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Busn379 final exam Busn379 final exam Document Transcript

  • BUSN379 FINAL EXAM PLEASE DOWNLOAD HERE1. (TCO 4) Which of the following is true regarding the evaluation of projects?(Points : 4)sunk costs should be included erosion effects should not be considered financing costs need to be included opportunity costs are relevant2. (TCO 4) Which of the following investment ranking methods does not considerthe time value of money? (Points : 4)net present value methodpayback methodinternal rate of return methodall of these are time-adjusted methods3. (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.4. (TCO 3 and 4) What is the net present value of a project with the followingcash flows, if the discount rate is 15 percent?Year01234Cash flow
  • -$45,000$11,520$13,630$16,470$18,990(Points : 4)-$2,989.48 -$2,599.55 $1,153.37 $2,880.08 $3,312.095. (TCO 4) Leward Manufacturing is spending $115,000 to update its equipment.This is necessary if the firm wishes to be competitive in the marketplace andprovide a wide array of product models. The company estimates that theseupdates will improve its cash inflows by $27,500 a year, for eight years. What isthe payback period? (Points : 4)4.18 years5.82 years6.62 years7.79 yearsThis project never pays back6. (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 netpresent value project. will generally cause the internal rate of return for a project to decline.7. (TCO 4) ___________, occurs when a firm cannot raise financing for a projectunder any circumstances. (Points : 4)contingency planning. hard rationing. soft rationing. capital constraint. scenario analysis.
  • 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 trueregarding 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 true9. (TCO 4) Assume Company X plans to invest $60,000 in new computers. UsingTables 9.6 and 9.7 of your textbook (Page 277), which is the second yeardepreciation amount under MACRS? (Points : 4)$12,000$19,200$19,800None of the above10. (TCO 1 and 4) Assume a corporation has earnings before depreciation, andtaxes of $100,000, depreciation of $40,000, and that it has a 30 percent taxbracket. What are the after-tax cash flows for the company? (Points : 4)$82,000$110,000$42,000none of these11. (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 measured by beta it is measured by standard deviation12. (TCO 8) Which statement is true regarding risk? (Points : 4)the expected return is usually the same as the actual return a key to assess risk is determining how much risk an investment adds to aportfolio risks can always be decreased or mitigated by the financial manager the higher the risk, the lower the return investors require for the investment13. (TCO 8) The stock of Hobby Town has an expected return of 8.8 percent.Given the information below, what is the expected return on this stock if theeconomy is normal? View slide
  • State of EconomyProbability of State of EconomyRate of ReturnRecession.10-.09Normal.70?Boom.20.26(Points : 4)3.86 percent4.42 percent6.43 percent7.28 percent8.21 percent14. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 instock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight ofstock B? (Points : 4)14.79 percent15.91 percent18.42 percent19.07 percent19.46 percent15. (TCO 8) You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. The one stock has a beta of .80. What does the beta ofthe second stock have to be if you want the portfolio risk to equal that of theoverall market? (Points : 4) View slide
  • (TCO 8) Weak form market efficiency states that the value of a security isbased 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 insidertrading. random information with no clear distinction as to the source of that information.2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can befinanced with debt at a cost of 6 percent (after-tax) and common equity at a costof 18 percent. Assume debt and common equity each represent 50 percent of thefirms 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 above3. (TCO 5, 6 and 7) An issue of common stock is expected to pay a dividend of$4.80 at the end of the year. Its growth rate is equal to eight percent. If therequired rate of return is 13 percent, what is its current price? (Points : 4)$103.68$36.92$96.00none of these4. (TCO 5, 6 and 7) Which of the following is true regarding the cost of debt?