FIN370 Final – 29 questions (Score: 28/29)

Buying and selling in more than one market to
make a riskless profit is called:
o
globalization
o
profit maximization.
o arbitrage.
o
international trading
2 Capital Structure
Theory in general assumes that:
o
A firm’s cash flows will grow
indefinitely at a constant rate.
o
A firm’s cost of capital rises as a
firm uses more financial leverage.
o A firm’s value is determined by discounting the firm’s
expected cash flows by the WACC.
o
A firm’s value is determined by capitalizing
(discounting) the firm’s expected net income by the firm’s cost of equity.
3. Which of the following best describes why
cash flows are utilized rather than accounting profits when evaluating capital
projects?
o
Cash flows have a greater present
value than accounting profits.
o
Cash flows are more stable than
accounting profits.
o Cash flows reflect the timing of benefits and costs more
accurately than accounting profits.
o
Cash flows improve the
tax position of a firm more than accounting profits.
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?
o $25,000
o
$15,000
o
$35,000
o
$45,000
5 Given an
accounts receivable turnover of 8 and annual credit sales of $362,000, the
average collection period (360-day year) is
o
60 days.
o
75 days
o
90 days.
o 45 days
6 Long-term
financial plans typically encompass:
o
the entire lifecycle of the
corporation.
o
about 5
years.
o
6 to 12 months.
o
to 10 years.
7 Which of the
following is most likely to occur if a firm over-invests in net working
capital?
o
The quick ratio will be lower than
it should be.
o
The times interest earned ratio will
be lower than it should be.
o
The current ratio will be lower than
it should be.
o The return on investment will be lower than it should
8 When the impact of
taxes is considered, as the firm takes on more debt
o
there will be no change in total
cash flows.
o
both taxes and total cash flow to
stockholders and bondholders will decrease.
o
the weighted average cost of capital
will increase.
o cash flows will increase because taxes will decrease
9 We compute the
profitability index of a capital-budgeting proposal by Initial outlay =
$1,748.80
o
dividing the present
value of the annual after-tax cash flows by the cost of capital.
o dividing the present value of the annual
after-tax cash flows by the cost of the project.
o
multiplying the cash
inflow by the IRR.
o
multiplying the IRR by
the cost of capital.
10 Which of the
following financial ratios is the best measure of the operating effectiveness
of a firm’s management?
o
Current ratio
o
Gross profit margin
o
Quick ratio
o Return on investment
11 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.
o
$216,418
o
$319,604
o
$75,003
o $120,725
12 Which of the
following statements best represents what finance is about?
o
Maximizing profits
o
Reducing risk
o
How political, social, and economic
forces affect corporations
o Creation and maintenance of economic wealth
13 Aspects of demand
risk controllable by the firm include:
o
interest rates.
o
entry of external competitors.
o
status of the regional and national
economy.
o product quality
14 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?
o
$3,525.62
o $5,008.76
o
$3,408.88
o
$2,465.78
15 When calculating the
weighted average cost of capital, which of the following has to be adjusted for
taxes?
o
Common stock
o
Retained earnings
o
Preferred stock
o Debt
16 Which of the
following is not part of the underwriting process?
o the Federal Reserve
o
the Securities and
Exchange Commission
o
the prospectus
o
the
syndicate
17 Which of the
following best describes why cash flows are utilized rather than accounting
profits when evaluating capital projects?
o
Cash flows are more stable than accounting
profits.
o
Cash flows have a greater present
value than accounting profits.
o
Cash flows improve the tax position
of a firm more than accounting profits.
o Cash flows reflect the timing of benefits and costs more
accurately than accounting profits.
18 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?
o
6.56%
o
8.32%
o
10.84%
o 12.78%
19 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?
o Its current assets would need to be highly liquid.
o
Its accounts receivable collection
policy could increase the average collection period.
o
It could offer no discounts for
early payment by its customers.
o
It could buy back some of its shares
in the open market in order to reduce its equity.
20 The Securities
Investor Protection Corporation protects individuals from
o brokerage firm failures
o
fraud by corporations
o
making poor investment
decisions
o
other investors who fail
to make delivery
21 If managers are
making decisions to maximize shareholder wealth, then they are primarily
concerned with making decisions that should:
o increase the market value of the firm’s common
stock.
o
either increase or have
no effect on the value of the firm’s common stock.
o
maximize sales revenues
o
positively affect
profits.
22 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?
o
1,314 tickets
o
1,223 tickets
o
1000 tickets
o 1,112 tickets
23 Which of the
following is true about bonds?
o
At maturity of the bond, the
investor receives the market price of the bond.
o
They are obligations from the
investor to the corporation.
o
Their interest rate always varies
with the Consumer Price Index
o They have a fixed maturity, and they pay an amount equal to
the maturity value times the coupon rate each year.
24 Which of the
following goals is in the best long-term interest of stockholders?
o Maximizing of the market value of the existing shareholders’
common stock
o
Risk minimization
o
Maximizing sales revenues
o
Profit maximization
25 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?
o
The company should look at other
investment criteria, not just NPV.
o Both projects should be accepted because they have positive NPV’s
o
Neither project should be accepted
because they might compete with one another
o
Only project Delta should be
accepted. Alpha’s NPV is too low for the investment.
26 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???
·
3.17 years
·
3.43 years
·
2.6 years
·
2.88 years
27 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?
o $31,060
o
$25,000
o
$39,720
o
$38,720
28 Which of
the following is true regarding Investment Banks?
o
Under the Glass-Steagal act,
commercial banks were allowed to operate as Investment banks.
o
When Glass-Steagal was repealed in
1999, commercial banks and Investment banks had to be separate entities.
o 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.
o
As of 2010, stand alone Investment
banks are numerous.
29 Accounting
break-even analysis solves for the level of sales that will result in:
net income = $0.00.
NPV = $0.00.
Free cash flow = $0.00.
IRR = Cost of Capital.