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1. FIN 534 Final Exam Set 1 (4 Sets)
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FIN 534 Final Exam Part 1 Set 1
• Question 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?
• Question 2
Which of the following statements is CORRECT?
• Question 3
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?

2. • Question 4
Which of the following statements is CORRECT?
• Question 5
Which of the following statements is CORRECT?
• Question 6
Which of the following statements is most correct, holding other things
constant, for XYZ Corporation's traded call options?
• Question 7
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?
• Question 8
Which of the following statements is CORRECT? Assume a company's target
capital structure is 50% debt and 50% common equity.
• Question 9

3. 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?
• Question 10
Which of the following statements is CORRECT?
• Question 11
Which of the following statements is CORRECT?
• Question 12
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?
• Question 13
Which of the following statements is CORRECT?
• Question 14

4. Which of the following statements is CORRECT?
• Question 15
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?
• Question 16
Which of the following statements is CORRECT?
• Question 17
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?
• Question 18
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.
• Question 19

5. Which of the following statements is CORRECT?
• Question 20
Which of the following statements is CORRECT?
• Question 21
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?
• Question 22
Which of the following rules is CORRECT for capital budgeting analysis?
• Question 23
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?
• Question 24
Which of the following statements is CORRECT?

6. • Question 25
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?
• Question 26
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?
• Question 27
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)?
• Question 28
Which of the following statements is CORRECT?
• Question 29
Which of the following statements is CORRECT?

7. • Question 30
The capital intensity ratio is generally defined as follows:
FIN 534 Final Exam Part 1 Set 2
FIN 534 Final Exam Part 1
•
The current price of a stock is $22, and at the end of one year its price will be
either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A
1-year call option on the stock, with an exercise price of $22, is available. Based on
the binomial model, what is the option's value? (Hint: Use daily
compounding.)
• Question 2
Cazden Motors' stock is trading at $30 a share. Call options on the company's
stock are also available, some with a strike price of $25 and some with a strike price
of $35. Both options expire in three months. Which of the following best describes the
value of these options?
• Question 3

8. Which of the following statements is CORRECT?
• Question 4
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?
• Question 5
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?
• Question 6
Which of the following statements is CORRECT?
• Question 7
Which of the following statements is CORRECT?
• Question 8

9. Which of the following statements is CORRECT?
• Question 9
Burnham Brothers Inc. has no retained earnings since it has always paid out all
of its earnings as dividends. This same situation is expected to persist in the future.
The company uses the CAPM to calculate its cost of equity, and its target capital
structure consists of common stock, preferred stock, and debt. Which of the following
events would REDUCE its WACC?
• Question 10
Which of the following statements is CORRECT?
• Question 11
Which of the following statements is CORRECT?
• Question 12
Which of the following statements is CORRECT?
• Question 13

10. Which of the following statements is CORRECT?
• Question 14
Which of the following statements is NOT a disadvantage of the regular
payback method?
• Question 15
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.
• Question 16
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?
• Question 17
The WACC for two mutually exclusive projects that are being considered is
12%. Project K has an IRR of 20% while Project R's IRR is 15%. The projects have
the same NPV at the 12% current WACC. Interest rates are currently high. However,
you believe that money costs and thus your WACC will soon decline. You also think

11. that the projects will not be funded until the WACC has decreased, and their cash
flows will not be affected by the change in economic conditions. Under these
conditions, which of the following statements is CORRECT?