FIN/370 FIN 370 FIN370 Week 5 Final Exam – New 2014 Version – from an A+ rated tutor!
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Capital Structure Theory in general assumes that:
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A firm’s value is determined by capitalizing (discounting) the firm’s expected net income by the firm’s cost of equity.
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A firm’s cost of capital rises as a firm uses more financial leverage.
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A firm’s value is determined by discounting the firm’s expected cash flows by the WACC.
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A firm’s cash flows will grow indefinitely at a constant rate.
Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management?
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Quick ratio
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Return on investment
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Current ratio
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Gross profit margin
The Securities Investor Protection Corporation protects individuals from
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other investors who fail to make delivery
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fraud by corporations
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making poor investment decisions
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brokerage firm failures
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?
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$25,000
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$35,000
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$45,000
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$15,000
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 Assessment of these two projects?
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The company should look at other investment criteria, not just NPV.
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Only project Delta should be accepted. Alpha’s NPV is too low for the investment.
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Both projects should be accepted because they have positive NPV’s
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Neither project should be accepted because they might compete with one another
Which of the following is not part of the underwriting process?
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the prospectus
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the Securities and Exchange Commission
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the syndicate
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the Federal Reserve
When the impact of taxes is considered, as the firm takes on more debt
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the weighted average cost of capital will increase.
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there will be no change in total cash flows.
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both taxes and total cash flow to stockholders and bondholders will decrease.
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cash flows will increase because taxes will decrease.
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?
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12.78%
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8.32%
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6.56%
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10.84%
Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is
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60 days.
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45 days.
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75 days
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90 days.
Accounting break-even analysis solves for the level of sales that will result in:
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Free cash flow = $0.00.
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NPV = $0.00.
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IRR=Cost of Capital.
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net income = $0.00.
Buying and selling in more than one market to make a riskless profit is called:
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profit maximization.
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arbitrage.
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international trading.
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globalization
Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?
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Cash flows are more stable than accounting profits.
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Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
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Cash flows have a greater present value than accounting profits.
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Cash flows improve the tax position of a firm more than accounting profits.
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?
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It could buy back some of its shares in the open market in order to reduce its equity.
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Its current assets would need to be highly liquid.
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It could offer no discounts for early payment by its customers.
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Its accounts receivable collection policy could increase the average collection period.
Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?
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Cash flows are more stable than accounting profits.
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Cash flows have a greater present value than accounting profits.
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Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
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Cash flows improve the tax position of a firm more than accounting profits.
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
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3.43 years
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3.17 years
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2.88 years
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2.6 years
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?
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1000 tickets
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1,314 tickets
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1,223 tickets
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1,112 tickets
Which of the following is true regarding Investment Banks?
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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.
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When Glass-Steagal was repealed in 1999, commercial banks and Investment banks had to be separate entities.
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As of 2010, stand alone Investment banks are numerous.
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Under the Glass-Steagal act, commercial banks were allowed to operate as Investment banks.
If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should:
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maximize sales revenues
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increase the market value of the firm’s common stock.
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positively affect profits.
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either increase or have no effect on the value of the firm’s common stock.
Which of the following is true about bonds?
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They are obligations from the investor to the corporation.
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They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.
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At maturity of the bond, the investor receives the market price of the bond.
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Their interest rate always varies with the Consumer Price Index
Which of the following is most likely to occur if a firm over-invests in net working capital?
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The current ratio will be lower than it should be.
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The return on investment will be lower than it should be.
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The quick ratio will be lower than it should be.
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The times interest earned ratio will be lower than it should be.
Which of the following goals is in the best long-term interest of stockholders?
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Profit maximization
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Maximizing sales revenues
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Maximizing of the market value of the existing shareholders’ common stock
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Risk minimization
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.
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$216,418
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$120,725
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$319,604
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$75,003
Which of the following statements best represents what finance is about?
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Maximizing profits
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Creation and maintenance of economic wealth
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How political, social, and economic forces affect corporations
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Reducing risk
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?
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$3,525.62
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$5,008.76
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$2,465.78
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$3,408.88
Long-term financial plans typically encompass:
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5 to 10 years.
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about 5 years.
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6 to 12 months.
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the entire lifecycle of the corporation.
When calculating the weighted average cost of capital, which of the following has to be adjusted for taxes?
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Common stock
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Retained earnings
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Preferred stock
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Debt
We compute the profitability index of a capital-budgeting proposal by Initial outlay = $1,748.80
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dividing the present value of the annual after-tax cash flows by the cost of capital.
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multiplying the cash inflow by the IRR.
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multiplying the IRR by the cost of capital.
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dividing the present value of the annual after-tax cash flows by the cost of the project.
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?
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$25,000
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$38,720
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$39,720
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$31,060
Aspects of demand risk controllable by the firm include:
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interest rates.
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entry of external competitors.
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status of the regional and national economy.
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product quality.
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:
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$21,000.
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$23,000.
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$27,000.
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$20,000.
