Name : _________________________________________

NIM

: _________________________________________
FINAL EXAM- MBA DOHA QATAR
MM - 5007 FINANCIAL MANAGEMENT
Date: 22 August 2015, Time: 16:300 17:30 (1.5 HOURS)
OPEN BOOK
TYPE A

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Exam Instruction:
Choose the right answer and record your answer at the answer sheet;
The question must be returned and attached to your answer sheet;
Cheating during exam strictly prohibited and caused fail from this
course;
Cheating student will not be allowed to take this course in the next
semester.

Section A: 40 Multiple Choice Questions (60%)

1) The cost to a corporation of each type of capital is dependent upon
A) the risk-free rate of bonds plus the business risk of the firm.
B) the risk-free rate of each type of capital plus the business risk of the firm.
C) the risk-free rate of each type of capital plus the financial risk of the firm.
D) the risk-free rate of each type of capital plus the business risk and the financial
risk of the firm.
2) A tax adjustment must be made in determining the cost of
A) long-term debt.
B) common stock.
C) preferred stock.
D) retained earnings.
3) The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par
value bond selling at $950 is
A) 10 percent.
B) 10.6 percent.
C) 12 percent.
D) 15.4 percent.
4) If a corporation has an average tax rate of 40 percent, the approximate, annual,
after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at
$950 is
A) 10 percent.
B) 10.6 percent.
C) 7.6 percent.
D) 6.0 percent.
5) The approximate after-tax cost of debt for a 20-year, 7 percent, $1,000 par value
bond selling at $960 (assume a marginal tax rate of 40 percent) is

A) 4.41 percent.
B) 5.15 percent.
C) 7 percent.
D) 7.35 percent.
6) Debt is generally the least expensive source of capital. This is primarily due to
A) fixed interest payments.
B) its position in the priority of claims on assets and earnings in the event of
liquidation.
C) the tax deductibility of interest payments.
D) the secured nature of a debt obligation.
7) A firm has issued 10 percent preferred stock, which sold for $100 per share par
value. The cost of issuing and selling the stock was $2 per share. The firm's
marginal tax rate is 40 percent. The cost of the preferred stock is
A) 3.9 percent.
B) 6.1 percent.
C) 9.8 percent.
D) 10.2 percent.
8) A firm has determined it can issue preferred stock at $115 per share par value.
The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is
$3 per share. The cost of the preferred stock is
A) 6.4 percent.
B) 10.4 percent.
C) 10.7 percent.
D) 12 percent.
9) A firm has determined its cost of each source of capital and optimal capital
structure, which is composed of the following sources and target market value
proportions:

The weighted average cost of capital is

A) 6 percent.
B) 10.7 percent.
C) 11 percent.
D) 15 percent.
10) Generally, the order of cost, from the least expensive to the most expensive, for
long-term capital of a corporation is
A) new common stock, retained earnings, preferred stock, long-term debt.
B) common stock, preferred stock, long-term debt, short-term debt.
C) preferred stock, retained earnings, common stock, new common stock.

D) long-term debt, preferred stock, retained earnings, new common stock.

11) A firm has EBIT of $375,000, interest expense of $75,000, preferred dividends of
$6,000 and a tax rate of 40 percent. The firm's degree of financial leverage at a
base EBIT level of $375,000 is ________.
A) 0.97
B) 1.29
C) 1.27
D) 1.09
12) A firm has fixed operating costs of $650,000, a sales price per unit of $20, and a
variable cost per unit of $13. At a base sales level of 500,000 units, the firm's
degree of operating leverage is ________.
A) 1.07
B) 1.11
C) 1.18
D) 1.23
13) ________ leverage is concerned with the relationship between earnings before
interest and taxes and earnings per share.
A) Financial
B) Operating
C) Variable
D) Total
14) The firm's ________ is the mix of long-term debt and equity utilized by the firm,
which may significantly affect its value by affecting return and risk.
A) dividend policy
B) capital budget
C) capital structure
D) working capital
15) The lower risk nature of long-term debt in a firm's capital structure is due to the
fact that
A) the equity holders are the true owners of the firm.
B) equity capital has a fixed return.
C) creditors have a higher position in the priority of claims.
D) dividend payments are tax-deductible.
16) A corporation borrows $1,000,000 at 10 percent annual rate of interest. The firm
has a 40 percent tax rate. The yearly, after-tax cost of this debt is
A) $ 40,000.
B) $ 60,000.
C) $100,000.
D) $166,667.
17) A corporation has $5,000,000 of 8 percent preferred stock outstanding and a 40
percent tax rate. The after-tax cost of the preferred stock is

A) $400,000.
B) $240,000.
C) $666,667.
D) $160,000.
18) Poor capital structure decisions can result in ________ the cost of capital,
resulting in ________ acceptable investments. Effective capital structure decisions
can ________ the cost of capital, resulting in ________ acceptable investments.
A) increasing; fewer; lower; more
B) decreasing; more; higher; fewer
C) increasing; more; lower, fewer
D) decreasing; fewer; higher; more
19) Dividend policy is a form of
A) capital budgeting policy.
B) financing policy.
C) working capital policy.
D) dividend reinvestment policy.
20) Modigliani and Miller suggest that the value of the firm is not affected by the
firm's dividend policy, due to
A) the relevance of dividends.
B) the clientele effect.
C) the informational content.
D) the optimal capital structure.
21) A ________ has an effect on the firm's share price similar to that of a ________.
A) stock repurchase; stock split
B) stock dividend; stock split
C) cash dividend; stock dividend
D) cash dividend; stock split
22) The primary purpose of a stock split is to
A) issue additional shares.
B) increase the dividend.
C) reduce the price of stock.
D) reduce trading activity.
23) Assets leased under ________ leases generally have a usable life longer than the
term of the lease.
A) financial
B) operating
C) capital
D) direct
24) A ________ is normally initiated by a firm that needs funds for operations. An
asset previously owned by a lessee is sold to the lessor.
A) direct lease
B) leveraged lease