(Points : 4)It is the return that the firm’s creditors demand on new borrowing. It is always equal to the weighted cost of capital. An appropriate method to compute the cost of debt is using the coupon rate ofcurrent bonds outstanding. All of the above are true.5. (TCO 5) Which of the following is not true regarding the cost of retainedearnings? (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 funds6. (TCO 4) A project has the following cash flows. What is the internal rate ofreturn?Year0123Cash 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%7. (TCO 5, 6 and 7) All else constant, the weighted average cost of capital for afirm will decrease if: (Points : 4)a firms bonds start selling at a premium, rather than at a discount.the market risk premium increases.the firm replaces some of its debt with preferred stock.corporate taxes are eliminated.the dividend yield on the common stock increases.8. (TCO 5, 6 and 7) The six percent preferred stock of FKH Manufacturing isselling for $62 a share. What is the firms cost of preferred stock, if the tax rate is34 percent and the par value per share is $100? (Points : 4)
  • 5.98%7.06%8.05%9.68%10.10%9. (TCO 2) Which one of the following occurs if a firm files for Chapter 7bankruptcy, but does not generally occur if the firm files for Chapter 11bankruptcy? (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 thefirm a trustee-in-bankruptcy is elected by the creditors10. (TCO 5) Which of the following statements is false regarding the cost ofcapital? (Points : 4)The cost of capital should consider the flotation costs. All other being equal, it is preferable to use market value weights than bookvalue weights. The WACC is the most appropriate discount rate for all projects. Should include the cost of retained earnings.11. (TCO 2) Which of the following increases the cash account? (Points : 4)Goods are sold on credit An interest payment on a notes payable is made A payment due is received from a client Raw materials are purchased and paid for with credit12. (TCO 2) Which of the following statements is true? (Points : 4)The optimal credit policy minimizes the total cost of granting credit. Firms should avoid offering credit at all cost. An increase in a firms average collection period generally indicates that anincreased number of customers are taking advantage of the cash discount. Character, refers to the ability of a firm to meet its credit obligations out itsoperating cash flows. The optimal credit policy, is the policy that produces the largest amount of salesfor a firm.13. (TCO 2) All else constant, a decrease in the accounts receivable period will:(Points : 4)
  • lengthen the accounts payable period. shorten the inventory period. lengthen the operating cycle. shorten the cash cycle. shorten the accounts payable period.14. (TCO 2) Delphinias has the following estimated quarterly sales for next year.The accounts receivable period is 30 days. What is the expected accountsreceivable balance at the end of the second quarter? Assume each month has 30days.Q1Q2Q3Q4Sales$1,800$1,700$2,100$1,900(Points : 4)$567$600$821$1,134$1,20015. (TCO 1) Why is maximization of the current value per share a moreappropriate financial management goal than profit maximization? (Points : 4)Because by maximizing the current stock value, you also maximize thecompany’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.
  • 1. (TCO 1) Which one of the following activities best exemplify working capitalmanagement? (Points : 4)Sale long-term bonds to raise funds for a new machine. Determine the return of a potential project. Calculate the cash flows for a project. Manage payments to suppliers.2. (TCO 1) Book values are different from market values because: (Points : 4)Book values reflect the value of the asset based on generally-acceptedaccounting principles.Book values are used in the company’s balance sheet.Book values do not reflect the amount someone is willing to pay today for anasset.All of the aboveNone of the above3. (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
  • $335,001-10,000,00034Riddell, Inc. earned $144,320 in taxable income for the year. How much tax doesthe company owe on this income? (Points : 4)$39,535$49,069$51,285$56,285$78,5354. (TCO 3) Regional Bank offers you an APR of 19 percent compoundedsemiannually, and Local Bank offers you an EAR of 19.50 percent for a newautomobile loan. You should choose ______________ because its _______ islower. (Points : 4)Regional Bank, APRLocal Bank, EARRegional Bank, EARLocal Bank, APR5. (TCO 3) You deposited $8,000 in your bank account today. Which of thefollowing will increase the future value of your deposit, assuming that all interestis reinvested? Assume the interest rate is a positive value. Select all that apply:(Points : 4)a decrease in the interest rateincreasing the initial amount of your depositdecreasing the frequency of the interest paymentsextending the length of the investment period6. (TCO 3) You want to have $15,000 for a down payment on a house five yearsfrom now. If you can earn 13 percent, compounded annually, on your savings,how much do you need to deposit today to reach your goal? (Points : 4)$7,858.11$8,141.40$9,803.58$12,464.28$14,213.25
