Fin320 Department Final Exam

1) The expected yield on junk bonds is lower than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds.

A) True B) False

2) Incremental cash flows refer to:

A) The difference between after-tax cash flows and before-tax accounting profits.

B) The new cash flows that will be generated if a project is undertaken.

C) The cash flows of a project, minus financing costs.

D) The cash flows that are foregone if a firm does not undertake a project.

3) The yield to maturity on a bond:

A) is fixed in the indenture.

B) is lower for higher risk bonds.

C) is the required rate of return on the bond.

D) is generally below the coupon interest rate.

4) Current assets would usually not include

A) plant and equipment B) marketable securities C) accounts receivables D) inventories

5) AJAX Company paid a dividend today of $4 per share. The dividend is expected to grow at a constant rate of 5% per year. If AJAX Company stock is selling for $56 per share, the stockholders’ expected rate of return is:

A) 12.1% B) 12.5% C) 7.5% D) 5.0%

6) The internal rate of return is:

A) The discount rate that makes the NPV positive.

B) The discount rate that equates the present value of the cash inflows with the present value of the cash outflows.

C) The discount rate that makes NPV negative and the PI greater than one.

D) The rate of return that makes the NPV positive.

7) Changes in the general economy, like changes in interest rates or tax laws represent what type of risk?

A) Company-unique risk B) Market risk C) Unsystematic risk D) Diversifiable risk

8) In order to maximize firm value, management should invest in new assets

A) so long as a project's IRR is greater or equal to the firm's marginal cost of capital

B) so long as a project's IRR is positive

C) so long as a project's accounting rate of return is greater or equal to the firm's marginal cost of capital

D) b and c

9) The debt ratio is a measure of a firm's

A) leverage B) profitability C) liquidity D) coverage

10) Increased depreciation expenses affect tax-related cash flows by

A) increasing taxable income, thus increasing taxes.

B) decreasing taxable income, thus reducing taxes.

C) decreasing taxable income, with no effect on cash flow since depreciation is a non-cash expense.

D) pushing a corporation into a higher tax bracket.