FIN/370 Final Exam

| March 14, 2016

1

Which financial statement shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time — generally one year?

· Correct Answer

Income statement

· Correct Answer

Balance sheet

· Correct Answer

Statement of retained earnings

· Correct Answer

Statement of cash flows

2

Which of these is the term for portfolios with the highest return possible for each risk level?

· Correct Answer

Modern portfolios

· Correct Answer

Optimal portfolios

· Correct Answer

Total portfolios

· Correct Answer

Efficient portfolios

3

The Rule of 72 is a simple mathematical approximation for__________.

· Correct Answer

the present value required to double an investment

· Correct Answer

the future value required to double an investment

· Correct Answer

the number of years required to double an investment

· Correct Answer

the payments required to double an investment

4

Which of these statements is true regarding divisional WACC?

· Correct Answer

Using a firmwide WACC to evaluate new projects would have no impact on projects that present less risk than the firm’s average beta.

· Correct Answer

Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm’s average beta.

· Correct Answer

Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present less risk than the firm’s average beta.

· Correct Answer

Using a divisional WACC versus a WACC for the firm’s current operations will result in quite a few incorrect decisions.

5

Which of these is used as a measure of the total amount of available cash flow from a project?

· Correct Answer

Operating cash flow

· Correct Answer

Sunk cash flow

· Correct Answer

Free cash flow

· Correct Answer

Investment in operating capital

6

Which financial statement reports the amounts of cash that the firm generated and distributed during a particular time period?

· Correct Answer

Income statement

· Correct Answer

Statement of cash flows

· Correct Answer

statement of retained earnings

· Correct Answer

Balance sheet

7

We commonly measure the risk-return relationship using which of the following?

· Correct Answer

Expected returns

· Correct Answer

Standard deviation

· Correct Answer

Coefficient of variation

· Correct Answer

Correlation coefficient

8

Financial plans include which of the following?

· Correct Answer

Pro forma Income Statement, Balance Sheet

· Correct Answer

All of the above

· Correct Answer

Schedule of Sales, Expenses, and Capital Expenditure

· Correct Answer

Short Term and Long Term Plan

9

Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds?

· Correct Answer

Investment banks

· Correct Answer

Secondary markets

· Correct Answer

Primary markets

· Correct Answer

Money markets

10

Suppose that Model Nails, Inc.’s capital structure features 60 percent equity, 40 percent debt, and that its before-tax cost of debt is 6 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 28 percent, what will be Model Nails’ WACC?

· Correct Answer

7.73 percent

· Correct Answer

8.40 percent

· Correct Answer

16.00 percent

· Correct Answer

8.00 percent

question11

What’s the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

· Correct Answer

6.1 percent

· Correct Answer

10.2 percent

· Correct Answer

6.0 percent

· Correct Answer

5.9 percent

12

We call the process of earning interest on both the original deposit and on the earlier interest payments:

· Correct Answer

computing.

· Correct Answer

discounting.

· Correct Answer

multiplying.

· Correct Answer

compounding.

13

Which of these ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm?

· Correct Answer

Liquidity

· Correct Answer

Coverage

· Correct Answer

Profitability

· Correct Answer

Financial

14

Which of the following is a true statement?

· Correct Answer

If interest rates fall, all bonds will enjoy rising values.

· Correct Answer

If interest rates fall, no bonds will enjoy rising values.

· Correct Answer

If interest rates fall, U.S. Treasury bonds will have decreasing values.

· Correct Answer

If interest rates fall, corporate bonds will have decreasing values.

15

Five years ago, Jane invested $5,000 and locked in an 8 percent annual interest rate for 25 years (ending 20 years from now). James can make a 20-year investment today and lock in a 10 percent interest rate. How much money should he invest now in order to have the same amount of money in 20 years as Jane?

· Correct Answer

$5,089.91

· Correct Answer

$3,160.43

· Correct Answer

$7,346.64

· Correct Answer

$3,464.11

16

The overall goal of the financial manager is to__________.

· Correct Answer

maximize net income

· Correct Answer

maximize earnings per share

· Correct Answer

minimize total costs

· Correct Answer

maximize shareholder wealth

17

Which of the following can create ethical dilemmas between corporate managers and stockholders?

