You are on page 1of 11

FIN 370 Final Exam (2nd Set) 50 Questions.

P.S. Your questions will be chosen randomly from a large set of questions. Nobody can guarantee
that these questions will cover completely your exam. If I helped you please leave A feedback
(I need it very much). Thank you and good luck.
a.
b.
c.
d.

1.
Which of the following is a characteristic of an efficient market?
Small number of individuals.
Opportunities exist for investors to profit from publicly available information.
Security prices reflect fair value of the firm.
Immediate response occurs for new public information.

a.
b.
c.
d.
e.

1.
Diversification increases when ________ decreases.
variability
return
risk
a and c
all of the above

a.
b.
c.
d.
e.

2.
Corporations receive money from investors with:
initial public offerings.
seasoned new issues.
primary market transactions.
a and b.
all of the above.
3.
a.
b.
c.
d.
e.

Which of the following is true regarding an initial public offering?


The corporation gets proceeds from the investor.
Investors get proceeds from other investors.
The security is sold for the first time to the public.
Both a and c.
All of the above.

Table 1(Use this table for questions 5-8)


Smith Company Balance Sheet
Cash and marketable securities
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Fixed assets
Less: accumulated depreciation
Net fixed assets

Assets:
$300,000
2,215,000
1,837,500
24,000
$3,286,500
2,700,000
1,087,500
$1,612,500
Page 1 of 11

Total assets
Liabilities:
Accounts payable
Notes payable
Accrued taxes
Total current liabilities
Long-term debt
Owners equity
Total liabilities and owners equity
Net sales (all credit)
Less: Cost of goods sold
Selling and administrative expense
Depreciation expense
Interest expense
Earnings before taxes
Income taxes
Net income
Common stock dividends
Change in retained earnings

$4,899,000
$240,000
825,000
42,500
$1,107,000
975,000
2,817,000
$4,899,000
$6,375,000
4,312,500
1,387,500
135,000
127,000
$412,500
225,000
$187,500
$97,500
$90,000

4.

Based on the information in Table 1, the current ratio is:


a. 2.97.
b. 1.46.
c. 2.11.
d. 2.23.

5.

Based on the information in Table 1, the debt ratio is:


a. 0.70.
b. 0.20.
c. 0.74.
d. 0.42.

6.

Based on the information in Table 1, the net profit margin is:


a. 4.61%
b. 2.94%.
c. 1.97%.
d. 5.33%.

7.

Based on the information in Table 1, the inventory turnover ratio is:


a. 0.29 times.
b. 2.35 times.
c. 0.43 times.
d. 3.47 times.

8.

Marshall Networks, Inc. has a total asset turnover of 2.5 and a net profit margin of
3.5%. The firm has a return on equity of 17.5%. Calculate Marshalls debt ratio.
Page 2 of 11

a.
b.
c.
d.

30%
40%
50%
60%

Use the following information and the percent-of-sales method to Answer questions 10 -12.
Below is the 2004 year-end balance sheet for Banner, Inc. Sales for 2004 were $1,600,000 and
are expected to be $2,000,000 during 2005. In addition, we know that Banner plans to pay
$90,000 in 2005 dividends and expects projected net income of 4% of sales. (For consistency
with the Answer selections provided, round your forecast percentages to two decimals.)
Banner, Inc. Balance Sheet
December 31, 2004
Assets
Current assets
$890,000
Net fixed assets
1,000,000
Total
$1,890,000
Liabilities and Owners Equity
Accounts payable
$160,000
Accrued expenses
100,000
Notes payable
700,000
Long-term debt
300,000
Total liabilities
1,260,000
Common stock (plus paid-in capital)
360,000
Retained earnings
270,000
Common equity
630,000
Total
$1,890,000
9.

Banners projected current assets for 2005 are:


a. $1,000,000.
b. $1,120,000.
c. $1,500,000.
d. $1,260,000.

10.

Banners projected accounts payable balance for 2005 is:


a. $160,000.
b. $120,000.
c. $200,000.
d. $300,000.

11.

Banners projected fixed assets for 2005 are:


a. $1,120,000.
b. $1,260,000.
c. $1,000,000.
d. $2,380,000.

Page 3 of 11

13.

What is the present value of $1,000 to be received 10 years from today? Assume that
the investment pays 8.5% and it is compounded monthly (round to the nearest $1).
a.
$893
b.
$3,106
c.
$429
d.
$833

14.

What is the present value of $12,500 to be received 10 years from today? Assume a
discount rate of 8% compounded annually and round to the nearest $10.
a.
$5,790
b.
$11,574
c.
$9,210
d.
$17,010

15.

The NPV method:


a. is consistent with the goal of shareholder wealth maximization.
b. recognizes the time value of money.
c. uses cash flows.
d. all of the above.

16.

If the IRR is greater than the required rate of return, the:


a. present value of all the cash inflows will be greater than the initial outlay.
b. payback will be less than the life of the investment.
c. project should be rejected.
d. both a and b.

17.

ABC Service can purchase a new assembler for $15,052 that will provide an annual
net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if
the required rate of return is 12%. (Round your answer to the nearest $1.)
a. $1,056
b. $4,568
c. $7,621
d. $6,577

18.

