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FIN/370 FIN 370 FIN370 FIN-370 Final Exam

 

1 If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should:

•increase the market value of the firm’s common stock.

•either increase or have no effect on the value of the firm’s common stock.

•maximize sales revenues

•positively affect profits.

2 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.

 

$319,604

$120,725

$75,003

$216,418

 

3 Which of the following statements best represents what finance is about? 

 

Maximizing profits

Reducing risk  

How political, social, and economic forces affect corporations

Creation and maintenance of economic wealth

 

4 Accounting break-even analysis solves for the level of sales that will result in:

 

NPV = $0.00.

net income = $0.00.

IRR=Cost of Capital.

Free cash flow = $0.00.

 

5 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

2.88 years

2.6 years

3.43 years

 

6 Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects? 

 

Cash flows improve the tax position of a firm more than accounting profits.

 

Cash flows are more stable than accounting profits.

 

Cash flows have a greater present value than accounting profits.

 

Cash flows reflect the timing of benefits and costs more accurately than accounting profits.

 

7 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

Both projects should be accepted because they have positive NPV’s

The company should look at other investment criteria, not just NPV.

 

8 Which of the following is true regarding Investment Banks?

 

When Glass-Steagal was repealed in 1999, commercial banks and Investment banks had to be separate entities.

As of 2010, stand alone Investment banks are numerous.

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.

Under the Glass-Steagal act, commercial banks were allowed to operate as Investment banks.

 

9 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.

$27,000.

$20,000.

$21,000.

 

10 Aspects of demand risk controllable by the firm include:

 

entry of external competitors.

product quality.

status of the regional and national economy.

interest rates.

 

11 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?

 

$45,000

$35,000

$15,000

$25,000

 

12 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 improve the tax position of a firm more than accounting profits.

Cash flows have a greater present value than accounting profits.

Cash flows are more stable than accounting profits.

 

13 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

 

14 Buying and selling in more than one market to make a riskless profit is called: 

 

globalization

profit maximization.

international trading.

arbitrage.

 

15 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?

 

$39,720

$38,720

$31,060

$25,000

 

16 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%

12.78%

10.84%

 

17 Which of the following is not part of the underwriting process?

 

the Securities and Exchange Commission

the prospectus

the Federal Reserve

the syndicate

 

18 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.

 

19 Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is 

 

45 days.

60 days.

90 days.

75 days

 

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

$3,408.88

$3,525.62

$2,465.78

 

21 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.

Its current assets would need to be highly liquid.

It could buy back some of its shares in the open market in order to reduce its equity.

It could offer no discounts for early payment by its customers.

 

22 Which of the following is true about bonds?

 

They are obligations from the investor to the corporation.

At maturity of the bond, the investor receives the market price of the bond.

They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.

Their interest rate always varies with the Consumer Price Index

 

23 Which of the following is most likely to occur if a firm over-invests in net working capital? 

 

The quick ratio will be lower than it should be.

The current ratio will be lower than it should be.

The times interest earned ratio will be lower than it should be.

The return on investment will be lower than it should be.

 

24 When calculating the weighted average cost of capital, which of the following has to be adjusted for taxes?

 

Retained earnings

Preferred stock

Debt

Common stock

 

25

Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management?

 

Quick ratio

Gross profit margin

Current ratio

Return on investment

 

26 Long-term financial plans typically encompass:

 

about 5 years.

6 to 12 months.

5 to 10 years.

the entire lifecycle of the corporation.

 

27 When the impact of taxes is considered, as the firm takes on more debt

 

the weighted average cost of capital will increase.

both taxes and total cash flow to stockholders and bondholders will decrease.

there will be no change in total cash flows.

cash flows will increase because taxes will decrease

 

28 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.

dividing the present value of the annual after-tax cash flows by the cost of the project.  

multiplying the IRR by the cost of capital.

multiplying the cash inflow by the IRR.

 

29 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?

 

1,223 tickets

1,112 tickets

1000 tickets

1,314 tickets

 

30 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

 

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