# Fin/370 fin 370 fin370 week 5 final exam – new 2014 version – from an

FIN/370 FIN 370 FIN370 Week 5 Final Exam – New 2014 Version – from an A+ rated tutor!

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Capital Structure Theory in general assumes that:

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A firm’s value is determined by capitalizing (discounting) the firm’s expected net income by the firm’s cost of equity.

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A firm’s cost of capital rises as a firm uses more financial leverage.

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A firm’s value is determined by discounting the firm’s expected cash flows by the WACC.

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A firm’s cash flows will grow indefinitely at a constant rate.

Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management?

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Quick ratio

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Return on investment

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Current ratio

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Gross profit margin

The Securities Investor Protection Corporation protects individuals from

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other investors who fail to make delivery

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fraud by corporations

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making poor investment decisions

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brokerage firm failures

A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of \$10,000 in August, \$20,000 in September, \$30,000 in October, and \$40,000 in November. How much money is expected to be collected in October?

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\$25,000

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\$35,000

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\$45,000

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\$15,000

Project Sigma requires an investment of \$1 million and has a NPV of \$10. Project Delta requires an investment of \$500,000 and has a NPV of \$150,000. The projects involve unrelated new product lines. What is your evaluation of these two projects?

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The company should look at other investment criteria, not just NPV.

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Only project Delta should be accepted. Alpha’s NPV is too low for the investment.

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Both projects should be accepted because they have positive NPV’s

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Neither project should be accepted because they might compete with one another

Which of the following is not part of the underwriting process?

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the prospectus

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the Securities and Exchange Commission

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the syndicate

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the Federal Reserve

When the impact of taxes is considered, as the firm takes on more debt

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the weighted average cost of capital will increase.

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there will be no change in total cash flows.

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both taxes and total cash flow to stockholders and bondholders will decrease.

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cash flows will increase because taxes will decrease.

Metals Corp. has \$2,575,000 of debt, \$550,000 of preferred stock, and \$18,125,000 of common equity. Metals Corp.’s after-tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Metals Corp.’s weighted average cost of capital?

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12.78%

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8.32%

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6.56%

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10.84%

Given an accounts receivable turnover of 8 and annual credit sales of \$362,000, the average collection period (360-day year) is

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60 days.

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45 days.

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75 days

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90 days.

Accounting break-even analysis solves for the level of sales that will result in:

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Free cash flow = \$0.00.

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NPV = \$0.00.

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IRR=Cost of Capital.

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net income = \$0.00.

Buying and selling in more than one market to make a riskless profit is called:

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profit maximization.

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arbitrage.

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globalization

Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?

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Cash flows are more stable than accounting profits.

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Cash flows reflect the timing of benefits and costs more accurately than accounting profits.

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Cash flows have a greater present value than accounting profits.

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Cash flows improve the tax position of a firm more than accounting profits.

Which of the following could offset the higher risk exposure a company would face if it’s current ratio and net working capital were relatively low?

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It could buy back some of its shares in the open market in order to reduce its equity.

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Its current assets would need to be highly liquid.

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It could offer no discounts for early payment by its customers.

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Its accounts receivable collection policy could increase the average collection period.

Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?

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Cash flows are more stable than accounting profits.

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Cash flows have a greater present value than accounting profits.

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Cash flows reflect the timing of benefits and costs more accurately than accounting profits.

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Cash flows improve the tax position of a firm more than accounting profits.

Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%.

Initial outlay = \$450

Cash flows:       Year 1 = \$325

Year 2 = \$65

Year 3 = \$100

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3.43 years

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3.17 years

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2.88 years

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2.6 years

The Oviedo Thespians are planning to present performances of their Florida Revue on 2 consecutive nights in January. It will cost them \$5,000 per night for theater rental, event insurance and professional musicians. The theater will also take 10% of gross ticket sales. How many tickets must they sell at \$10.00 per ticket to raise \$1,000 for their organization?

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1000 tickets

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1,314 tickets

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1,223 tickets

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1,112 tickets

Which of the following is true regarding Investment Banks?

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As a result of the financial crisis of 2008, all stand-alone Investment banks either failed, were merged into commercial banks, or became commercial banks.

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When Glass-Steagal was repealed in 1999, commercial banks and Investment banks had to be separate entities.

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As of 2010, stand alone Investment banks are numerous.

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Under the Glass-Steagal act, commercial banks were allowed to operate as Investment banks.

If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should:

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maximize sales revenues

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increase the market value of the firm’s common stock.

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positively affect profits.

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either increase or have no effect on the value of the firm’s common stock.

Which of the following is true about bonds?

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They are obligations from the investor to the corporation.

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They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.

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At maturity of the bond, the investor receives the market price of the bond.

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Their interest rate always varies with the Consumer Price Index

Which of the following is most likely to occur if a firm over-invests in net working capital?

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The current ratio will be lower than it should be.

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The return on investment will be lower than it should be.

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The quick ratio will be lower than it should be.

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The times interest earned ratio will be lower than it should be.

Which of the following goals is in the best long-term interest of stockholders?

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Profit maximization

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Maximizing sales revenues

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Maximizing of the market value of the existing shareholders’ common stock

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Risk minimization

Apple Two Enterprises expects to generate sales of \$5,950,000 for fiscal 2014; sales were \$3,450,000 in fiscal 2013. Assume the following figures for the fiscal year ending 2013: cash \$70,000; accounts receivable \$250,000; inventory \$400,000; net fixed assets \$520,000; accounts payable \$235,000; and accruals \$155,000. Use the percent-of-sales method to forecast cash for the fiscal year ending 2014.

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\$216,418

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\$120,725

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\$319,604

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\$75,003

Which of the following statements best represents what finance is about?

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Maximizing profits

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Creation and maintenance of economic wealth

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How political, social, and economic forces affect corporations

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Reducing risk

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?

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\$3,525.62

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\$5,008.76

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\$2,465.78

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\$3,408.88

Long-term financial plans typically encompass:

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5 to 10 years.

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6 to 12 months.

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the entire lifecycle of the corporation.

When calculating the weighted average cost of capital, which of the following has to be adjusted for taxes?

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Common stock

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Retained earnings

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Preferred stock

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Debt

We compute the profitability index of a capital-budgeting proposal by Initial outlay = \$1,748.80

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dividing the present value of the annual after-tax cash flows by the cost of capital.

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multiplying the cash inflow by the IRR.

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multiplying the IRR by the cost of capital.

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dividing the present value of the annual after-tax cash flows by the cost of the project.

You just purchased a parcel of land for \$10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?

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\$25,000

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\$38,720

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\$39,720

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\$31,060

Aspects of demand risk controllable by the firm include:

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interest rates.

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entry of external competitors.

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status of the regional and national economy.

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product quality.

Delta Inc. is considering the purchase of a new machine which is expected to increase sales by \$10,000 in addition to increasing non-depreciation expenses by \$3,000 annually. Due to the sales increase, Delta expects its working capital to increase \$1,000 during the life of the project. Delta will depreciate the machine using the straight-line method over the project’s five year life to a salvage value of zero. The machine’s purchase price is \$20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The machine’s initial cash outflow is:

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\$21,000.

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\$23,000.

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\$27,000.

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\$20,000.