FIN 370 Week 5 Final Exam (Latest - A Graded) -
1. The Securities Investor Protection Corporation protects individuals from
- brokerage firm failures
- making poor investment decisions
- fraud by corporations
- other investors who fail to make delivery
2. 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?
- $38,720
- $39,720
- $31,060
- $25,000
3. When calculating the weighted average cost of capital, which of the following has to be adjusted for taxes?
- Debt
- Preferred stock
- Retained earnings
- Common stock
4. Buying and selling in more than one market to make a riskless profit is called:
- profit maximization.
- globalization
- arbitrage.
- international trading.
5. Which of the following is true about bonds?
- They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.
- At maturity of the bond, the investor receives the market price of the bond.
- They are obligations from the investor to the corporation.
- Their interest rate always varies with the Consumer Price Index
6. 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
- 3.17 years
- 2.6 years
- 2.88 years
- 3.43 years
7. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?
- Cash flows have a greater present value than accounting profits.
- Cash flows improve the tax position of a firm more than accounting profits.
- Cash flows are more stable than accounting profits.
- Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
8. 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:
- $23,000.
- $20,000.
- $27,000.
- $21,000.
9. Which of the following is most likely to occur if a firm over-invests in net working capital?
- The return on investment will be lower than it should be.
- The times interest earned ratio will be lower than it should be.
- The current ratio will be lower than it should be.
- The quick ratio will be lower than it should be.
10. 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?
- 8.32%
- 6.56%
- 10.84%
- 12.78%
11. Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?
- Return on investment
- Gross profit margin
- Current ratio
- Quick ratio
12. We compute the profitability index of a capital-budgeting proposal by Initial outlay = $1,748.80
- dividing the present value of the annual after-tax cash flows by the cost of capital.
- multiplying the cash inflow by the IRR.
- multiplying the IRR by the cost of capital.
- dividing the present value of the annual after-tax cash flows by the cost of the project.
13. 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?
- $15,000
- $35,000
- $25,000
- $45,000
14. 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?
- Its accounts receivable collection policy could increase the average collection period.
- It could offer no discounts for early payment by its customers.
- It could buy back some of its shares in the open market in order to reduce its equity.
- Its current assets would need to be highly liquid.
15. 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?
- 1,314 tickets
- 1,112 tickets
- 1,223 tickets
- 1000 tickets
16. Aspects of demand risk controllable by the firm include:
- product quality.
- interest rates.
- entry of external competitors.
- status of the regional and national economy.
17. Which of the following is true regarding Investment Banks?
- As of 2010, stand alone Investment banks are numerous.
- Under the Glass-Steagal act, commercial banks were allowed to operate as Investment banks.
- 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.
- When Glass-Steagal was repealed in 1999, commercial banks and Investment banks had to be separate entities.
18. Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is
- 60 days.
- 75 days
- 90 days.
- 45 days.
19. When the impact of taxes is considered, as the firm takes on more debt
- there will be no change in total cash flows.
- cash flows will increase because taxes will decrease.
- the weighted average cost of capital will increase.
- both taxes and total cash flow to stockholders and bondholders will decrease.
20. 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?
- $5,008.76
- $3,525.62
- $3,408.88
- $2,465.78
21. 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.
- $75,003
- $216,418
- $120,725
- $319,604
22. If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should:
- maximize sales revenues
- either increase or have no effect on the value of the firm's common stock.
- increase the market value of the firm's common stock.
- positively affect profits.
23. 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?
- Only project Delta should be accepted. Alpha's NPV is too low for the investment.
- Neither project should be accepted because they might compete with one another
- The company should look at other investment criteria, not just NPV.
- Both projects should be accepted because they have positive NPV's
24. Capital Structure Theory in general assumes that:
- A firm's value is determined by discounting the firm's expected cash flows by the WACC.
- A firm's cost of capital rises as a firm uses more financial leverage.
- A firm's value is determined by capitalizing (discounting) the firm's expected net income by the firm's cost of equity.
- A firm's cash flows will grow indefinitely at a constant rate.
25. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?
- Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
- Cash flows have a greater present value than accounting profits.
- Cash flows improve the tax position of a firm more than accounting profits.
- Cash flows are more stable than accounting profits.
26. Which of the following is not part of the underwriting process?
- the syndicate
- the prospectus
- the Federal Reserve
- the Securities and Exchange Commission
27. Long-term financial plans typically encompass:
- 6 to 12 months.
- 5 to 10 years.
- about 5 years.
- the entire lifecycle of the corporation.
28. Accounting break-even analysis solves for the level of sales that will result in:
- IRR = Cost of Capital.
- net income = $0.00.
- Free cash flow = $0.00.
- NPV = $0.00.
29. Which of the following statements best represents what finance is about?
- How political, social, and economic forces affect corporations
- Reducing risk
- Creation and maintenance of economic wealth
- Maximizing profits
30. Which of the following goals is in the best long-term interest of stockholders?
- Risk minimization
- Maximizing of the market value of the existing shareholders' common stock
- Maximizing sales revenues
- Profit maximization