1. FIN 370 Final Exam SET 6
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1) Which of the following categories of owners have limited liability?
A.
General partners
B.
Sole proprietors
C.
Shareholders of a corporation
D.
Both a and b
2) The true owners of the corporation are the:
A.
common stockholders.
B.
board of directors of the firm.
C.
preferred stockholders.
D.
holders of debt issues of the firm.
3) Which of the following best describes the goal of the firm?
A.
The maximization of the total market value of the firm’s common stock]
B.

2. Profit maximization
C.
Risk minimization
D.
None of the above
4) Money market instruments include:
A.
common stock.
B.
corporate bonds.
C.
preferred stock.
D.
bankers’ acceptances.
5) Which of the following does NOT involve underwriting by an investment
banker?
A.
Commission basis purchases
B.
Syndicated purchases
C.
Negotiated purchases
D.
Competitive bid purchases
6) __________ is a method of offering securities to a limited number of investors.

3. A.
Syndicated underwriting
B.
Public offering
C.
Private placement
D.
Initial public offering
7) According to the agency problem, _________ represent the principals of a
corporation.
A.
suppliers
B.
employees
C.
managers
D.
shareholders
8) Difficulty in finding profitable projects is due to:
A.
opportunity costs.
B.
ethical dilemmas.
C.
competitive markets.

4. D.
social responsibility.
9) Which of the following is NOT a principle of basic financial management?
A.
Incremental cash flow counts
B.
Efficient capital markets
C.
Profit is king
D.
Risk/return tradeoff
10) Marshall Networks, Inc. has a total asset turnover of 2.5% and a net profit
margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall’s
debt ratio.
A.
40%
B.
50%
C.
60%
D.
30%
11) Another name for the acid test ratio is the:
A.
quick ratio.
B.

5. inventory turnover ratio.
C.
average collection period.
D.
current ratio.
12) The accounting rate of return on stockholders’ investments is measured by:
A.
return on equity.
B.
operating income return on investment.
C.
realized rate of inflation.
D.
return on assets.
13) When George Washington was president of the United States in 1797, his
salary was $25,000. If you assume an annual rate of inflation of 2.5%, how much
would his salary have been in 1997?
A.
$954,719
B.
$2,525,548
C.
$4,085,920
D.
$1,025,000
E.

6. $3,489,097
14) Suppose that you wish to save for your child's college education by opening
up an educational IRA. You plan to deposit $100 per month into the IRA for the
next 18 years. Assume that you will be able to earn 10%, compounded monthly,
on your investment. How much will you have accumulated at the end of 18
years?
A.
$54,719
B.
$33,548
C.
$85,920
D.
$21,600
E.
$60,056
15) You have $10,000 to invest. You do not want to take any risk, so you will put
the funds in a savings account at the local bank. Of the following choices, which
one will produce the largest sum at the end of 22 years?
A.
An account that compounds interest daily
B.
An account that compounds interest quarterly
C.
An account that compounds interest monthly
D.
An account that compounds interest annually

7. 16) Which of the following statements about the percent-of-sales method of
financial forecasting is true?
A.
It is a much more precise method of financial forecasting than a cash budget
would be.
B.
It involves estimating the level of an expense, asset, or liability for a future period
as a percent of the forecast for sales revenues.
C.
It projects all liabilities as a fixed percentage of sales.
D.
It is the least commonly used method of financial forecasting.
17) All of the following are found in the cash budget EXCEPT:
A.
inventory.
B.
cash disbursements.
C.
new financing needed.
D.
a net change in cash for the period.
18) Which of the following is NOT a basic function of a budget?
A.
Budgets provide the basis for corrective action when actual figures differ from the
budgeted figures.
B.
Budgets compare historical costs of the firm with its current cost performance.