C) sale-leaseback
D) capital lease
25) The total payments of ________ lease over the lease period are greater than the
cost of the leased asset to the lessor.
A) a financial
B) an operating
C) a serial
D) a direct
26) A lease under which a lessee sells an asset for cash to a prospective lessor and
then leases back the same asset is called a(n)
A) operating lease.
B) leveraged lease.
C) sale-leaseback arrangement.
D) direct lease.
Table 15.1
Irish Air Services has determined several factors relative to its asset and financing
mix.
(a) The firm earns 10 percent annually on its current assets.
(b) The firm earns 20 percent annually on its fixed assets.
(c) The firm pays 13 percent annually on current liabilities.
(d) The firm pays 17 percent annually on long-term funds.
(e) The firm's monthly current, fixed and total asset requirements for the previous
year are summarized in the table below:

27) The firm's monthly average permanent funds requirement is ________. (See Table
15.1)
A) $100,000
B) $57,500
C) $140,000
D) $157,500

28) The firm's monthly average seasonal funds requirement is ________. (See Table
15.1)
A) $17,500
B) $57,500
C) $40,000
D) $157,500
29) The firm's annual financing costs of the aggressive financing strategy are
________. (See Table 15.1)
A) $21,175
B) $26,075
C) $24,475
D) $22,775
30) The firm's annual financing costs of conservative financing strategy are ________.
(See Table 15.1)
A) $22,775
B) $26,075
C) $26,775
D) $21,175
31) The firm's annual profits on total assets for the previous year were ________.
(See Table 15.1)
A) $20,000
B) $21,500
C) $23,625
D) $25,750
32) If the firm's current liabilities in December were $40,000, the net working capital
was ________. (See Table 15.1)
A) $140,000
B) $60,000
C) $10,000
D) -$10,000
33) The firm's initial ratio of current to total asset is ________. (See Table 15.1)
A) 1:3
B) 3:1
C) 2:3
D) 3:2
34) As part of a union negotiation agreement, the United Clerical Workers Union
conceded to be paid every two weeks instead of every week. A major firm
employing hundreds of clerical workers had a weekly payroll of $1,000,000 and the
cost of short-term funds was 12 percent. The effect of this concession was to delay
clearing time by one week. Due to the concession, the firm
A) realized an annual loss of $120,000.
B) realized an annual savings of $120,000.
C) increased its cash cycle.
D) decreased its cash turnover.

35) Tangshan Mining was extended credit terms of 3/15 net 30 EOM. The cost of
giving up the cash discount, assuming payment would be made on the last day of
the credit period, is 75.26 percent. If the firm were able to stretch its accounts
payable to 60 days without damaging its credit rating, the cost of giving up the cash
discount would only be
A) 18.81%.
B) 18.25%.
C) 21.90%.
D) 25.09%.
36) Tangshan Mining was extended credit terms of 3/15 net 30 EOM. The cost of
giving up the cash discount, assuming payment would be made on the last day of
the credit period, would be ________. If the firm were able to stretch its accounts
payable to 60 days without damaging its credit rating, the cost of giving up the cash
discount would only be ________.
A) 72.99%; 18.81%
B) 72.99%; 18.25%
C) 75.25%; 21.90%
D) 75.26%; 25.09%
37) The lower risk nature of long term debt in a firms capital structure is due to the
fact that :
A) the shareholder are true ower
B)equity capital has a fixed return
C)creditors have a higher position in the priority of claims
D)dividend payments are tax deductible
38) Tangshan Mining is considering the acquisition of Zhengsen Mining at a cash
price of $6,000,000. The primary motivation 27) Hayley Medical, Inc. is evaluating
the acquisition of Health-o-Matic, Inc., which had a loss carryforward of $3.75
million, resulting from earlier operations. Hayley Medical can purchase Health-oMatic for $4.5 million and liquidate the assets for $3.25 million. Hayley Medical
expects earnings before taxes in the three years following the acquisition to be as
follows:

(These earnings are assumed to fall within the annual limit legally allowed for
application of a tax loss carryforward resulting from the proposed acquisition.)
Hayley Medical has a 40 percent tax rate and a cost of capital of 15 percent. The
approximate maximum cash price Hayley Medical would be willing to pay for
Health-o-Matic is
A) $4,750,000.
B) $4,500,000.
C) $4,410,000.
D) $3,750,000.

39) Marketing Concepts, Inc. is considering the acquisition of Management Theories,

Inc. at a cash price of $1.5 million. Management Theories, Inc. has short-term
liabilities of $500,000. As a result of acquiring Management Theories, Inc.,
Marketing Concepts, Inc. would acquire the copyrights to a national best-seller
which would provide an estimated cash flow of $300,000 for the next five years. The
firm has a cost of capital of 20 percent. The approximate net present value of this
acquisition is
A) $500,000.
B) $480,800.
C) -$102,700.
D) -$1,102,700.
40) Generally, the order of cost, from the most expensive to the least expensive, for
long-term capital of a corporation is
A) new common stock, retained earnings, preferred stock, long-term debt.
B) common stock, preferred stock, long-term debt, short-term debt.
C) preferred stock, retained earnings, common stock, new common stock.
D) long-term debt, preferred stock, retained earnings, new common stock.

MM 5007 FINANCIAL MANAGEMENT

FINAL EXAM TYPE A
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