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Fin 571 Final Exam 1

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1.  Which of the following is considered a hybrid organizational form?

·         corporation

·         sole proprietorship

·         limited liability partnership

·         partnership

 

2. Which of the following is a principal within the agency relationship?

·         the CEO of the firm

·         the board of directors

·         a company engineer

·         a shareholder

 

3. Which of the following presents a summary of the changes in a firm’s balance sheet from the beginning of an accounting period to the end of that accounting period?

·         The statement of retained earnings.

·         The statement of working capital.

·         The statement of cash flows.

·         The statement of net worth.

 

4. Teakap, Inc., has current assets of $ 1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000, and retained earnings of $1,468,347. How much long-term debt does the firm have?

·         $2,303,010

·         $1,844,022

·         $2,123,612

·         $803,010

 

5. Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm’s days’s sales in inventory?

65.2 days

64.3 days

61.7 days

57.9 days

 

6. Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?

·         1.74

·         0

·         0.60

·         1.47

 

7. Which of the following is not a method of “benchmarking”?

·         Conduct an industry group analysis.

·         Identify a group of firms that compete with the company being analyzed.

·         Utilize the DuPont system to analyze a firm’s performance.

·         Evaluating a single firm’s performance over time.

                                     

8. Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)

·         $26,454

·         $16,670

·         $22,680

·         $19,444

 

9. Ferris, Inc., has borrowed from their bank at a rate of 8 percent and will repay the loan with interest over the next five years. Their scheduled payments, starting at the end of the year are as follows—$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments? (Round to the nearest dollar.)

·         $2,735,200

·         $2,615,432

·         $2,431,224

·         $2,815,885

 

                         

10. Ajax Corp. is expecting the following cash flows—$79,000, $112,000, $164,000, $84,000, and $242,000—over the next five years. If the company’s opportunity cost is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)

·         $480,906

·         $414,322

·         $477,235

·         $429,560

                         

11.  Jayadev Athreya has started on his first job. He plans to start saving for retirement early. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Jayadev have at the end of 45 years? (Round to the nearest dollar.)

·         $5,233,442

·         $2,667,904

·         $1,745,600

·         $3,594,524

 

12. Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)

·         32%

·         40%

·         12%

·         16%

 

13. Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company’s bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)

·         $972

·         $1,014

·         $923

·         $1,066

 

                         

14. Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years?

·         $9.72

·         $12.50

·         $11.63

·         $13.50

 

15. TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?

·         0.11

·         0.90

·         1.90

·         1.11

 

 16. What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?

·         The profitability index.

·         The internal rate of return.

·         The modified internal rate of return.

·         The discounted payback

 

17.  The WACC for a firm is 13.00 percent. You know that the firm’s cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt?

·         30%

·         33%

·         50%

·         70%

 

 

 

18. If a company’s weighted average cost of capital is less than the required return on equity, then the firm:

·         Must have preferred stock in its capital structure

·         Is financed with more than 50% debt

·         Is perceived to be safe

·         Has debt in its capital structure

                                     

19. Gangland Water Guns, Inc., is expected to pay a dividend of $2.10 one year from today. If the firm’s growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50?

·         12.00%

·         14.65%

·         15.00%

·         15.36%

                         

20. A firm’s capital structure is the mix of financial securities used to finance its activities and can include all of the following except

·         stock.

·         bonds.

·         equity options.

·         preferred stock.

                         

21. Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they issue?

·         $600

·         $225

·         $321

·         $375

 

                         

22. Turnbull Corp. had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Turnbull has an enterprise value/EBITDA multiple of 5.40.

What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars.

·         $1,315 million

·         $1,334 million

·         $1,787 million

·         $453.6 million

                         

23. Jockey Company has total assets worth $4,417,665. At year-end it will have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support?

·         30.3%

·         27.3%

·         32.9%

·         25.1%

 

24. Which of the following cannot be engaged in managing the business?

·         a sole proprietor

·         a general partner

·         a limited partner

·         none of these

 

25. Which of the following does maximizing shareholder wealth not usually account for?

·         Government regulation.

·         Risk.

·         The timing of cash flows.

·         Amount of Cash flows.

 

 26. The strategic plan does NOT identify

·         working capital strategies.

·         the lines of business a firm will compete in.

·         major areas of investment in real assets.

·         future mergers, alliances, and divestitures.

 

 27. Firms that achieve higher growth rates without seeking external financing

·         none of these.

·         have a low plowback ratio.

