ABUSN 379 FINANCE FINAL EXAM ANSWERS
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BUSN 379 Finance Final Exam Answers
1. (TCO 4) Which
of the following is true regarding the evaluation of projects? (Points: 4)
2. (TCO 4) Which of the following investment ranking methods does not consider the time value of money? (Points: 4)
3. (TCO 3 and 4) The net present value is: (Points: 4)
2. (TCO 4) Which of the following investment ranking methods does not consider the time value of money? (Points: 4)
3. (TCO 3 and 4) The net present value is: (Points: 4)
4. (TCO 3 and 4) What is the net present value of a
project with the following cash flows, if the discount rate is 10 percent?
5. (TCO 4) Leward
Manufacturing is spending $115,000 to update its equipment. This is necessary
if the firm wishes to be competitive in the marketplace and provide a wide
array of product models. The company estimates that these updates will improve
its cash inflows by $27,500 a year, for eight years. What is the payback
period? (Points: 4)
6. (TCO 4) Ignoring the option to expand: (Points: 4)
overestimates the internal rate of return on a project.
6. (TCO 4) Ignoring the option to expand: (Points: 4)
overestimates the internal rate of return on a project.
7. (TCO 4) ___________,
occurs when a firm cannot raise financing for a project under any
circumstances. (Points: 4)
8. (TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points: 4)
8. (TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points: 4)
9. (TCO 4) Assume
Company X plans to invest $60,000 in industrial equipment. Using Tables 9.6 and
9.7 of your textbook (Page 277), which is the first year depreciation amount
under MACRS? (Points: 4)
10. (TCO 1 and 4) Assume a project has earnings before depreciation and taxes of $120,000, depreciation of $40,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? (Points: 4)
10. (TCO 1 and 4) Assume a project has earnings before depreciation and taxes of $120,000, depreciation of $40,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? (Points: 4)
11. (TCO 8) Which
of the following factors will affect the expected rate of return on a security?
(Points: 4)
12. (TCO 8) Which
statement is not true regarding risk? (Points: 4)
the expected return is usually not the same as the actual return
the expected return is usually not the same as the actual return
13. (TCO 8) The
stock of Chocolate Galore is expected to produce the following returns, given
the various states of the economy. What is the expected return on this stock?
(Points: 4)
7.33 percent
9.82 percent
11.26 percent
11.33 percent
11.50 percent
(Points: 4)
7.33 percent
9.82 percent
11.26 percent
11.33 percent
11.50 percent
14. (TCO 8) You
own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000
in stock C, and $5,500 in stock D. What is the portfolio weight of stock B?
(Points: 4)
15. (TCO 8) You
currently own a portfolio valued at $24,000 that has a beta of 1.1. You have
another $8,000 to invest, and would like to invest it in a manner such that the
risk of the new portfolio matches that of the overall market. What does the
beta of the new security have to be? (Points: 4)
. 1. (TCO 8) Company insiders cannot earn excess profits based on the knowledge they have related to their employer if the financial markets are: (Points: 4)
. 1. (TCO 8) Company insiders cannot earn excess profits based on the knowledge they have related to their employer if the financial markets are: (Points: 4)
2. (TCO 5) Royal
Petroleum Co. can buy a piece of equipment that can be financed with debt at an
after-tax cost of 8 percent and common equity at a cost of 20 percent. Assume
debt and common equity each represent 50 percent of the firm’s capital
structure. What is the weighted average cost of capital? (Points: 4)
3. (TCO 5, 6 and 7) An issue of common stock’s most recent
dividend is $3.75. Its growth rate is eight percent. What is its price if the
market’s rate of return is 16 percent? (Points: 4)
4. (TCO 5, 6 and 7) Which of the following is not true
regarding the cost of debt? (Points: 4)
5. (TCO 5) Retained
earnings has a cost associated with it because: (Points: 4)
new funds must be raised.
new funds must be raised.
6. (TCO 4) A
project has the following cash flows. What is the internal rate of return?
7. (TCO 5, 6 and 7) Which one of the following is a correct
statement? (Points: 4)
Current tax laws favor debt financing.
Current tax laws favor debt financing.
8. (TCO 5, 6 and 7) The six percent preferred stock of FKH
Manufacturing is selling for $62 a share. What is the firm’s cost of preferred
stock, if the tax rate is 34 percent and the par value per share is $100?
(Points: 4)
9. (TCO 2) Which
one of the following occurs if a firm files for Chapter 7 bankruptcy, but does
not generally occur if the firm files for Chapter 11 bankruptcy? (Points: 4)
10. (TCO 5) Which
of the following statements is false regarding the cost of capital? (Points: 4)
11. (TCO 2) Select
any actions that do not affect the cash account. (Points: 4)
12. (TCO 2) Which of the following statements is true? (Points:
4)
The optimal credit policy minimizes the total cost of granting credit.
