1. FIN 571 FINAL EXAMS
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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 __________
2) An investor's risky portfolio is made up of individual stocks. Which of the following statements about
this portfolio is true?
3) An all-equity-financed firm would __________.
4) The capital budgeting process can be broken down into five steps. These steps include which of the
following?
5) Projects can be classified into various categories. These include:
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.
7) A firm cannot simply adopt the industry average debt ratio, because differences exist among firms in
any particular industry with respect to __________.
8) Studies show systematic differences in capital structures across industries. These are due mostly to
differences in __________.
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 __________.
10) Preferred stock payment obligations are typically
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 __________.
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?
13) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much
internationally. Possible factors include __________.
14) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much
internationally. Possible factors include __________.
15) According to the CAPM, the expected return for a portfolio is determined by the portfolio's.

2. 16) Which of these investments would you expect to have the highest rate of return for the next 20
years?
17) The Principle of __________ implies that the expected return for an asset equals its required return.
18) According to the Principle of Risk-Return Trade-Off, investors require a higher return to compensate
for __________.
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)?
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?
21) Stony Products has a payables turnover of six times. What is Stony's payables deferral period (PDP)?
22) __________ says to look for opportunities to develop asset-based financing arrangements that offer
new positive-NPV financing mechanisms.
23)__________ says to calculate the net advantage of leasing based on the incremental after-tax
benefits that leasing will provide.
24) __________ says to transfer the tax benefits of ownership to other parties if they are willing to pay
for benefits your firm cannot use.
25) Which of the following favors a high dividend payout policy?
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?
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?
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__________.
29) An investor's risky portfolio is made up of individual stocks. Which of the following statements about
this portfolio is true?
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)

3. 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.
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%.
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?
34) The __________ method breaks down when evaluating projects in which the sign of the cash
flow changes.
35) In practice, the __________ rule is preferred.
36) Net present value ( NPV) is the difference between __________.
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%.
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?
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?
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?
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?
42) Some countries have __________ in which shareholders' returns are not fully taxed twice.
43) The Time Value of Money Principle says __________.
44) Conditional sales contracts __________.

4. 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?
46) The true risk of any investment is which of the following?
47) The capital asset pricing model .
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?
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?
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?
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?
52) In efficient markets, as in the United States, you should think long and hard before you conclude
that a market price is __________.
53) Under capital rationing, a good tool to use is the __________.
54) Which of the following statements is true?
55) ___________ says to use both bottom-up and top-down processes to increase the chance of
uncovering valuable ideas.
56) __________ says to forecast the firm’s cash flows, and analyze the incremental cash flows of
alternative decisions.
57) __________ says to use common industry practices as a good starting place for the planning
process.