8. C.
Budgets allow for performance evaluation.
D.
Budgets indicate the need for future financing.
19) A plant can remain operating when sales are depressed:
A.
to help the local economy.
B.
in an effort to cover at least some of the variable cost.
C.
unless variable costs are zero when production is zero.
D.
if the selling price per unit exceeds the variable cost per unit.
20) The break-even model enables the manager of a firm to:
A.
set appropriate equilibrium thresholds.
B.
determine the quantity of output that must be sold to cover all operating costs.
C.
determine the optimal amount of debt financing to use.
D.
calculate the minimum price of common stock for certain situations.
21) Which of the following is a non-cash expense?
A.
Interest expense

9. B.
Packaging costs
C.
Administrative salaries
D.
Depreciation expenses
22) Which of the following is the formula for compound value?
A.
FVn = (1+i)/P
B.
/(1+i)n
C.
(1+i)-n
D.
(1+i)n
23) How long will it take $750 to double at 8% compounded annually?
A.
48 months
B.
9 years
C.
12 years
D.
6.5 years

10. 24) 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?
A.
$5,008.76
B.
$3,408.88
C.
$2,465.78
D.
$3,525.62
25) Which of the following is considered to be a spontaneous source of
financing?
A.
Accounts payable
B.
Inventory
C.
Accounts receivable
D.
Operating leases
26) Which of the following is NOT considered a permanent source of financing?
A.
Commercial paper
B.
Preferred stock

11. C.
Common stock
D.
Corporate bonds
27) A toy manufacturer following the hedging principle will generally finance
seasonal inventory build-up prior to the Christmas season with:
A.
preferred stock.
B.
trade credit.
C.
selling equipment.
D.
common stock.
28) We compute the profitability index of a capital-budgeting proposal by:
A.
multiplying the cash inflow by the IRR.
B.
dividing the present value of the annual after-tax cash flows by the cost of the
project.
C.
dividing the present value of the annual after-tax cash flows by the cost of capital.
D.
multiplying the IRR by the cost of capital.
29) Your company is considering a project with the following cash flows: Initial
outlay = $1,748.80 Cash flows Years 1–6 = $500 Compute the IRR on the
project.

12. A.
24%
B.
18%
C.
11%
D.
9%
30) Artie’s Soccer Ball Company is considering a project with the following cash
flows: Initial outlay = $750,000 Incremental after-tax cash flows from operations
Years 1–4 = $250,000 per year Compute the NPV of this project if the company’s
discount rate is 12%.
A.
$2,534
B.
$4,337
C.
$7,758
D.
$9,337
31) Many firms today continue to use the payback method but employ the NPV or
IRR methods as secondary decision methods of control for risk.
A.
True
B.
False

13. 32) You have been asked to analyze a capital investment proposal. The project’s
cost is $2,775,000. Cash inflows are projected to be $925,000 in Year 1;
$1,000,000 in Year 2; $1,000,000 in Year 3; $1,000,000 in Year 4; and
$1,225,000 in Year 5. Assume that your firm discounts capital projects at 15.5%.
What is the project’s MIRR?
A.
19.99%
B.
16.73%
C.
10.44%
D.
12.62%
33) Most firms use the payback period as a secondary capital-budgeting
technique, which, in a sense, allows them to control for risk.
A.
True
B.
False
34) The NPV assumes cash flows are reinvested at the:
A.
cost of capital.
B.
real rate of return.
C.
NPV.
D.

14. IRR.
35) The firm should accept independent projects if:
A.
the NPV is greater than the discounted payback.
B.
the IRR is positive.
C.
the profitability index is greater than 1.0.
D.
the payback is less than the IRR.
36) ABC Service can purchase a new assembler for $15,052 that will provide an
annual net cash flow of $6,000 per year for five years. Calculate the NPV of the
assembler if the required rate of return is 12%. (Round your answer to the
nearest $1.)
A.
$6,577
B.
$7,621
C.
$4,568
D.
$1,056
37) The most expensive source of capital is:
A.
retained earnings.
B.

15. debt.
C.
new common stock.
D.
preferred stock.
38) Cost of capital is:
A.
the average cost of the firm’s assets.
B.
the rate of return that must be earned on additional investment if firm value is to
remain unchanged.
C.
a hurdle rate set by the board of directors.
D.
the coupon rate of debt.
39) The average cost associated with each additional dollar of financing for
investment projects is:
A.
beta.
B.
risk-free rate.
C.
the marginal cost of capital.
D.
the incremental return.

