FIN571 FINAL EXAM

1) Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes __________

A. an irrelevant consideration for a cost of capital.

B. the relevant consideration for a cost of capital.

C. important only if the firm faces financial distress.

D. none of these

2) An investor's risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?

A. Each stock in the portfolio will have a beta greater than one.

B. Selling any stock in this portfolio will lower the beta of the portfolio.

C. An investor cannot change the risk of this portfolio by her choice about personal leverage (lending or borrowing).

D. Each stock in the portfolio has its own beta.

3) An all-equity-financed firm would __________.

A. not pay any income taxes because interest would exactly offset its taxable income.

B. pay corporate income taxes if its taxable income is positive.

C. pay corporate income taxes because it would have interest expense.

D. not pay corporate income taxes because it would have no interest expense.

4)  The capital budgeting process can be broken down into five steps. These steps include which of the following?

A. Generate ideas for capital budgeting projects

B. Prepare proposals

C. Review existing projects and facilities

D. all of these

5) Projects can be classified into various categories. These include:

A. maintenance expenditures projects that involve replacing worn-out or damaged equipment.

B. that include improvements in production technology to realize cost savings and marketing campaigns to achieve revenue enhancement.

C. capacity expansion projects that involve expanding the current business by adding new equipment and facilities.

D. all of these

6) Boeing Corporation is a world leader in commercial aircraft. In the face of competition, Boeing often faces a critical decision: whether to develop a new generation of passenger aircraft.

A. dividend

B. payback

C. capital budgeting

D. present value

7) A firm cannot simply adopt the industry average debt ratio, because differences exist among firms in any particular industry with respect to __________.

A. tax position.

B. size.

C. competitive position.

D. all of these

8) Studies show systematic differences in capital structures across industries. These are due mostly to differences in __________.

A. hiring and firing practices.

B. the availability of tax shelter provided by things other than debt, such as accelerated depreciation, investment tax credit, and operating tax loss carryforwards.

C. what the arbitrage pricing theory tells us.

D. none of these

9) Studies show systematic differences in capital structures across industries. These are due mostly to differences in the availability of tax shelter provided by things other than debt, such as __________.

A. accelerated depreciation.

B. operating tax loss carryforwards.

C. investment tax credit.

D. all of these

10) Preferred stock payment obligations are typically

A. viewed like debt obligations.

B. issued with a maturity date.

C. valued as an annuity.

D. none of these

11) If the yield to maturity for a bond is less than the bond's coupon rate, then the market value of the bond is __________.

A. greater than the par value.

B. equal to the par value.

C. cannot tell

D. less than the par value.

12) Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the current yield is 10%. Which of the following statements is true?

A. The current yield was a lot less than 9% when the bond was first issued

B. The market value of the bond is more than $1,000

C. The market value of the bond is less than $1,000

D. The current yield was a lot greater than 9% when the bond was first issued

13) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________.

A. non-listing of foreign securities on U.S. stock exchanges.

B. foreign tax considerations.

C. efficiency in converting currencies.

D. all of these

14) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________.

A. lower transaction costs.

B. expropriation risk.

C. firm-specific risk.

D. all of these

15) According to the CAPM, the expected return for a portfolio is determined by the portfolio's.

A. variance.

B. beta.

C. standard deviation.

D. none of these

16) Which of these investments would you expect to have the highest rate of return for the next 20 years?

A. U.S. Treasury bills

B. intermediate-term U.S. government bonds

C. anybody’s guess

D. long-term corporate bonds

17) The Principle of __________ implies that the expected return for an asset equals its required return.

A. Capital Market Efficiency

B. Comparative Advantage

C. Signaling

D. Risk-Return Trade-Off

18) According to the Principle of Risk-Return Trade-Off, investors require a higher return to compensate for __________.

A. lack of diversification

B. less risk

C. greater risk

D. diversification

19) Stony Products has an inventory conversion period (ICP) of about 60.83 days. The receivables collection period (RCP) is 36.50 days. The payables deferral period (PDP) is about 30.42 days. What is Stony's cash conversion cycle (CCC)?

A. about 66 days

B. about 68 days

C. about 69 days

D. about 67 days

20) Suppose the Ruskin Oil Corporation has $150,000 for both its book balance and its bank balance. It takes 4 days for a check to clear. If Ruskin writes a $3,000 check, which of the following statements is false?

A. If Ruskin writes a $3,000 check that takes 4 days to clear, during this period, $3,000 of disbursement float has been created.

B. Ruskin’s available balance is $150,000, its book balance is $147,000, and its disbursement float is $3,000.

C. After the check clears, the book and bank balances will both be $147,000 and there is no more disbursement float.

D. Ruskin’s book balance declines by the amount of the check, from $150,000 to $147,000, but the bank balance is unchanged until the check clears.

