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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.

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.
• 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