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FIN 370 Week 5 Final Exam (Latest - A Graded)

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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

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