·         have less equity and/or are able to generate high net income leading to a high ROE.

·         are highly leveraged.

                         

28. Drekker, Inc., has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid dividends of $34,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.

·         85%, 15%

·         45%, 55%

·         15%, 85%

·         55%, 45%

                         

29. The cash conversion cycle

·         begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.

·         estimates how long it takes on average for the firm to collect its outstanding accounts receivable balance.

·         shows how long the firm keeps its inventory before selling it.

·         begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures.

                                     

30. You are provided the following working capital information for the Ridge Company:

Ridge Company

Account

$

   

Inventory

$12,890

Accounts receivable

12,800

Accounts payable

12,670

   

Net sales

$124,589

Cost of goods sold

99,630

 

 

 

 

 

 

 

 

 

 

Cash conversion cycle: What is the cash conversion cycle for Ridge Company?

           

·         129.9 days

·         46.4 days

·         83.5 days

·         38.3 days

 

 

 

Fin 571 Final Exam 2

 

1) Which of the following statements is true?

a)      The Principle of Diversification states that investors are better off by investing in two or three good assets even within the same industry.

b)      The Principle of Diversification states that investors are better off by investing in different types of assets.

c)      The Principle of Diversification states that investors are better off by investing in risk-free assets.

d)     The Principle of Diversification states that investors are better off by investing in an industry of their choice.

 

2) Which of the following investments is more likely to give you a diversified common stock portfolio?

a)          An index fund investing in stocks in the S&P 500 and in a money market fund.

b)          Any stock mutual fund investing in a variety of industries in the United States.

c)          A mutual fund investing in European and Asian stocks.

d)         An international mutual fund investing in a wide variety of stocks within and outside one’s country.

         

3) Which of the following assets would pay a dividend?

a)      U.S. Treasury security

b)      Municipal bond

c)      Share of preferred stock

d)     Corporate bond

 

4) The market price of a bond in today’s dollars is the future value of its promised future coupon and principal payments. True or False

 

5) The dot-com bubble reminds us about what?

a)          Capital markets are probably never efficient.

b)          Capital markets are always inefficient.

c)          Capital markets are not always efficient.

d)         All of these

 

 

6) A stock with a beta less than 1.0 will rise or fall more than the market. True or False (it would be less risky and volatile than the rest of the market)

 

7) Which of the following statements is false?

a)          Treasury bills (T-bills) have an original maturity of one   year or less when they are issued.

b)          Treasury notes and bonds have an original maturity of one year or more. 

c)          Negotiable CDs are time deposits issued by domestic or foreign commercial banks that can be sold to a third party.

d)         Munis are long-term securities, issued by state and local governments, and are exempt from federal taxation.

 

8) The weighted average cost of capital (WACC) can be computed using the formula: WACC = (1 – L)re + L(1 – T)rd.  Which (if any) of the following statements is true?

a)          L is equity divided by firm value.

b)          T is the personal tax rate.

c)          re is the required return on debt.

d)         None of these

 

9) Net present value (NPV) is the difference between:

a)          What a capital budgeting project produces and what it is worth (its market value)

b)          What a capital budgeting project costs and what it is worth (its market value)

c)          What a capital budgeting project produces and what it is pays

d)         Cash flows before taxes and cash flows after taxes

 

10) The NPV for a project equals the present value of the future cash flows divided by the initial investment. True or False

 

11) Firms that use debt financing                    .

a)          Can always claim the interest deductions.

b)          Must generate sufficient income from operations to claim the deduction.

c)          Must have high operating leverage.

d)         All of these

 

12) The use of debt in the firm’s capital structure is called:

a)          Homemade leverage.

b)          Operating leverage.

c)          Financial leverage.

d)         Decreasing leverage.

 

13) A firm’s capital structure policy is an established guide for the firm to determine the amount of money it will pay out as dividends. True or False (dividends policy)

 

14) Because zero-coupon bonds make only a single payment at maturity, they are the deepest-discount bonds possible. True or False

 

15) Which of the below is an example of one acting on the Principle of Market Efficiency.

a)          You are going through Wal-Mart and the sacker tells you about a “hot” Brazilian fund. You call up your broker and order 100 shares.

b)          Your sister-in-law is visiting. She tells you that her boss told her to invest in IBM. You go out and buy 100 shares of IBM.

c)          You are at a barbeque and an acquaintance tells you they just read in The Wall Street Journal that Acme, Inc. has increased its dividend. Two days later you buy 100 shares of Acme.

d)         Whenever you hear a “hot” tip, you assume it is too late for you to expect to make a profit.

