BUSN379 - Final Exam

If you are looking for something else, email me at [email protected]. 

1. (TCO 4) Which of the following is true regarding the evaluation of projects? (Points : 4)

       sunk costs should be included

       erosion effects should be considered

       financing costs need to be included

       opportunity costs are irrelevant 

Question 2.2. (TCO 4) Which of the following investment ranking methods does not consider the time value of money? (Points : 4)

       net present value method

       payback method

       internal rate of return method

       all of these are time-adjusted methods 

Question 3.3. (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.

Question 4.4. (TCO 3 and 4) Portman's is considering adding a new product to its lineup. This product is expected to generate sales for three years, after which time the product will be discontinued. What is the project's net present value, if the firm wants to earn a 12 percent rate of return? 

Year0123

Cash flow-$62,000$10,730$20,190$40,340 (Points : 4)

       $7,611.08

       $6,795.61

       $1,084.41

       $4,862.07

       $9,682.26

Question 5.5. (TCO 4) Howard Company is considering a new project that will require an initial cash investment of $575,000. The project will produce no cash flows for the first three years. The projected cash flows for years 4 through 8 are $73,000, $112,000, $124,000, $136,000, and $145,000, respectively. How long will it take the firm to recover its initial investment in this project? (Points : 4)

       5.81 years

       6.05 years

       6.96 years

       7.90 years

       This project never pays back

Question 6.6. (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.

Question 7.7. (TCO 4) ____________, refers to the situation a firm faces when it has positive net present value projects, but cannot obtain financing for those projects. (Points : 4)

       capital planning.

       soft rationing.

       capital rationing.

       hard rationing.

       a sunk cause.

Question 8.8. (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

Question 9.9. (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)

       $12,000

       $19,200

       $19,800

       None of the above

Question 10.10. (TCO 1 and 4) Assume a project has earnings before depreciation and taxes of $120,000, depreciation of $40,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? (Points : 4)

       $56,000

       $96,000

       a loss of $21,000

       none of these

Question 11.11. (TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4)

       is diversifiable

       is the total risk associated with surprise events

       it is not project or firm specific

       it is measured by standard deviation

Question 12.12. (TCO 8) Which statement is not true regarding risk? (Points : 4)

       the expected return is always the same as the actual return

       a key to assess risk is determining how much risk an investment adds to a portfolio

       risks can not always be diversified

       the higher the risk, the higher the return investors require for the investment 

Question 13.13. (TCO 8) The stock of Uptown Men's Wear is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock?

State of EconomyProbability of State of EconomyRate of Return

Recession.20-.10

Normal.75.14

Boom.05.22 (Points : 4)

       9.6 percent

       10.4 percent

       12.8 percent

       13.6 percent

       15.3 percent

Question 14.14. (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 A? (Points : 4)

       14.79 percent

       15.91 percent

       18.42 percent

       19.07 percent

       25.72 percent

Question 15.15. (TCO 8) Stock A has an expected return of 14 percent and a beta of 1.3. Stock B has an expected return of 10 percent and a beta of .9. Both stocks have the same reward-to-risk ratio. What is the risk-free rate? (Points : 4)

       1.0 percent

       1.8 percent

       2.3 percent

       2.5 percent

       3.1 percent

Question 1.1. (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.

Question 2.2. (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%

       exactly 12%

       more than 14%

       exactly 11%

       none of the above

Question 3.3. (TCO 5, 6 and 7) An issue of common stock is selling for $57.20. The year end dividend is expected to be $2.32, assuming a constant growth rate of six percent. What is the required rate of return? (Points : 4)

       10.3%

       10.1%

       4.1%

       5.8%

Question 4.4. (TCO 5, 6 and 7) Which of the following is true regarding the cost of debt? (Points : 4)

       It is the same as cost of equity.

       It is the interest rate that the firm pays on current/existing borrowing.

       An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding.

       All of the above are true.

Question 5.5. (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

Question 6.6. (TCO 4) A project has the following cash flows. What is the internal rate of return? 

Year0123

Cash flow-$195,600$99,800$87,600$75,300 (Points : 4)

       less than 5%

       between 5 and 15%

       between 15 and 18%

       more than 21%

Question 7.7. (TCO 5, 6 and 7)  Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC)? (Points : 4)

       the WACC can be used as the required return for all new projects.

       the WACC of a leveraged firm will decrease when the tax rate decreases.

       an increase in the market risk premium will tend to decrease a firm's WACC.

       the WACC is a starting point for the subjective approach to setting discount rates.

       a reduction in the risk level of a firm will tend to increase the firm's WACC.

Question 8.8. (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)

       5.98%

       7.06%

       8.05%

       9.68%

       10.10%

Question 9.9. (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

Question 10.10. (TCO 5) Which of the following statements is true regarding the cost of capital? (Points : 4)

       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 not include the cost of retained earnings.

       Depends primarily on the source of the funds, not the use.

Question 11.11. (TCO 2) Which of the following decreases the cash account? (Points : 4)

       A payment due is received from a client

       Dividends are paid to shareholders

       Raw materials are purchased and paid for with credit

       A new machine is purchased and paid for with the business line of credit

Question 12.12. (TCO 2) Which of the following statements is true? (Points : 4)

       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. 

       The costs of the credit application process and the costs expended in the collection process are carrying costs of granting credit.

       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.

Question 13.13. (TCO 2) Which one of the following industries is most apt to have the shortest cash cycle? (Points : 4)

       electric utility company

       airplane manufacturer

       fast-food restaurant

       furniture store

       clothing manufacturer

Question 14.14. (TCO 2) The Yellow Box has the following estimated quarterly sales for next year. The accounts receivable period is 45 days. What is the expected accounts receivable balance at the end of the third quarter? Assume each month has 30 days. 