16. 40) Bender and Co. is issuing a $1,000 par value bond that pays 9% interest
annually. Investors are expected to pay $918 for the 10-year bond. Bender will
have to pay $33 per bond in flotation costs. What is the cost of debt if the firm is
in the 34% tax bracket?
A.
11.95%
B.
9.23%
C.
9.01%
D.
7.23%
41) Given the following information, determine the risk-free rate.
Cost of equity = 12%
Beta = 1.50
Market risk premium = 3%
A.
6.5%
B.
7.0%
C.
7.5%
D.
8.0%
42) J & B, Inc. has $5 million of debt outstanding with a coupon rate of 12%.
Currently, the yield to maturity on these bonds is 14%. If the firm’s tax rate is
40%, what is the cost of debt to J & B?

17. A.
5.6%
B.
8.4%
C.
14.0%
D.
12.0%
43) Lever Brothers has a debt ratio (debt to assets) of 20%. Management is
wondering if its current capital structure is too conservative. Lever Brothers’s
present EBIT is $3 million, and profits available to common shareholders are
$1,680,000, with 457,143 shares of common stock outstanding. If the firm were to
instead have a debt ratio of 40%, additional interest expense would cause profits
available to stockholders to decline to $1,560,000, but only 342,857 common
shares would be outstanding. What is the difference in EPS at a debt ratio of 40%
versus 20%?
A.
$1.95
B.
$1.16
C.
$2.12
D.
$0.88
44) Lever Brothers has a debt ratio (debt to assets) of 40%. Management is
wondering if its current capital structure is too conservative. Lever Brothers’s
present EBIT is $3 million, and profits available to common shareholders are
$1,560,000, with 342,857 shares of common stock outstanding. If the firm were to
instead have a debt ratio of 60%, additional interest expense would cause profits
available to stockholders to decline to $1,440,000, but only 228,571 common

18. shares would be outstanding. What is the difference in EPS at a debt ratio of 60%
versus 40%?
A.
$2.00
B.
$3.25
C.
$1.75
D.
$4.50
45) Zybeck Corp. projects operating income of $4 million next year. The firm’s
income tax rate is 40%. Zybeck presently has 750,000 shares of common stock
which have a market value of $10 per share, no preferred stock, and no debt. The
firm is considering two alternatives to finance a new product: (a) the issuance of
$6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common
stock. If Zybeck issues common stock this year, what will projected EPS be next
year?
A.
$2.96
B.
$2.33
C.
$2.10
D.
$1.67
46) Capital markets in foreign countries:
A.
offer lower returns than those obtainable in the domestic capital markets.

19. B.
provide international diversification.
C.
in general are becoming less integrated due to the widespread availability of
interest rate and currency swaps.
D.
all of the choices.
47) _________ risk is generally considered only a paper gain or loss.
A.
Translation
B.
Economic
C.
Transaction
D.
Financial
48) Which of the following statements about exchange rates is true?
A.
Exchange rates were fixed prior to establishing a floating-rate international
currency system, and all countries set a specific parity rate for their currency
relative either to the Canadian or to the U.S. dollar.
B.
Day-to-day fluctuations in exchange rates currently are caused by changes in
parity rates.
C.
A floating-rate international currency system has been operating since 1973.
D.

20. All of the choices.
49) If the quote for a forward exchange contract is greater than the computed
price, the forward contract is:
A.
undervalued.
B.
a good buy.
C.
overvalued.
D.
at equilibrium.
50) A spot transaction occurs when one currency is:
A.
immediately exchanged for another currency.
B.
exchanged for another currency at a specified price.
C.
deposited in a foreign bank.
D.
traded for another at an agreed-upon future price.
51) The interplay between interest rate differentials and exchange rates such that
both adjust until the foreign exchange market and the money market reach
equilibrium is called the:
A.
balance of payments quantum theory.
B.

21. interest rate parity theory.
C.
purchasing power parity theory.
D.
arbitrage markets theory.
52) An important (additional) consideration for a direct foreign investment is:
A.
political risk.
B.
maximizing the firm’s profits.
C.
attaining a high international P/E ratio.
D.
all of the above.
53) One reason for international investment is to reduce:
A.
price-earnings (P/E) ratios.
B.
advantages in a foreign country.
C.
portfolio risk.
D.
beta risk.
54) Buying and selling in more than one market to make a riskless profit is called:
A.

22. arbitrage.
B.
international trading.
C.
profit maximization.
D.
cannot be determined from the above information.