points : 4)
1. (TCO 8) Weak form market efficiency states that the value of a security is based on: (Points : 4)
all public and private information.
historical information only.
all publicly available information.
all publicly available information, plus any data that can be gathered from insider trading.
random information with no clear distinction as to the source of that information.
2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 6 percent (after-tax) and common equity at a cost of 18 percent. Assume debt and common equity each represent 50 percent of the firm’s capital structure. What is the weighted average cost of capital? (Points : 4)
between 3 and 9%
more than 14%
none of the above
3. (TCO 5, 6 and 7) An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to eight percent. If the required rate of return is 13 percent, what is its current price? (Points : 4)
none of these
4. (TCO 5, 6 and 7) Which of the following is true regarding the cost of debt? (Points : 4)
It is the return that the firm’s creditors demand on new borrowing.
It is always equal to the weighted cost of capital.
An appropriate method to compute the cost of debt is using the coupon rate of current bonds outstanding.
All of the above are true.
5. (TCO 5) Which of the following is not true regarding the cost of retained earnings? (Points : 4)
it is relevant to the WACC
does not require new funds to be raised
has associated flotation costs
has a cost, which is the opportunity cost associated with stockholder funds
6. (TCO 4) A project has the following cash flows. What is the internal rate of return?
(Points : 4)
less than 5%
between 5 and 15%
between 15 and 18%
more than 21%
7. (TCO 5, 6 and 7) All else constant, the weighted average cost of capital for a firm will decrease if: (Points : 4)
a firm’s bonds start selling at a premium, rather than at a discount.
the market risk premium increases.
the firm replaces some of its debt with preferred stock.
corporate taxes are eliminated.
the dividend yield on the common stock increases.
8. (TCO 5, 6 and 7) The six percent preferred stock of FKH Manufacturing is selling for $62 a share. What is the firm’s cost of preferred stock, if the tax rate is 34 percent and the par value per share is $100? (Points : 4)
9. (TCO 2) Which one of the following occurs if a firm files for Chapter 7 bankruptcy, but does not generally occur if the firm files for Chapter 11 bankruptcy? (Points : 4)
a petition is filed in federal court
administrative fees are incurred
a list of creditors is compiled
pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firm
a trustee-in-bankruptcy is elected by the creditors
10. (TCO 5) Which of the following statements is false regarding the cost of capital? (Points : 4)
The cost of capital should consider the flotation costs.
All other being equal, it is preferable to use market value weights than book value weights.
The WACC is the most appropriate discount rate for all projects.
Should include the cost of retained earnings.
11. (TCO 2) Which of the following increases the cash account? (Points : 4)
Goods are sold on credit
An interest payment on a notes payable is made
A payment due is received from a client
Raw materials are purchased and paid for with credit
12. (TCO 2) Which of the following statements is true? (Points : 4)
The optimal credit policy minimizes the total cost of granting credit.
Firms should avoid offering credit at all cost.
An increase in a firm’s average collection period generally indicates that an increased number of customers are taking advantage of the cash discount.
Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.
The optimal credit policy, is the policy that produces the largest amount of sales for a firm.
13. (TCO 2) All else constant, a decrease in the accounts receivable period will: (Points : 4)
lengthen the accounts payable period.
shorten the inventory period.
lengthen the operating cycle.
shorten the cash cycle.
shorten the accounts payable period.
14. (TCO 2) Delphinia’s has the following estimated quarterly sales for next year. The accounts receivable period is 30 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days.
(Points : 4)
15. (TCO 1) Why is maximization of the current value per share a more appropriate financial management goal than profit maximization? (Points : 4)
Because by maximizing the current stock value, you also maximize the company’s profit for the year.
Because this criterion is non-ambiguous.
Because financial managers always act in the best interest of shareholders.
Because it creates short-term gains in the financial statements.
1. (TCO 1) Which one of the following activities best exemplify working capital management? (Points : 4)
Sale long-term bonds to raise funds for a new machine.
Determine the return of a potential project.
Calculate the cash flows for a project.
Manage payments to suppliers.
2. (TCO 1) Book values are different from market values because: (Points : 4)
Book values reflect the value of the asset based on generally-accepted accounting principles.
Book values are used in the company’s balance sheet.
Book values do not reflect the amount someone is willing to pay today for an asset.