· Correct Answer

Auditors

· Correct Answer

Venture Capitalist

· Correct Answer

Agency relationship

· Correct Answer

Board of directors

18

When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm’s cash flows as__________.

· Correct Answer

they apply to each asset as they are purchased with their respective forms of debt or equity

· Correct Answer

a sum of the capital components costs

· Correct Answer

a weighted average of the capital components costs

· Correct Answer

a simple average of the capital components costs

19

You are trying to pick the least-expensive machine for your company. You have two choices: machine A, which will cost $50,000 to purchase and which will have OCF of -$3,500 annually throughout the machine’s expected life of three years; and machine B, which will cost $75,000 to purchase and which will have OCF of -$4,900 annually throughout that machine’s four-year life. Both machines will be worthless at the end of their life. If you intend to replace whichever type of machine you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 14 percent, which one should you choose?

· Correct Answer

Neither machine A nor B

· Correct Answer

Both machines A and B

· Correct Answer

Machine A

· Correct Answer

Machine B

20

The top part of Mars, Inc.’s 2013 balance sheet is listed as follows (in millions of dollars).

What are Mars, Inc.’s current ratio, quick ratio, and cash ratio for 2013?

· Correct Answer

10.5, 6.0, 1.0

· Correct Answer

2.3333, 0.5556, 0.1111

· Correct Answer

0.1111, 0.5556, 0.2

· Correct Answer

4.2, 1.0, 0.2

21

We can estimate a stock’s value by__________.

· Correct Answer

using the book value of the total assets divided by the number of shares outstanding

· Correct Answer

discounting the future dividends and future stock price appreciation

· Correct Answer

using the book value of the total stockholder equity section

· Correct Answer

compounding the past dividends and past stock price appreciation

22

Which of these does NOT perform vital functions to securities markets of all sorts by channeling funds from those with surplus funds to those with shortages of funds?

· Correct Answer

Commercial banks

· Correct Answer

Insurance companies

· Correct Answer

Secondary markets

· Correct Answer

Mutual funds

23

A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts believe the stock will be at their target price of $75.00 in two years. Compute the value of this stock with a required return of 10 percent.

· Correct Answer

$65.40

· Correct Answer

$79.14

· Correct Answer

$65.57

· Correct Answer

$66.67

24

Will’s Wheels, Inc. reported a debt-to-equity ratio of 0.65 times at the end of 2013. If the firm’s total debt at year-end was $5 million, how much equity does Will’s Wheels have?

· Correct Answer

$7.69 million

· Correct Answer

$5 million

· Correct Answer

$3.25 million

· Correct Answer

$0.65 million

25

Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?

· Correct Answer

Substitutionary analysis

· Correct Answer

Cash flow analysis

· Correct Answer

Incremental cash flows

· Correct Answer

Pro forma analysis

26

Which financial statement reports a firm’s assets, liabilities, and equity at a particular point in time?

· Correct Answer

Balance sheet

· Correct Answer

Income statement

· Correct Answer

Statement of retained earnings

· Correct Answer

Statement of cash flows

27

Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

· Correct Answer

Liquidity rate risk

· Correct Answer

Reinvestment rate risk

· Correct Answer

Credit quality risk

· Correct Answer

Interest rate risk

28

What are the tools available for the manager in financial planning?

· Correct Answer

Increasing inventory turnover and reducing collection period

· Correct Answer

Reducing collection period and delaying disbursement of cash

· Correct Answer

Delaying disbursement of cash and cash management

· Correct Answer

Delaying disbursement of cash, reducing collection period, cash management, and Increasing inventory turnover

29

As new capital budgeting projects arise, we must estimate__________.

· Correct Answer

the cost of the stock being sold for the specific project

· Correct Answer

the cost of the loan for the specific project

· Correct Answer

when such projects will require cash flows

· Correct Answer

the float costs for financing the project

30

What are reasons for the firm to go abroad?

· Correct Answer

Diversification

· Correct Answer

Access to raw materials

· Correct Answer

Lower production cost

· Correct Answer

All of the above

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