21) Stony Products has a payables turnover of six times. What is Stony's payables deferral period (PDP)?

A. about 30.42 days

B. about 56.50 days

C. about 60.83 days

D. none of these

22) __________ says to look for opportunities to develop asset-based financing arrangements that offer new positive-NPV financing mechanisms.

A. The Principle of Comparative Advantage

B. The Principle of Valuable Ideas

C. The Principle of Self-Interested Behavior

D. The Time Value of Money Principle

23) __________ says to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will provide.

A. The Principle of Incremental Benefits

B. The Options Principle

C. The Principle of Comparative Advantage

D. The Capital Market Efficiency

24) __________ says to transfer the tax benefits of ownership to other parties if they are willing to pay for benefits your firm cannot use.

A. The Capital Market Efficiency Principle

B. The Principle of Two-Sided Transactions

C. The Principle of Comparative Advantage

D. The Principle of Incremental Benefits

25) Which of the following favors a high dividend payout policy?

A. no legal restrictions

B. policy restrictions affecting trust and endowment funds

C. higher taxes

D. all of these

26) The weighted average cost of capital (WACC) can be computed using the formula: WACC = (1 - L)re + L(1 - T)rd. Which of the following statements is true?

A. L is debt divided by firm value.

B. T is the personal tax rate.

C. rd is the required return on equity.

D. none of these

27) You are considering the capital budgeting project j with a life expectancy of 20 years. The short-term government rate (rf) is 5%, the beta of firms that produce products similar to project j is 1.2, and the return on the market (rm) the last 20 years has been 10%. What is the cost of capital for this project?

A. 9.00%

B. 10.00%

C. 11.00%

D. cannot tell

28) Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes__________.

A. an irrelevant consideration for a cost of capital.

B. the relevant consideration for a cost of capital.

C. important only if the firm faces financial distress.

D. none of these

29) An investor's risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?

A. Selling any stock in this portfolio will lower the beta of the portfolio.

B. An investor cannot change the risk of this portfolio by her choice about personal leverage (lending or borrowing).

C. Each stock in the portfolio will have a beta greater than one.

D. Each stock in the portfolio has its own beta.

30) Calculate the IRR for the following investment project: initial investment is $75,000; inflows are $20,000 for the next five years; required rate of return is 15%. (Round your answer to the nearest whole percentage)

A. 10%

B. 11%

C. 12%

D. 13%

31) Your firm uses the payback method but does not discount any of the cash flows. Calculate the payback for the following investment: A machine costs $200,000 with after-tax installation costs of $15,000. After-tax cash inflows are expected to be 36,000 per year for the next seven years.

A. greater than 6

B. 5.85 years

C. 5.14 years

D. 4.42 years

32) Compute the NPV for the following project. The initial cost is $5,000. The net cash flows are $1,900 for four years. The net salvage value is $1,000 when the project terminates. The cost of capital is 10%.

A. $1,705.76

B. $5,000.00

C. $6,705.76

D. none of these

33) Each year for eight years, an investment will generate incremental sales of $8,000 and cash operating expenses of $2,500. The applicable tax rate is 30% and depreciation is $2,000. What is the net cash flows for each of the eight years?

A. $8,000

B. $6,500

C. $4,500

D. none of these

34) The __________ method breaks down when evaluating projects in which the sign of the cash flow changes.

A. PI

B. IRR

C. Payback

D. NPV

35) In practice, the __________ rule is preferred.

A. PI

B. IRR

C. Payback

D. NPV

36) Net present value ( NPV) is the difference between __________.

A. what a capital budgeting project costs and what it is worth (its market value)

B. what a capital budgeting project produces and what it is pays

C. cash flows before taxes and cash flows after taxes

D. what a capital budgeting project produces and what it is worth (its market value)

37) Compute the IRR for the following project. The initial cost is $10,000. The net cash flows are 3,800 for four years. The net salvage value is $2,000 when the project terminates. The cost of capital is 10%.

A. 13.91%

B. 18.91%

C. 23.91%

D. 25.91%

38) Suppose you purchase a zero coupon bond for $214.55 with a face value of $1,000 maturing in twenty years. If the yield to maturity (YTM) on the bond is 8.00%, what will the price of the bond be at the end of five years from now?

A. $315.24

B. $387.52

C. $410.91

D. none of these

39) A bond for J. Morris, Inc. a coupon rate of 6%. The yield to maturity is 7%. The bond has a remaining life of 20 years and makes semi-annual coupon payments? What is the present value of the bond’s face value?