All of the above
None of the above
3. (TCO 1) Use the following tax table to answer this question:
Riddell, Inc. earned $144,320 in taxable income for the year. How much tax does the company owe on this income? (Points : 4)
4. (TCO 3) Regional Bank offers you an APR of 19 percent compounded semiannually, and Local Bank offers you an EAR of 19.50 percent for a new automobile loan. You should choose ______________ because its _______ is lower. (Points : 4)
Regional Bank, APR
Local Bank, EAR
Regional Bank, EAR
Local Bank, APR
5. (TCO 3) You deposited $8,000 in your bank account today. Which of the following will increase the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all that apply: (Points : 4)
a decrease in the interest rate
increasing the initial amount of your deposit
decreasing the frequency of the interest payments
extending the length of the investment period
6. (TCO 3) You want to have $15,000 for a down payment on a house five years from now. If you can earn 13 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal? (Points : 4)
7. (TCO 3) The new home that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment? (Points : 4)
8. (TCO 3) Which type of loan is comparable to the present value of a future lump sum? (Points : 4)
effective annual rate
9. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 16 percent? Assume annual payments. (Points : 4)
10. (TCO 6) The market where new securities are offered is called the _____ market. (Points : 4)
11. (TCO 7) Which one of the following statements concerning financial leverage is correct? (Points : 4)
Financial leverage increases profits and decreases losses.
Financial leverage has no effect on a firm’s return on equity.
Financial leverage, refers to the use of common stock.
Financial leverage magnifies both profits and losses.
Increasing financial leverage will always increase the earnings per share.
12. (TCO 3) SmithKline Company’s bonds are currently selling for $1,157.75 per $1000 par-value bond. The bonds have a 10 percent coupon rate and will mature in 10 years. What is the approximate yield to maturity? (Points : 4)
13. (TCO 8) Which of the following is true regarding bonds? (Points : 4)
Bonds do not carry default risk.
Bonds are sensitive to changes in the interest rates.
Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
Municipal bonds are free of default risk.
None of the above is true
14. (TCO 8) Which one of the following bonds is the most sensitive to interest rate movements? (Points : 4)
zero-coupon, five year
seven percent annual coupon, five year
zero-coupon, 10 year
five percent semi-annual coupon, 10 year
five percent annual coupon, 10 year
15. (TCO 6) A sinking fund is an account managed by a bond trustee for the sole purpose of: (Points : 4)
paying interest payments on a semi-annual basis.
redeeming bonds early.
repaying the face value at maturity.
paying the expenses required to reissue outstanding bonds.
paying the “balloon payment” at maturity.
1. (TCO 6) Which of the following is true regarding put bonds? (Points : 4)
Have coupons that depend on the company’s income
Can be exchanged for a fixed number of shares before maturity only
Can be exchanged for a fixed number of shares before maturity
Allow the holder to require the issuer to buy the bond back
2. (TCO 6 and 7) Financial leverage deals with: (Points : 4)
the relationship of fixed and variable costs.
the percentage of debt in the capital structure.
the entire income statement.
the entire balance sheet.
3. (TCO 6) Company A has a bond outstanding with $90 annual interest payment, a market price of $820, and a maturity date in five years. Assume the par value to be $1,000. What is the bond’s current yield? (Points : 4)
Cannot be determined
None of the above
4. (TCO 2) Which of the following does not reduce collection float? (Points : 4)
installing a lockbox system.
deposit collections weekly, instead of daily.
requiring all customers pay by cash, rather than with check.
utilize the benefits of the Check Clearing Act for the 21stCentury.
5. (TCO 2) ___________, is a system that minimizes inventory. (Points : 4)
material requirements planning
just in time
6. (TCO 1) Provide three examples of situations in which business ethics play a role in the financial management process. Explain your rationale, and how these situations may affect the value of the firm. (Points : 10)
7. (TCO 4) What are sunk costs? Provide at least two real-life examples of sunk costs for a project. Should sunk costs be included as incremental cash flows? Why or why not? Explain your rationale. (Points : 10)
8. (TCO 8) What is the difference between systematic and unsystematic risk? Provide one example of each. Can both systematic and unsystematic risks be diversified? Why or why not? (Points : 10)
9. (TCO 2) What are the costs associated with extending (or not extending) a credit policy to customers? (Points : 10)
10. (TCO 6 and 7) Consider the following statement: “In order to maximize value, all firms should maintain a 30/70 debt to equity ratio”. Do you believe this statement is correct? Explain your rationale. (Points : 10)