BUSN 379 Finance Final Exam Answers

BUSN 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)

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.

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)

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)

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

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

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)

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.

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.

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.

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

11. (TCO 7) A taxpaying, levered firm’s optimal capital structure: (Points: 4)
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

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

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)
.

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)