  • 7. (TCO 3) The new home that you want to buy costs $249,500. You plan tomake a cash down payment of 20 percent and finance the balance over 10 yearsat 6.75 percent. What will be the amount of your monthly mortgage payment?(Points : 4)$2,291.89$2,809.10$3,287.46$3,412.67$4,145.688. (TCO 3) Which type of loan is comparable to the present value of a future lumpsum? (Points : 4)effective annual rateamortizedinterest-onlyannual percentagepure discount9. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at12 percent interest. The bonds mature in 25 years. What is the current price ofthe bond if the YTM is 16 percent? Assume annual payments. (Points : 4)$1315$1300$756$100010. (TCO 6) The market where new securities are offered is called the _____market. (Points : 4)primarymainsecondaryprincipaldealer11. (TCO 7) Which one of the following statements concerning financial leverageis correct? (Points : 4)Financial leverage increases profits and decreases losses.Financial leverage has no effect on a firms return on equity.Financial leverage, refers to the use of common stock.Financial leverage magnifies both profits and losses.Increasing financial leverage will always increase the earnings per share.
  • 12. (TCO 3) SmithKline Companys bonds are currently selling for $1,157.75 per$1000 par-value bond. The bonds have a 10 percent coupon rate and will maturein 10 years. What is the approximate yield to maturity? (Points : 4)6.96%7.69%11.0%12.1%13. (TCO 8) Which of the following is true regarding bonds? (Points : 4)Bonds do not carry default risk. Bonds are sensitive to changes in the interest rates. Moody’s and Standard and Poor’s provide information regarding a bond’sinterest rate risk. Municipal bonds are free of default risk. None of the above is true14. (TCO 8) Which one of the following bonds is the most sensitive to interest ratemovements? (Points : 4)zero-coupon, five year seven percent annual coupon, five year zero-coupon, 10 year five percent semi-annual coupon, 10 year five percent annual coupon, 10 year15. (TCO 6) A sinking fund is an account managed by a bond trustee for the solepurpose of: (Points : 4)paying interest payments on a semi-annual basis.redeeming bonds early.repaying the face value at maturity.paying the expenses required to reissue outstanding bonds.paying the "balloon payment" at maturity.1. (TCO 6) Which of the following is true regarding put bonds? (Points : 4)Have coupons that depend on the company’s incomeCan be exchanged for a fixed number of shares before maturity onlyCan be exchanged for a fixed number of shares before maturityAllow the holder to require the issuer to buy the bond back2. (TCO 6 and 7) Financial leverage deals with: (Points : 4)the relationship of fixed and variable costs. the percentage of debt in the capital structure.
  • the entire income statement.the entire balance sheet.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 tobe $1,000. What is the bonds current yield? (Points : 4)9%14%11%Cannot be determinedNone of the above4. (TCO 2) Which of the following does not reduce collection float? (Points : 4)installing a lockbox system. deposit collections weekly, instead of daily. requiring all customers pay by cash, rather than with check. utilize the benefits of the Check Clearing Act for the 21stCentury.5. (TCO 2) ___________, is a system that minimizes inventory. (Points : 4)material requirements planningABC approachjust in timereorder points6. (TCO 1) Provide three examples of situations in which business ethics play arole in the financial management process. Explain your rationale, and how thesesituations may affect the value of the firm. (Points : 10)7. (TCO 4) What are sunk costs? Provide at least two real-life examples of sunkcosts for a project. Should sunk costs be included as incremental cash flows?Why or why not? Explain your rationale. (Points : 10)8. (TCO 8) What is the difference between systematic and unsystematic risk?Provide one example of each. Can both systematic and unsystematic risks bediversified? Why or why not? (Points : 10)
  • 9. (TCO 2) What are the costs associated with extending (or not extending) acredit policy to customers? (Points : 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 thisstatement is correct? Explain your rationale. (Points : 10)