FIN 534 Final Exam 1

FIN 534 Final Exam 1

Part 1

1.
An investor who writes standard call options against stock held in his or her
portfolio is said to be selling what type of options?

2. Suppose you
believe that Basso Inc.’s stock price is going to increase from its current
level of $22.50 sometime during the next 5 months. For $3.10 you can buy a
5-month call option giving you the right to buy 1 share at a price of $25 per
share. If you buy this option for $3.10 and Basso’s stock price actually rises
to $45, what would your pre-tax net profit be?

3. An option that
gives the holder the right to sell a stock at a specified price at some future
time is

4. Other things held
constant, the value of an option depends on the stock’s price, the risk-free
rate, and the

5. Which of the
following statements is CORRECT?
6. Which of the
following statements is CORRECT?

7. Which of the
following statements is CORRECT? Assume a company’s target capital structure is
50% debt and 50% common equity.

8. To help them
estimate the company’s cost of capital, Smithco has hired you as a consultant.
You have been provided with the following data: D1 = $1.45; P0 = $22.50; and g
= 6.50% (constant). Based on the DCF approach, what is the cost of common from
reinvested earnings?

9. Which of the
following is NOT a capital component when calculating the weighted average cost
of capital (WACC) for use in capital budgeting?

10. As a consultant
to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 =
$27.50; and g = 8.00% (constant). What is the cost of common from reinvested
earnings based on the DCF approach?

11. Adams Inc. has
the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm’s
cost of common from reinvested earnings based on the CAPM?

12. Burnham Brothers
Inc. has no retained earnings since it has always paid out all of its earnings
as dividends. This same situation is expected to persist in the future. The
company uses the CAPM to calculate its cost of equity, and its target capital
structure consists of common stock, preferred stock, and debt. Which of the
following events would REDUCE its WACC?

13. Which of the
following statements is CORRECT?
14. Which of the
following statements is CORRECT?
15. Which of the
following statements is CORRECT?
16. Assume a project
has normal cash flows. All else equal, which of the following statements is
CORRECT?
17. Which of the
following statements is CORRECT?
18. Which of the
following statements is CORRECT? Assume that the project being considered has normal
cash flows, with one outflow followed by a series of inflows.
19. Which of the
following should be considered when a company estimates the cash flows used to
analyze a proposed project?
20. Which of the
following statements is CORRECT
21. Which of the
following procedures does the text say is used most frequently by businesses
when they do capital budgeting analyses?
22. Which of the
following statements is CORRECT
23. Which of the
following statements is CORRECT
24. Puckett Inc.
risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for
below-average risk projects, 10% for average-risk projects, and 12% for
above-average risk projects. Which of the following independent projects should
Puckett accept, assuming that the company uses the NPV method when choosing
projects ?
25. A company expects
sales to increase during the coming year, and it is using the AFN equation to
forecast the additional capital that it must raise. Which of the following
conditions would cause the AFN to increase?
26. Which of the
following statements is CORRECT?
27. The term
“additional funds needed (AFN)” is generally defined as follows:
28. Which of the
following statements is CORRECT?
29. The capital
intensity ratio is generally defined as follows:
30. The Besnier
Company had $250 million of sales last year, and it had $75 million of fixed
assets that were being operated at 80% of capacity. In millions, how large
could sales have been if the company had operated at full capacity?

FIN 534 Part 2
1. Which of the
following statements is CORRECT?
2. Which of the
following statements is CORRECT?
3. Which of the
following statements is CORRECT?
4. Which of the
following statements is CORRECT? Assume that the project being considered has
normal cash flows, with one outflow followed by a series of inflows.
5. Which of the
following statements is CORRECT? Assume that the project being considered has
normal cash flows, with one outflow followed by a series of inflows
6. Which of the
following statements is CORRECT?
7. The WACC for two
mutually exclusive projects that are being considered is 12%. Project K has an
IRR of 20% while Project R’s IRR is 15%. The projects have the same NPV at the
12% current WACC. Interest rates are currently high. However, you believe that
money costs and thus your WACC will soon decline. You also think that the
projects will not be funded until the WACC has decreased, and their cash flows
will not be affected by the change in economic conditions. Under these
conditions, which of the following statements is CORRECT?
8. Which of the
following statements is NOT a disadvantage of the regular payback method?
9. Which of the
following statements is CORRECT? Assume that the project being considered has
normal cash flows, with one outflow followed by a series of inflows.
10. Which of the
following statements is CORRECT?
11. Projects S and L
are both normal projects with an initial cost of $10,000, followed by a series
of positive cash inflows. Project S’s undiscounted net cash flows total
$20,000, while L’s total undiscounted flows are $30,000. At a WACC of 10%, the
two projects have identical NPVs. Which project’s NPV is more sensitive to
changes in the WACC?
12. Projects C and D
both have normal cash flows and are mutually exclusive. Project C has a higher
NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the
WACC exceeds 12%. Which of the following statements is CORRECT?
13. Which of the
following statements is CORRECT?
14. Which of the
following statements is CORRECT?
15. Which of the
following statements is CORRECT?
16. Which of the
following procedures does the text say is used most frequently by businesses
when they do capital budgeting analyses?
17. A firm is
considering a new project whose risk is greater than the risk of the firm’s
average project, based on all methods for assessing risk. In evaluating this
project, it would be reasonable for management to do which of the following?
18. Which of the
following statements is CORRECT?
19. Which of the
following is NOT a relevant cash flow and thus should not be reflected in the
analysis of a capital budgeting project?
20. Puckett Inc.
risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for
below-average risk projects, 10% for average-risk projects, and 12% for
above-average risk projects. Which of the following independent projects should
Puckett accept, assuming that the company uses the NPV method when choosing
projects?
21. While developing
a new product line, Cook Company spent $3 million two years ago to build a
plant for a new product. It then decided not to go forward with the project, so
the building is available for sale or for a new product. Cook owns the building
free and clear¾there is no mortgage on it. Which of
the following statements is CORRECT?
22. Which of the
following procedures best accounts for the relative risk of a proposed project?
23. Which of the
following should be considered when a company estimates the cash flows used to
analyze a proposed project?
24. The CFO of Cicero
Industries plans to calculate a new project’s NPV by estimating the relevant
cash flows for each year of the project’s life (i.e., the initial investment
cost, the annual operating cash flows, and the terminal cash flow), then
discounting those cash flows at the company’s overall WACC. Which one of the
following factors should the CFO be sure to INCLUDE in the cash flows when
estimating the relevant cash flows?
25. Which of the
following statements is CORRECT?
26. To increase
productive capacity, a company is considering a proposed new plant. Which of
the following statements is CORRECT?
27. Which of the
following statements is CORRECT?
28. Which one of the
following would NOT result in incremental cash flows and thus should NOT be
included in the capital budgeting analysis for a new product?
29. Which of the
following statements is CORRECT ?
30. Which of the
following statements is CORRECT?