 

16) A yield curve or term structure of interest rates is: _________

a)          Upward sloping if yields increase with maturity.

b)          Downward sloping if yields decrease with maturity

c)          Upward sloping if yields decrease with maturity

d)         Both a & b are correct

 

17) If the yield to maturity for a bond is less than the bond’s coupon rate, then the market value of the bond is: _______

a)          Greater than the par value.

b)          Less than the par value.

c)          Equal to the par value.

d)         Cannot tell

 

18) Your father gave you a gift of $20,000 for good behavior and you wanted to invest in the stock market.  How much will your investment grow in five years, assuming that you earned 8% each and every year?

 

Amount =20000*(1.08^5) =   $29,386.56

 

19) How much is eight $2000 payments worth to us today discounted at 7%?

 

PMT    -2000

N         8

Rate     7%

PV       $11,942.60

 

20) What is the present value of $50,000 discounted at 15% for 10 years?

 

PV = 50000/(1.15^10) =         $12,359.24

 

21) If I made seven, $1000 payments into a 401(k) account, how much would my account be worth after 20 years if I made 13% a year during that investment?

 

PMT    -1000

N         20

Rate     13%

FV       $80,946.83

 

22) What is the value of a $100 investment that earned 6% per year for five years?

 

Amount =100*(1.06^5) =       $133.82

 

23) What is $1 million discounted at 10% for four years worth to us today?

PV = 1000000/(1.10^4) =       $683,013.46

 

24) You won the lottery and paid you $100,000 per year for the next 10 years. Assuming that you placed your winnings in an investment account, how much would that amount grow if you earned 6% during that time period?

 

PMT    (100,000.00)

N         10

Rate     6%

FV       $1,318,079.49

 

25) What is the present value of $500 discounted at 5% for five years?

 

 

PV = 500/(1.05^5) =   $391.76

 

fin 571 final exam 3

 

1)Which of the following statements is true?

A. A security is a claim issued by a firm that pays owners interest, not dividends.

B. A call option analyzes conflicts of interest and behavior in a principal-agent relationship.

C. An agent-manager can never make bad decisions.

D. The difference between the value of one action and the value of the best alternative is called an opportunity cost.

2) Book value, or net book value, refers to

 

A. the statement of a firm’s financial position at one point in time, including its assets and the claims on those assets by creditors and owners

 

C. an agent-manager never making bad decisions

D. the net of assets less liabilities shown in the accounting statements

 

3) 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?

A. The current yield was less than 9% when the bond was first issued.

B. The current yield was greater than 9% when the bond was first issued.

C. The market value of the bond is more than $1,000.

D. The market value of the bond is less than $1,000.

 

4) If the yield to maturity for a bond is less than the bond’s coupon rate, the market value of the bond is __________.

A. greater than the par value

B. less than the par value

C. equal to the par value

D. cannot tell

5)For investors the proper measure of a stock’s risk is its __________.

A. nondiversifiable risk

B. specific risk

C. nonsystematic risk

D. standard deviation

 

 

 

6) A company’s beta is -1.5. If the overall stock market decreases by 5%, what is the expected change in the firm’s stock price?

A. Share price decreases by 5%

B. Share price decreases by 6.5%

C. Share price increases by 7.5%

D. Share price decreases by 7.5%

 

7) Which of these investments would you expect to have the highest rate of return for the next 20 years?

A. U.S. Treasury bills

B. Long-term corporate bonds

C. Intermediate-term U.S. government bonds

D. Money market funds

    

8) Dimensions of risk include __________.

A. uncertainty about the future outcome

B. the certainty of a negative outcome

C. the impossibility of the same return

D. uncertainty about yesterday’s outcome

9) One problem with using negative values for the proportion invested in the riskless asset to represent a borrowed amount is that the implied borrowing rate of interest is the same as the __________.

A. prime rate of interest

B. current rate of interest

C. lending rate of interest

D. nominal rate of interest

10) If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in

A. high beta stocks

B. low beta stocks

C. stocks with large amounts of unique risk

D. stocks that plot below the security market line

11) Stony Products has an inventory conversion period (ICP) of about 70 days. The receivables collection period (RCP) is 30 days. The payables deferral period (PDP) is about 40 days. What is Stony’s cash conversion cycle (CCC)?

