Fin 571 Final Exam 1
1. Which of the following is considered a hybrid organizational form?
· sole proprietorship
· limited liability 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?
5. Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm’s days’s sales in inventory?
6. Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?
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.)
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.)
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.)
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.)
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.)
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.)
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?
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?
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?
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?
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
· 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?
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?
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.
· 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:
Cost of goods sold
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%?
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?
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?
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?
2) Book value, or net book value, refers to