Fin 571/Fin 571 Final Exam UOP 100% Correct

1) Which of the following statements is true?
A. A security is a claim issued by a firm that pays owners
interest, not dividends
B. A call option analyzes conflicts of interest and behavior in
a principal-agent relationship
C. An agent-manager can never make bad decisions
D. The difference between the value of one action and the value
of the best alternative is called an opportunity cost
2) Book value, or net book value, refers to
A. the statement of a firm’s financial position at one point in
time, including its assets and the claims on those assets by creditors and
B. the price for which something could be bought or sold in a
reasonable length of time, where reasonable length of time is defined in terms
of the item’s liquidity
C. an agent-manager never making bad decisions
D. the net of assets less liabilities shown in the accounting
3) Assume that the par value of a bond is $1,000. Consider a
bond where the coupon rate is 9% and the current yield is 10%. Which of the
following statements is true?
A. The current yield was less than 9% when the bond was first
B. The current yield was greater than 9% when the bond was first
C. The market value of the bond is more than $1,000
D. The market value of the bond is less than $1,000
4) If the yield to maturity for a bond is less than the bond’-s
coupon rate, the market value of the bond is __________
A. greater than the par value
B. less than the par value
C. equal to the par value
D. cannot tell
5) For investors, the proper measure of a stock’-s risk is its
A. nondiversifiable risk
B. specific risk
C. nonsystematic risk
D. standard deviation
6) A company’s beta is -1.5. If the overall stock market
decreases by 5%, what is the expected change in the firm’-s stock price?
A. Share price decreases by 5%
B. Share price decreases by 6.5%
C. Share price increases by 7.5%
D. Share price decreases by 7.5%
7) Which of these investments would you expect to have the
highest rate of return for the next 20 years?
A. U.S. Treasury bills
B. Long-term corporate bonds
C. Intermediate-term U.S. government bonds
D. Money market funds
8) Dimensions of risk include __________
A. uncertainty about the future outcome
B. the certainty of a negative outcome
C. the impossibility of the same return
D. uncertainty about yesterday’s outcome
9) One problem with using negative values for the proportion
invested in the riskless asset to represent a borrowed amount is that the
implied borrowing rate of interest is the same as the __________.
A. prime rate of interest
B. current rate of interest
C. lending rate of interest
D. nominal rate of interest
10) If you were willing to bet that the overall stock market was
heading up on a sustained basis, it would be logical to invest in
A. high beta stocks
B. low beta stocks
C. stocks with large amounts of unique risk
D. stocks that plot below the security market line
11) Stony Products has an inventory conversion period (ICP) of
about 70 days. The receivables collection period (RCP) is 30 days. The payables
deferral period (PDP) is about 40 days. What is Stony’-s cash conversion cycle
A. 100 days
B. 60 days
C. 140 days
D. 70 days
12) The main source of short-term operating capital is _________
A. trade credit
B. bank loans
C. Bonds
D. sale of treasury stock
13) An investor’s risky portfolio is made up of individual
stocks. Which of the following statements about this portfolio is true?
A. Each stock in the portfolio has its own beta
B. Selling any stock in this portfolio will lower the beta of
the portfolio
C. An investor cannot change the risk of this portfolio by her
choice about personal leverage
D. Each stock in the portfolio will have a beta greater than 1
14) An all-equity-financed firm would __________.
A. not pay any income taxes, because interest would exactly
offset its taxable income
B. pay corporate income taxes, because it would have interest
C. not pay corporate income taxes, because it would have no
interest expense
D. pay corporate income taxes if its taxable income is positive
15) If a firm wants to lower its weighted average cost of
capital (WACC), one way to do so would be to
A. sell more common shares
B. sell more bonds
C. pay a cash dividend
D. issue a stock dividend
16) Boeing® is a world leader in commercial aircraft. In the
face of competition, Boeing® often faces a critical __________ decision:
whether to develop a new generation of passenger aircraft
A. present value
B. payback
C. capital budgeting
D. dividend
17) Ideas for capital budgeting projects come from all levels
within an organization. The bottom-up process results in ideas moving
__________ through the organization
A. downward
B. upward
C. sideways
D. any way
18) Which of the following statements is true?
A. A mutually exclusive project can be chosen independently of
other projects
B. When undertaking one project prevents investing in another
project, and vice versa, the projects have a positive payback
C. A conventional project has an initial cash outflow followed
by one or more expected future cash inflows
D. Whenever projects are independent and conventional, the
internal rate of return (IRR) and net present value (NPV) methods will disagree

19) In practice, the __________ rule is the preferred criteria
to accept or reject a capital investment project
D. Payback
20) The Jerome Inc. western regional branch has been looking to
install a new distribution center. The analysts have run the numbers on the
distribution center costs and annual inflow from the investment. The project
will cost $5 million at the beginning of the first year. The project will
generate $1 million in earnings before interest and taxes at the end of each
year. Jerome is in the 35% tax bracket and annual depreciation equates to
$500,000 per year. The distribution center’s end of the fifth year’s salvage
equals its book value, or $2,500,000. Compute the project’s NPV, assuming
Jerome’-s WACC equals 12%.
A. -$1,238,328
B. $564,060
C. $1,825,731
D. -$66,776
21) The __________ method breaks down when evaluating projects
in which the sign of the cash flow changes
D. Payback
22) Studies show systematic differences in capital structures
across industries. These are due primarily to differences in __________
A. a firm’s inventory turnover ratio
B. the ability of assets to support borrowing
C. accounting practices
D. management’s attitude toward what other industries are doing
23) Capital structure decisions refer to the
A. dividend yield of the firm’s stock
B. blend of equity and debt used by the firm
C. capital gains available on the firm’s stock
D. maturity date for the firm’s securities
24) Which of the following statements concerning preferred stock
is true?
A. Preferred stockholders have a prior claim on the income and
assets of the firm, as compared to the claims of lenders
B. Preferred stock dividends per share are normally increased as
the earnings of the firm increase
C. Preferred dividends per share are usually not cut or
suspended unless the firm is faced with serious financial problems
D. Preferred stockholders are the ultimate owners of the firm
25) Mortgage bonds are __________A. secured by a lien on the
issuer’s general assets
B. secured by the lien on the issuer’s specific, real assets
C. usually secured by assets such as common shares of one of the
issuer’s subsidiaries
D. a form of unsecured debt
26) __________ says to calculate the net advantage of leasing
based on the incremental after-tax benefits that leasing will provide
A. The capital market efficiency
B. The options principle
C. The principle of comparative advantage
D. The principle of incremental benefits
27) From the lessee’s viewpoint, the relevant discount rate for
evaluating a lease versus buy decision is the __________
A. cost of issuing new common stock
B. pretax cost of issuing debt
C. after-tax cost of issuing debt
D. lessor’s cost of debt
28) The wholesale price for Captain John’s is $0.612 per loaf,
and the variable cost of production is $0.387 per loaf. Captain John’s expects
that expansion will allow them to sell an additional 4.5 million loaves in the
next 5 years. What additional revenues minus expenses will be generated from
A. $912,500
B. $1,000,500
C. $1,012,500
D. $1,102,500
29) Which of the following statements is true?
A. Soft capital rationing refers to the rationing imposed externally
by limited funds for borrowing from outside sources
B. Hard capital rationing refers to the rationing imposed
internally by the firm
C. A post audit is a set of procedures for evaluating a capital
budgeting decision after the fact
D. Few firms will engage in capital rationing
30) In efficient markets, as in the United States, market prices
are not expected to be __________
A. wrong
B. fair
C. followed by many analysts
D. incorporate all information

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