A. 100 days

B. 60 days

C. 140 days

D. 70 days

CCC = ICP + RCP − PDP = 70 days + 30 days − 40 days = 60 days

12) The main source of short-term operating capital is _________.

A. trade credit

B. bank loans

C. bonds

D. sale of treasury stock

13) An investor’s risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?

A. Each stock in the portfolio has its own beta.

B. Selling any stock in this portfolio will lower the beta of the portfolio.

C. An investor cannot change the risk of this portfolio by her choice about personal leverage.

D. Each stock in the portfolio will have a beta greater than 1.

14) An all-equity-financed firm would __________.

A. not pay any income taxes, because interest would exactly offset its taxable income.

B. pay corporate income taxes, because it would have interest expense.

C. not pay corporate income taxes, because it would have no interest expense.

D. pay corporate income taxes if its taxable income is positive.

15) If a firm wants to lower its weighted average cost of capital (WACC), one way to do so would be to

A. sell more common shares

B. sell more bonds

C. Pay a cash dividend

17) Ideas for capital budgeting projects come from all levels within an organization. The bottom-up process results in ideas moving __________ through the organization.

A. downward

B. upward

C. sideways

D. any way

18) Which of the following statements is true?

A. A mutually exclusive project can be chosen independently of other projects

B. When undertaking one project prevents investing in another project, and vice versa, the projects have a positive payback.

 

C. A conventional project has an initial cash outflow followed by one or more expected future cash inflows.

D. Whenever projects are independent and conventional, the internal rate of return (IRR) and net present value (NPV) methods will disagree

19) In practice, the __________ rule is the preferred criteria to accept or reject a capital investment project.

A. NPV

B. profitability index

C. IRR

D. payback

20) The Jerome Inc. western regional branch has been looking to install a new distribution center. The analysts have run the numbers on the distribution center costs and annual inflow from the investment. The project will cost $5 million at the beginning of the first year. The project will generate $1 million in earnings before interest and taxes at the end of each year. Jerome is in the 35% tax bracket and annual depreciation equates to $500,000 per year. The distribution center’s end of the fifth year’s salvage equals its book value, or $2,500,000. Compute the project’s NPV, assuming Jerome’s WACC equals 12%.

A. -$1,238,328

B. $564,060

C. $1,825,731

D. -$66,776

21) The __________ method breaks down when evaluating projects in which the sign of the cash flow changes.

A. IRR

B. NVP

C. PI

D. Payback

22) Studies show systematic differences in capital structures across industries. These are due primarily to differences in __________.

A. a firm’s inventory turnover ratio

B. the ability of assets to support borrowing

C. accounting practices

D. management’s attitude toward what other industries are doing

23) Capital structure decisions refer to the

A. dividend yield of the firm’s stock

B. blend of equity and debt used by the firm

C. capital gains available on the firm’s stock

D. maturity date of firm’s securities

 

24) Which of the following statements concerning preferred stock is true?

A. Preferred stockholders have a prior claim on the income and assets of the firm, as compared to the claims of lenders.

B. Preferred stock dividends per share are normally increased as the earnings of the firm increase.

C. Preferred dividends per share are usually not cut or suspended unless the firm is faced with serious financial problems.

D. Preferred stockholders are the ultimate owners of the firm.

25) Mortgage bonds are __________.

A. secured by a lien on the issuer’s general assets

B. secured by the lien on the issuer’s specific, real assets

C. usually secured by assets such as common shares of one of the issuer’s subsidiaries

D. a form of unsecured debt

26) __________ says to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will provide.

A. The capital market efficiency

B. The options principle

C. The principle of comparative advantage

D. The principle of incremental benefits

27) From the lessee’s viewpoint, the relevant discount rate for evaluating a lease versus buy decision is the __________.

A. cost of issuing new common stock

B. pretax cost of issuing debt

C. after-tax cost of issuing debt

D. lessor’s cost of debt

28) 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 expects that expansion will allow them to sell an additional 4.5 million loaves in the next 5 years. What additional revenues minus expenses will be generated from expansion?

A. $912,500

B. $1,000,500

C. $1,012,500

D. $1,102,500

29) Which of the following statements is true?

A. Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from outside sources.

B. Hard capital rationing refers to the rationing imposed internally by the firm.

C. A post audit is a set of procedures for evaluating a capital budgeting decision after the fact.

D. Few firms will engage in capital rationing.

30) In efficient markets, as in the United States, market prices are not expected to be __________.

A. wrong

B. fair

C. followed by many analysts

D. incorporate all information