The optimal credit policy minimizes the total cost of granting credit.
13. (TCO 2) Which
one of the following industries is most apt to have the shortest cash cycle?
(Points: 4)
14. (TCO 2) Delphinia’s
has the following estimated quarterly sales for next year. The accounts
receivable period is 30 days. What is the expected accounts receivable balance
at the end of the second quarter? Assume each month has 30 days.
15. (TCO 1) Which
of the following statements is true regarding the goal of financial management?
(Points: 4)
2. (TCO 1) Book
values are different from market values because: (Points: 4)
3. (TCO 1) Use
the following tax table to answer this question:
McKenzie, Inc. earned $144,320 in taxable income for the year.
What is the company’s approximate average tax rate? (Points: 4)
4. (TCO 3) Regional
Bank offers you an APR of 19 percent compounded semiannually, and Local Bank
offers you an EAR of 20.10 percent for a new automobile loan. You should choose
______________ because its _______ is lower. (Points: 4)
5. (TCO 3) You
deposited $11,000 in your bank account today. Which of the following will
decrease the future value of your deposit, assuming that all interest is
reinvested? Assume the interest rate is a positive value. Select all that
apply: (Points: 4)
6. (TCO 3) Thirteen
years from now, you will be inheriting $30,000. What is this inheritance worth
to you today, if you can earn four percent interest compounded annually?
(Points: 4)
7. (TCO 3) The
new home that you want to buy costs $249,500. You plan to make a cash down
payment of 20 percent and finance the balance over 10 years at 6.75 percent.
What will be the amount of your monthly mortgage payment? (Points: 4)
8. (TCO 3) Amy
borrowed $5,000 from her bank three years ago. The loan term is five years.
Each year, Amy must repay the bank $1,000 plus the annual interest. Which type
of loan does Amy have? (Points: 4)
9. (TCO 3) Fanta
Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds
mature in 25 years. What is the current price of the bond if the YTM is 13
percent? Assume annual payments. (Points: 4)
10. (TCO 6) The
market where new securities are offered is called the _____ market. (Points: 4)
primary
primary
11. (TCO 7) A
taxpaying, levered firm’s optimal capital structure: (Points: 4)
is 100 percent equity financing.
is 100 percent equity financing.
12. (TCO 3) What
is the approximate yield to maturity for a seven-year bond that pays 11 percent
interest on a $1000 face value annually if the bond sells for $952? (Points: 4)
13. (TCO 8) Which
of the following is true regarding bonds? (Points: 4)
14. (TCO 8) Two
years ago, MorningStar Company issued seven percent, 25-year bonds and Track,
Inc. issued seven percent, 10-year bonds. Since their time of issue, interest
rates have increased. Which of the following statements is true of each firm’s
bond prices in the market,
15. (TCO 6) Star
Industries has one bond issue outstanding. An indenture provision prohibits the
firm from redeeming the bonds during the first two years. This provision is
referred to as a _____ provision. (Points: 4)
1. (TCO 6) Which
of the following is true regarding put bonds? (Points: 4)
2. (TCO 6 and 7) Financial leverage deals with: (Points:
4)
3. (TCO 6) Company
A has a bond outstanding with $90 annual interest payment, a market price of
$820, and a maturity date in five years. Assume the par value to be $1,000.
What is the bond’s yield to maturity? (Points: 4)
4. (TCO 2) Which
one of the following practices will reduce a firm’s collection float? (Points:
4)
utilizing zero-balance accounts
depositing checks weekly, rather than daily
requiring all customers pay by check, rather than with cash
installing a lockbox system
utilizing zero-balance accounts
depositing checks weekly, rather than daily
requiring all customers pay by check, rather than with cash
installing a lockbox system
paying all bills five days sooner
5. (TCO 2) ___________,
is a system that minimizes inventory. (Points: 4)
material requirements planning
ABC approach
just in time
reorder points
material requirements planning
ABC approach
just in time
reorder points
6. (TCO 1) Provide
three examples of recent well-known unethical behavior cases. Explain the
situation in one or two paragraphs. How do you believe that this behavior
affected the firm’s value? (Points: 10)
7. (TCO 4) What are sunk costs? Provide at least two real-life examples of sunk costs for a project. Should sunk costs be included as incremental cash flows? Why or why not? Explain your rationale. (Points: 10)
.
7. (TCO 4) What are sunk costs? Provide at least two real-life examples of sunk costs for a project. Should sunk costs be included as incremental cash flows? Why or why not? Explain your rationale. (Points: 10)
.
8. (TCO 8) What
is the difference between systematic and unsystematic risk? Provide one example
of each. Can both systematic and unsystematic risks be diversified? Why or why
not? (Points: 10)
9. (TCO 2) What
are some important elements of the collection policy? (Points: 10)
10. (TCO 6 and 7) How can you calculate the cost of debt?
What methods can you use? Provide at least two examples. (Points: 10)
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