FIN 370 FINAL EXAM NEW VERSION

1.
Capital Structure Theory in general assumes that:
A firm’s
value is determined by capitalizing (discounting) the firm’s expected net
income by the firm’s cost of equity.
A firm’s
cost of capital rises as a firm uses more financial leverage.
A firm’s
value is determined by discounting the firm’s expected cash flows by the WACC.
A firm’s
cash flows will grow indefinitely at a constant rate.
2. Which
of the following financial ratios is the best measure of the operating
effectiveness of a firm’s management?
Quick
ratio
Return on
investment
Current
ratio
Gross
profit margin
3. The
Securities Investor Protection Corporation protects individuals from
other
investors who fail to make delivery
fraud by
corporations
making
poor investment decisions
brokerage
firm failures
4. A
company collects 60% of its sales during the month of the sale, 30% one month
after the sale, and 10% two months after the sale. The company expects sales of
$10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in
November. How much money is expected to be collected in October?
$25,000
$35,000
$45,000
$15,000
5.
Project Sigma requires an investment of $1 million and has a NPV of $10.
Project Delta requires an investment of $500,000 and has a NPV of $150,000. The
projects involve unrelated new product lines. What is your evaluation of these
two projects?
The
company should look at other investment criteria, not just NPV.
Only
project Delta should be accepted. Alpha’s NPV is too low for the investment.
Both
projects should be accepted because they have positive NPV’s
Neither
project should be accepted because they might compete with one another
6. Which
of the following is not part of the underwriting process?
the
prospectus
the
Securities and Exchange Commission
the syndicate
the
Federal Reserve
7. When
the impact of taxes is considered, as the firm takes on more debt
the
weighted average cost of capital will increase.
there
will be no change in total cash flows.
both
taxes and total cash flow to stockholders and bondholders will decrease.
cash
flows will increase because taxes will decrease.
8. Metals
Corp. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of
common equity. Metals Corp.’s after-tax cost of debt is 5.25%, preferred stock
has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What
is Metals Corp.’s weighted average cost of capital?
12.78%
8.32%
6.56%
10.84%
9. Given
an accounts receivable turnover of 8 and annual credit sales of $362,000, the
average collection period (360-day year) is
60 days.
45 days.
75 days
90 days.
10.
Accounting break-even analysis solves for the level of sales that will result
in:
Free cash
flow = $0.00.
NPV =
$0.00.
of
Capital.
net
income = $0.00.
11.
Buying and selling in more than one market to make a riskless profit is called:
profit
maximization.
arbitrage.
international
trading.
globalization
12. Which
of the following best describes why cash flows are utilized rather than
accounting profits when evaluating capital projects?
Cash
flows are more stable than accounting profits.
Cash
flows reflect the timing of benefits and costs more accurately than accounting
profits.
Cash
flows have a greater present value than accounting profits.
Cash
flows improve the tax position of a firm more than accounting profits.
13. Which
of the following could offset the higher risk exposure a company would face if
it’s current ratio and net working capital were relatively low?
It could
buy back some of its shares in the open market in order to reduce its equity.
Its
current assets would need to be highly liquid.
It could
offer no discounts for early payment by its customers.
Its
accounts receivable collection policy could increase the average collection
period.
14. Which
of the following best describes why cash flows are utilized rather than
accounting profits when evaluating capital projects?
Cash
flows are more stable than accounting profits.
Cash
flows have a greater present value than accounting profits.
Cash
flows reflect the timing of benefits and costs more accurately than accounting
profits.·
Cash
flows improve the tax position of a firm more than accounting profits.
15.
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
3.43
years
3.17
years
2.88
years
2.6 years
16. The
Oviedo Thespians are planning to present performances of their Florida Revue on
2 consecutive nights in January. It will cost them $5,000 per night for theater
rental, event insurance and professional musicians. The theater will also take
10% of gross ticket sales. How many tickets must they sell at $10.00 per ticket
to raise $1,000 for their organization?
1000
tickets
1,314
tickets
1,223
tickets
1,112
tickets
17. Which
of the following is true regarding Investment Banks?
As a
result of the financial crisis of 2008, all stand-alone Investment banks either
failed, were merged into commercial banks, or became commercial banks.
When
Glass-Steagal was repealed in 1999, commercial banks and Investment banks had
to be separate entities.
As of
2010, stand alone Investment banks are numerous.
Under the
Glass-Steagal act, commercial banks were allowed to operate as Investment
banks.
18. If
managers are making decisions to maximize shareholder wealth, then they are
primarily concerned with making decisions that should:
maximize
sales revenues
increase
the market value of the firm’s common stock.
positively
affect profits.
either
increase or have no effect on the value of the firm’s common stock.
19. Which
of the following is true about bonds?
They are
obligations from the investor to the corporation.
They have
a fixed maturity, and they pay an amount equal to the maturity value times the
coupon rate each year.
At
maturity of the bond, the investor receives the market price of the bond.
Their
interest rate always varies with the Consumer Price Index
20. Which
of the following is most likely to occur if a firm over-invests in net working
capital?
The
current ratio will be lower than it should be.
The
return on investment will be lower than it should be.
The quick
ratio will be lower than it should be.
The times
interest earned ratio will be lower than it should be.
21. Which
of the following goals is in the best long-term interest of stockholders?
Profit
maximization
Maximizing
sales revenues
Maximizing
of the market value of the existing shareholders’ common stock
Risk
minimization
22. Apple
Two Enterprises expects to generate sales of $5,950,000 for fiscal 2014; sales
were $3,450,000 in fiscal 2013. Assume the following figures for the fiscal
year ending 2013: cash $70,000; accounts receivable $250,000; inventory
$400,000; net fixed assets $520,000; accounts payable $235,000; and accruals
$155,000. Use the percent-of-sales method to forecast cash for the fiscal year
ending 2014.
$216,418
$120,725
$319,604
$75,003
23. Which
of the following statements best represents what finance is about?
Maximizing
profits
Creation
and maintenance of economic wealth
How
political, social, and economic forces affect corporations
Reducing
risk
24. 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?
$3,525.62
$5,008.76
$2,465.78
$3,408.88
25.
Long-term financial plans typically encompass:
5 to 10
years.
about 5
years.
6 to 12
months.
the
entire lifecycle of the corporation.
26. When
calculating the weighted average cost of capital, which of the following has to
be adjusted for taxes?
Common
stock
Retained
earnings
Preferred
stock
Debt
27. We
compute the profitability index of a capital-budgeting proposal by Initial
outlay = $1,748.80
dividing
the present value of the annual after-tax cash flows by the cost of capital.
multiplying
the cash inflow by the IRR.
multiplying
the IRR by the cost of capital.
dividing
the present value of the annual after-tax cash flows by the cost of the
project.
28. You
just purchased a parcel of land for $10,000. If you expect a 12% annual rate of
return on your investment, how much will you sell the land for in 10 years?
$25,000
$38,720
$39,720
$31,060
29. Aspects
of demand risk controllable by the firm include:
interest
rates.
entry of
external competitors.
status of
the regional and national economy.
product
quality.
30. Delta
Inc. is considering the purchase of a new machine which is expected to increase
sales by $10,000 in addition to increasing non-depreciation expenses by $3,000
annually. Due to the sales increase, Delta expects its working capital to
increase $1,000 during the life of the project. Delta will depreciate the
machine using the straight-line method over the project’s five year life to a
salvage value of zero. The machine’s purchase price is $20,000. The firm has a
marginal tax rate of 34 percent, and its required rate of return is 12 percent.
The machine’s initial cash outflow is:
$21,000.
$23,000.
$27,000.
$20,000.