Fin534 final exam part 1

1. FIN534 Final Exam Part 1
BLW Corporation is considering the terms to be set on the options it plans to issue to its
executives. Which of the following actions would decrease the value of the options, other things
held constant?
Suppose you believe that Florio Company's stock price is going to decline from its current level
of $82.50 sometime during the next 5 months. For $5.10 you could buy a 5-month put option
giving you the right to sell 1 share at a price of $85 per share. If you bought this option for $5.10
and Florio's stock price actually dropped to $60, what would your pre-tax net profit be?
Which of the following statements is most correct, holding other things constant, for XYZ
Corporation's traded call options?
To help them estimate the company's cost of capital, Smithco has hired you as a consultant. You
have been provided with the following data: D1 = $1.45; P0 = $22.50; and g = 6.50% (constant).
Based on the DCF approach, what is the cost of common from reinvested earnings?
Which of the following statements is CORRECT? Assume a company's target capital structure is
50% debt and 50% common equity.
A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00
annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost
of 5.00% of the issue price. What is the firm's cost of preferred stock?
You have been hired as a consultant by Feludi Inc.'s CFO, who wants you to help her estimate
the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM =
5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from reinvested
earnings?
Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher
NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds
12%. Which of the following statements is CORRECT?
Projects S and L are both normal projects with an initial cost of $10,000, followed by a series of
positive cash inflows. Project S's undiscounted net cash flows total $20,000, while L's total
undiscounted flows are $30,000. At a WACC of 10%, the two projects have identical NPVs.
Which project's NPV is more sensitive to changes in the WACC?

2. Which of the following statements is CORRECT? Assume that the project being considered has
normal cash flows, with one outflow followed by a series of inflows.
Collins Inc. is investigating whether to develop a new product. In evaluating whether to go ahead
with the project, which of the following items should NOT be explicitly considered when cash
flows are estimated?
Which one of the following would NOT result in incremental cash flows and thus should NOT
be included in the capital budgeting analysis for a new product?
A company expects sales to increase during the coming year, and it is using the AFN equation to
forecast the additional capital that it must raise. Which of the following conditions would cause
the AFN to increase?
Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales
and $100 million of fixed assets. However, its fixed assets were used at only 75% of capacity.
Now the company is developing its financial forecast for the coming year. As part of that
process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have
had had it been operating at full capacity. What target FA/Sales ratio should the company set?
F. Marston, Inc. has developed a forecasting model to estimate its AFN for the upcoming year.
All else being equal, which of the following factors is most likely to lead to an increase of the
additional funds needed (AFN)?