Fin 370 Final Examinations 3030 100% Correct
1) The goal of the firm should be
A. maximization of profits
B. maximization of shareholder wealth
C. maximization of consumer satisfaction
D. maximization of sales
2) An example of a primary market transaction is
A. a new issue of common stock by AT&T
B. a sale of some outstanding common stock of AT&T
C. AT&T repurchasing its own stock from a stockholder
D. one stockholder selling shares of common stock to anotherindividual
3) According to the agency problem, _________ represent theprincipals of a corporation.
A. shareholders
B. managers
C. employees
D. suppliers
4) Which of the following is a principle of basic financialmanagement?
A. Risk/return tradeoff
B. Derivatives
C. Stock warrants
D. Profit is king
5) Another name for the acid test ratio is the
A. current ratio
B. quick ratio
C. inventory turnover ratio
D. average collection period
6) The accounting rate of return on stockholders’ investments ismeasured by
A. return on assets
B. return on equity
C. operating income return on investment
D. realized rate of inflation
7) If you are an investor, which of the following would youprefer?
A. Earnings on funds invested compound annually
B. Earnings on funds invested compound daily
C. Earnings on funds invested would compound monthly
D. Earnings on funds invested would compound quarterly
8) The primary purpose of a cash budget is to
A. determine the level of investment in current and fixedassets
B. determine accounts payable
C. provide a detailed plan of future cash flows
D. determine the estimated income tax for the year
9) Which of the following is a non-cash expense?
A. Depreciation expenses
B. Interest expense
C. Packaging costs
D. Administrative salaries
10) The break-even model enables the manager of a firm to
A. calculate the minimum price of common stock for certainsituations
B. set appropriate equilibrium thresholds
C. determine the quantity of output that must be sold to cover alloperating costs
D. determine the optimal amount of debt financing to use
11) A zero-coupon bond
A. pays no interest
B. pays interest at a rate less than the market rate
C. is a junk bond
D. is sold at a deep discount at less than the par value
12) If you have $20,000 in an account earning 8% annually, whatconstant amount could you withdraw each year and have nothingremaining at the end of 5 years?
A. $3,525.62
B. $5,008.76
C. $3,408.88
D. $2,465.78
13) At what rate must $400 be compounded annually for it to grow to$716.40 in 10 years?
A. 6%
B. 5%
C. 7%
D. 8%
14) The present value of a single future sum
A. increases as the number of discount periods increase
B. is generally larger than the future sum
C. depends upon the number of discount periods
D. increases as the discount rate increases
15) Which of the following is considered to be a spontaneous sourceof financing?
A. Operating leases
B. Accounts receivable
C. Inventory
D. Accounts payable
16) Compute the payback period for a project with the followingcash flows, if the company’s discount rate is 12%.
Initial outlay = $450
Cash flows:
Year 1 = $325
Year 2 = $65
Year 3 = $100
A. 3.43 years
B. 3.17 years
C. 2.88 years
D. 2.6 years
17) For the NPV criteria, a project is acceptable if the NPV is__________, while for the profitability index, a project isacceptable if the profitability index is __________.
A. less than zero, greater than the required return
B. greater than zero, greater than one
C. greater than one, greater than zero
D. greater than zero, less than one
18) Which of the following is considered to be a deficiency of theIRR?
A. It fails to properly rank capital projects.
B. It could produce more than one rate of return.
C. It fails to utilize the time value of money.
D. It is not useful in accounting for risk in capitalbudgeting.
19) The firm should accept independent projects if
A. the payback is less than the IRR
B. the profitability index is greater than 1.0
C. the IRR is positive
D. the NPV is greater than the discounted payback
20) The most expensive source of capital is
A. preferred stock
B. new common stock
C. debt
D. retained earnings
21) The cost associated with each additional dollar of financingfor investment projects is
A. the incremental return
B. the marginal cost of capital
C. risk-free rate
D. beta
22) The XYZ Company is planning a $50 million expansion. Theexpansion is to be financed by selling $20 million in new debt and$30 million in new common stock. The before-tax required rate ofreturn on debt is 9%, and the required rate of return on equity is14%. If the company is in the 40% tax bracket, what is the marginalcost of capital?
A. 14.0%
B. 9.0%
C. 10.6%
D. 11.5%
23) Shawhan Supply plans to maintain its optimal capital structureof 30% debt, 20% preferred stock, and 50% common stock far into thefuture. The required return on each component is: debt–10%;preferred stock–11%; and common stock–18%. Assuming a 40% marginaltax rate, what after-tax rate of return must Shawhan Supply earn onits investments if the value of the firm is to remainunchanged?
A. 18.0%
B. 13.0%
C. 10.0%
D. 14.2%
24) Lever Brothers has a debt ratio (debt to assets) of 40%.Management is wondering if its current capital structure is tooconservative. Lever Brothers’ present EBIT is $3 million, andprofits available to common shareholders are $1,560,000, with342,857 shares of common stock outstanding. If the firm were toinstead have a debt ratio of 60%, additional interest expense wouldcause profits available to stockholders to decline to $1,440,000,but only 228,571 common shares would be outstanding. What is thedifference in EPS at a debt ratio of 60% versus 40%?
A. $1.75
B. $2.00
C. $3.25
D. $4.50
25) Zybeck Corp. projects operating income of $4 million next year.The firm’s income tax rate is 40%. Zybeck presently has 750,000shares of common stock which have a market value of $10 per share,no preferred stock, and no debt. The firm is considering twoalternatives to finance a new product: (a) the issuance of $6million of 10% bonds, or (b) the issuance of 60,000 new shares ofcommon stock. If Zybeck issues common stock this year, what will bethe projected EPS next year?
A. $4.94
B. $2.96
C. $5.33
D. $3.20
26) _________ risk is generally considered only a paper gain orloss.
A. Transaction
B. Translation
C. Economic
D. Financial
27) Capital markets in foreign countries
A. offer lower returns than those obtainable in the domesticcapital markets
B. provide international diversification
C. in general are becoming less integrated due to the widespreadavailability of interest rate and currency swaps
D. have been getting smaller in the past decade
28) Buying and selling in more than one market to make a risklessprofit is called
A. profit maximization
B. arbitrage
C. international trading
D. an efficient market
29) What keeps foreign exchange quotes in two different countriesin line with each other?
A. Cross rates
B. Forward rates
C. Arbitrage
D. Spot rates
30) One reason for international investment is to reduce
A. portfolio risk
B. price-earnings (P/E) ratios
C. advantages in a foreign country
D. exchange rate risk
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