A. $252.57

B. $640.65

C. $893.22

D. $1,000.00

40) You own a stock that will start paying $0.50 annually at the end of the year. It will then grow each year at a constant annual rate of 5%. If the required rate of return is 14%, what should you pay per share?

A. $5.56

B. $4.27

C. $3.57

D. $0.50

41) What is the present value of a zero coupon bond that will pay $1,000 in two years if the applicable discount rate equals 8 percent?

A. $827.35

B. $847.34

C. $857.34

D. $1,000.00

42) Some countries have __________ in which shareholders' returns are not fully taxed twice.

A. an imputation tax system

B. a split tax system

C. a two-tier tax system

D. none of these

43) The Time Value of Money Principle says __________.

A. to look for the most advantageous ways to finance the firm, such as the lowest-cost debt alternative

B. to set a price and other terms that investors will find acceptable when issuing securities C. that announcing the firm's decision to issue securities conveys information about the firm

D. to use discounted cash flow analysis to compare the costs and benefits of financing decisions, such as alternative securities to sell, lease versus borrow and buy, and bond refunding

44) Conditional sales contracts __________.

A. are seldom issued to finance the purchase of aircraft

B. are similar to equipment trust certificates

C. enable the borrower to obtain title to the assets only before it fully repays the debt ALL

45) You own a stock that is currently selling for $50. You expect a dividend of $1.50 next year and you require a 12% rate of return.. What is the dividend growth rate for your stock assuming constant growth?

A. 6.00%

B. 9.00%

C. 12.00%

D. 15.00%

46) The true risk of any investment is which of the following?

A. the variance of the investment's return

B. the uncertainty that cannot be diversified away

C. the expected part of any announcement

D. b & c

47) The capital asset pricing model .

A. provides a risk-return trade off with risk is measured in terms of the market returns.

B. provides a risk-return trade off in which risk is measured in terms of beta.

C. measures risk as the coefficient of variation between security and market rates of return.

D. depicts the total risk of a security.

48) The wholesale price for Captain John’s is $0.612 per loaf, and the variable cost of production is $0.387 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 4.5 million loaves in the next five years. What additional revenues minus expenses will be generated from expansion?

A. $1,102,000
B. $1,000,500
C. $912,500
D. $1,012,500

49) The wholesale price for Captain John’s is $3.00 per loaf. One million loaves will be sold in the next year. What is the contribution margin?

A. $3,000,000

B. $3,000,000 minus fixed costs

C. $3.00

D. cannot tell

50) The wholesale price for Captain John’s is $1.00 per loaf, and the variable cost of production is $0.50 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 5.0 million loaves in the next year. What additional revenues minus expenses will be generated from expansion?

A. $25,000

B. $250,000

C. $550,000

D. none of these

51) You are thinking about abandoning your business. If you do, then you will receive $168,000 on an after-tax basis from the land associated with your business. Abandoning your business would bring $15,000 on an after-tax basis from sale of equipment; also, you would not have to repair equipment at a cost of $10,800 per year on an after-tax basis. The before-tax cash flows from your business are $60,000 per year. Your tax rate is 25% and your required return is 12%. If you abandon your business, you will be able to spend your time earning wages that are equivalent to receiving an annuity of $16,000 per year on an after-tax basis until you retire in 12 years. At that time you could sell your land but would only realize what you could receive today. Should you abandon your business if you can make more money doing that?

A. No. The NPV from abandoning is negative.

B. Yes. The NPV is greater than $100,000

C. Yes. Abandon the business.

D. No. The NPV from abandoning is smaller than -$5,000

52) In efficient markets, as in the United States, you should think long and hard before you conclude that a market price is __________.

A. wrong.

B. fair.

C. followed by many analysts.

D. all of these

53) Under capital rationing, a good tool to use is the __________.

A. PI method.

B. payback method.

C. IRR method.

D. NPV method.

54) Which of the following statements is true?

A. Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from outside sources.

B. Hard capital rationing refers to the rationing imposed internally by the firm.

C. A post audit is a set of procedures for evaluating a capital budgeting decision after the fact.

D. all of these

55) ___________ says to use both bottom-up and top-down processes to increase the chance of uncovering valuable ideas.

A. The Principle of Two-Sided Transactions

B. The Principle of Comparative Advantage

C. The Behavioral Principle

D. The Principle of Valuable Ideas

56) __________ says to forecast the firm’s cash flows, and analyze the incremental cash flows of alternative decisions.

A. The Principle of Incremental Benefits

B. The Time Value of Money Principle

C. The Signaling Principle

D. The Principle of Risk-Return Trade-Off

57) __________ says to use common industry practices as a good starting place for the planning process.

A. The Principle of Self-Interested Behavior

B. The Principle of Valuable Ideas

C. The Principle of Incremental Benefits

D. The Behavioral Principle