 Q1Q2Q3Q4

Sales$1,200$1,400$1,800$1,700 (Points : 4)

       $600

       $750

       $900

       $1,050

       $1,200

Question 15.15. (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.

Question 1.1. (TCO 1) Which of the these activities is a capital budgeting task? (Points : 4)

       determining the amount of cash needed on a daily basis to operate a firm

       . identifying assets that produce value in excess of the cost to acquire those assets

       establishing the inventory level

       establishing a new credit policy

Question 2.2. (TCO 1) Market value is important to the financial manager because: (Points : 4)

       It reflects the value of the asset based on generally-accepted accounting principles.

       Is a crucial component of the balance sheet, and can impact the financial statements.

       Market values reflect the amount someone is willing to pay today for an asset. The market value of an asset reflects its historical cost.

Question 3.3. (TCO 1) Use the following tax table to answer this question: 

Taxable IncomeTax Rate

$0-$50,00015%

$50,001-75,00025   

$75,001-100,00034   

$100,001-335,00039   

$335,001-10,000,00034   

John  has taxable income of $389,745. What is John’s average tax rate? (Points : 4)

       33%

       34%

       36%

       37%

       38%

Question 4.4. (TCO 3) Regional Bank offers you an APR of 19 percent compounded semiannually, and Local Bank offers you an EAR of 20.10 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

Question 5.5. (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 

Question 6.6. (TCO 3) Amy needs to save $20,000 in cash to buy a new car five years from today. She expects to earn 6.5 percent, compounded annually, on her savings. How much does she need to deposit today, if this is the only money she saves for this purpose? (Points : 4)

       $12,468.07

       $12,502.14

       $14,597.62

       $17,044.32

       $17,129.01

Question 7.7. (TCO 3) Paper Pro needed a new store. The company spent $65,000 to refurbish an old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost at eight percent interest for 11 years. What is the amount of each monthly payment? (Points : 4)

       $91.05

       $284.13

       $556.50

       $682.87

       $731.60

Question 8.8. (TCO 3) John borrowed $5,500 four years ago at an annual interest rate of 10 percent. The loan term is seven years. Since he borrowed the money, Sonny has been making annual payments of $550 to the bank. Which type of loan does John have? (Points : 4)

       interest-only

       pure discount

       compounded

       amortized

       complex

Question 9.9. (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)

       $1315

       $1300

       $756

       $1000

Question 10.10. (TCO 6) The market where one shareholder sells shares to another shareholder is called the _____ market. (Points : 4)

       primary

       main

       secondary

       principal

       dealer

Question 11.11. (TCO 7) A taxpaying, levered firm's optimal capital structure: (Points : 4)

       is 100 percent equity financing.

       consists of equal amounts of debt and equity financing.

       is the mixture of debt and equity financing that minimizes the firm's aftertax cost of debt.

       is the mixture of debt and equity financing that minimizes the weighted average cost of capital.

       is 100 percent debt financing.

Question 12.12. (TCO 3) What is the approximate yield to maturity for a seven-year bond that pays 11 percent interest on a $1000 face value annually if the bond sells for $952? (Points : 4)

       10.5%

       10.6%

       11.5%

       12.1% 

Question 13.13. (TCO 8) Which of the following is true regarding bonds? (Points : 4)

       Bonds do not carry default risk.

       Bonds are not 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 not free of default risk.

       None of the above is true 

Question 14.14. (TCO 8) Two years ago, Maple Enterprises issued six percent, 20-year bonds and Temple Corp issued six percent, 10-year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm's bond prices in the market, assuming they have equal risk? (Points : 4)

       Maple's decreased more than Temple's

       Temple's decreased more than Maple's

       Maple's increased more than Temple's

       They are both priced the same

Question 15.15. (TCO 6) A call provision in a bond agreement grants the issuer the right to: (Points : 4)

       repurchase the bonds prior to maturity at a pre-specified price.

       replace the bonds with equity securities.

       repurchase the bonds after maturity at a pre-specified price.

       change the coupon rate, provided the bondholders are notified in advance.

       buy back the bonds on the open market prior to 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

Question 2.2. (TCO 6 and 7) The term debenture refers to (Points : 4)

       long-term, secured debt.

       long-term, unsecured debt.

       the after-acquired property clause.

       a document covering the specific terms of the debt issue. 

Question 3.3. (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 yield to maturity? (Points : 4)

       9%

       14%

       11%

       Cannot be determined

       None of the above

Question 4.4. (TCO 2) Which one of the following practices will reduce a firm's collection float?  (Points : 4)

       utilizing zero-balance accounts

       depositing checks weekly, rather than daily

       requiring all customers pay by check, rather than with cash

       installing a lockbox system

       paying all bills five days sooner

Question 5.5. (TCO 2) ___________, is a system that minimizes inventory. (Points : 4)

       material requirements planning

       ABC approach

       just in time

       reorder points  

Question 6. 6. (TCO 1) Provide three examples of recent well-known unethical behavior cases. Explain the situation in one or two paragraphs. How do you believe that this behavior affected the firm’s value? (Points : 10)

Question 7. 7. (TCO 4) What is an opportunity cost? Provide two real-life examples of opportunity costs for a project. Should opportunity costs be included in the project analysis process? Why or why not? Explain your rationale. (Points : 10)

Question 8. 8. (TCO 8) Consider the following statement: “Any risk is diversifiable”. Do you agree or disagree? Why? (Points : 10)

Question 9. 9. (TCO 2) What are the costs associated with extending (or not extending) a credit policy to customers? (Points : 10)

Question 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)