Stamford FIN 370 Week 5 final exam-The goal of the firm

1) The goal of the firm should beA. maximization of profitsB. maximization of shareholder wealthC. maximization of consumer satisfactionD. maximization of sales2) An example of a primary market transaction isA. a new issue of common stock by AT&TB. a sale of some outstanding common stock of AT&TC. AT&T repurchasing its own stock from a stockholderD. one stockholder selling shares of common stock to another individual3) According to the agency problem, _________ represent the principals of a corporation.A. shareholdersB. managersC. employeesD. suppliers4) Which of the following is a principle of basic financial management?A. Risk/return tradeoffB. DerivativesC. Stock warrantsD. Profit is king5) Another name for the acid test ratio is theA. current ratioB. quick ratioC. inventory turnover ratioD. average collection period6) The accounting rate of return on stockholders’ investments is measured byA. return on assetsB. return on equityC. operating income return on investmentD. realized rate of inflation7) If you are an investor, which of the following would you prefer?A. Earnings on funds invested compound annuallyB. Earnings on funds invested compound dailyC. Earnings on funds invested would compound monthlyD. Earnings on funds invested would compound quarterly8) The primary purpose of a cash budget is toA. determine the level of investment in current and fixed assetsB. determine accounts payableC. provide a detailed plan of future cash flowsD. determine the estimated income tax for the year9) Which of the following is a non-cash expense?A. Depreciation expensesB. Interest expenseC. Packaging costsD. Administrative salaries10) The break-even model enables the manager of a firm toA. calculate the minimum price of common stock for certain situationsB. set appropriate equilibrium thresholdsC. determine the quantity of output that must be sold to cover all operating costsD. determine the optimal amount of debt financing to use11) A zero-coupon bondA. pays no interestB. pays interest at a rate less than the market rateC. is a junk bondD. is sold at a deep discount at less than the par value12) 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 5 years?A. $3,525.62B. $5,008.76C. $3,408.88D. $2,465.7813) 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 sumA. increases as the number of discount periods increaseB. is generally larger than the future sumC. depends upon the number of discount periodsD. increases as the discount rate increases15) Which of the following is considered to be a spontaneous source of financing?A. Operating leasesB. Accounts receivableC. InventoryD. Accounts payable16) Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%.Initial outlay = $450Cash flows:Year 1 = $325 Year 2 = $65Year 3 = $100A. 3.43 yearsB. 3.17 yearsC. 2.88 yearsD. 2.6 years17) For the NPV criteria, a project is acceptable if the NPV is __________, while for the profitability index, a project is acceptable if the profitability index is __________.A. less than zero, greater than the required returnB. greater than zero, greater than oneC. greater than one, greater than zeroD. greater than zero, less than one18) Which of the following is considered to be a deficiency of the IRR?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 capital budgeting.19) The firm should accept independent projects ifA. the payback is less than the IRRB. the profitability index is greater than 1.0C. the IRR is positiveD. the NPV is greater than the discounted payback20) The most expensive source of capital isA. preferred stockB. new common stockC. debtD. retained earnings21) The cost associated with each additional dollar of financing for investment projects isA. the incremental return B. the marginal cost of capital C. risk-free rate D. beta22) The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital?A. 14.0% B. 9.0% C. 10.6% D. 11.5%23) Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt-10%; preferred stock-11%; and common stock-18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?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 too conservative. Lever Brothers’ present EBIT is $3 million, and profits available to common shareholders are $1,560,000, with 342,857 shares of common stock outstanding. If the firm were to instead have a debt ratio of 60%, additional interest expense would cause profits available to stockholders to decline to $1,440,000, but only 228,571 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%?A. $1.75 B. $2.00 C. $3.25 D. $4.5025) Zybeck Corp. projects operating income of $4 million next year. The firm’s income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will be the projected EPS next year?A. $4.94 B. $2.96 C. $5.33 D. $3.2026) _________ risk is generally considered only a paper gain or loss.A. Transaction B. Translation C. Economic D. Financial27) Capital markets in foreign countriesA. offer lower returns than those obtainable in the domestic capital markets B. provide international diversification C. in general are becoming less integrated due to the widespread availability of interest rate and currency swaps D. have been getting smaller in the past decade28) Buying and selling in more than one market to make a riskless profit is calledA. profit maximization B. arbitrage C. international trading D. an efficient market29) What keeps foreign exchange quotes in two different countries in line with each other?A. Cross rates B. Forward rates C. Arbitrage D. Spot rates30) One reason for international investment is to reduceA. portfolio risk B. price-earnings (P/E) ratios C. advantages in a foreign country D. exchange rate risk

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