Suppose you determine that the NPV of a project is $1,525,855. What does that
mean?
a. In all cases, investing in this project would be better than investing in a project that has
an NPV of $850,000.
b. The project would add value to the firm.
c. Under all conditions, the projects payback would be less than the profitability index.
d. The projects IRR would have to be less that the firms discount rate.

Page 4 of 11

19.

The IRR is:


a. the discount rate that makes the NPV positive.
b. the discount rate that equates the present value of the cash inflows with the cost of
the project.
c. the discount rate that makes the NPV negative and the profitability index greater than
one.
d. the rate of return that makes the NPV positive.

20.

Crawfish Kitchen Inc. is planning to invest in one of three mutually exclusive


projects. Projected cash flows for these ventures are as follows:

Which project is the most profitable according to the NPV Criteria if the discount
rate for the firm is 14%?
a. Plan A
b. Plan B
c. Plan C

21.

You are in charge of one division of Bigfella Conglomerate Inc. Your division is
subject to capital rationing. Your division has four indivisible projects available,
detailed as follows:
Project Initial Outlay IRR
NPV
1
2 million
18% 2,500,000
3
1 million
10%
600,000
2
1 million
15%
950,000
4
3 million
9% 2,000,000
If you must select projects subject to a budget constraint of 5 million dollars, which
set of projects should be accepted so as to maximize firm value?
a. Projects 1, 2, and 3
b. Project 1 only
c. Projects 1 and 4
d. Projects 2, 3, and 4

22.

J & B, Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently,
the yield to maturity on these bonds is 14%. If the firms tax rate is 40%, what is the
cost of debt to J & B?
Page 5 of 11

a.
b.
c.
d.

12.0%
14.0%
8.4%
5.6%

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: debt10%; preferred stock11%; and common stock18%.
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.

Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually.
Investors are expected to pay $918 for the 10-year bond. Bender will have to pay $33
per bond in flotation costs. What is the cost of debt if the firm is in the 34% tax
bracket?
a. 7.23%
b. 9.01%
c. 9.23%
d. 11.95%

25.

Armadillo Mfg. Co. has a target capital structure of 50% debt and 50% equity. They
are planning to invest in a project which will necessitate raising new capital. New
debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The
equity will be provided by internally generated funds. No new outside equity will be
issued. If the required rate of return on the firms stock is 15% and its marginal tax
rate is 40%, compute the firms cost of capital.
a. 13.5%
b. 12.5%
c. 7.2%
d. 11.1%

26.

Which of the following relationships is true, regarding the costs of issuing the below
securities?
a. Common stock > bonds > preferred stock
b. Preferred stock > common stock > bonds
c. Bonds > common stock > preferred stock
d. Common stock > preferred stock > bonds

27.

The _______ is the federal agency primarily responsible for regulating the securities
Page 6 of 11

industry.
a. FTC
b. SEC
c. FRB
d. SCC
28.

A firms business risk is influenced by the:


a. competitive position of the firm within the industry.
b. demand characteristics of the firms products.
c. financing structure of the firm.
d. both a and b.
e. all of the above.

29.

Cost of capital is:


a. the coupon rate of debt.
b. a hurdle rate set by the board of directors.
c. the rate of return that must be earned on additional investment if firm value is to
remain unchanged.
d. the average cost of the firms assets.

30.

Given the following information, determine the risk-free rate.


Cost of equity
= 12%
Beta
= 1.50
Market risk premium = 3%
a. 8.0%
b. 7.5%
c. 7.0%
d. 6.5%

31.

Which of the following relationships is true, regarding the costs of issuing the below
securities?
a. Common stock > bonds > preferred stock
b. Preferred stock > common stock > bonds
c. Bonds > common stock > preferred stock
d. Common stock > preferred stock > bonds
Table 1 (Use this for questions 32-36)
Average selling price per unit
$16.00
Variable cost per unit
$11.00
Page 7 of 11

32.

Units sold
200,000
Fixed costs
$800,000
Interest expense
$ 50,000
Based on the data in Table 1, what is the break-even point in units produced and
sold?
a. $130,000
b. $140,000
c. $150,000
d. $160,000

33.

Based on the data contained in Table 1, what is the degree of operating leverage?
a. 1.00 times
b. 2.00 times
c. 3.00 times
d. 4.00 times
e. 5.00 times

34.

Based on the data contained in Table 1, what is the contribution margin?


a. $5.00
b. $4.00
c. $3.00
d. $2.00

35.

Based on the data contained in Table 1, what is the degree of financial leverage?
a. 3.33 times
b. 2.50 times
c. 1.50 times
d. 1.33 times

36.

Based on the data contained in Table 1, what is the degree of combined leverage?
a. 6.33
b. 6.67
c. 7.33
d. 7.67

37.

Fluctuations in EBIT result in:


a. fluctuations in EPS, which might be larger or smaller as financial leverage increases.
b. smaller fluctuations in EPS, the greater the degree of financial leverage.
c. greater fluctuations in EPS, the greater the degree of financial leverage.
d. equal fluctuations in EPS, the greater the degree of financial leverage.

38.

A toy manufacturer following the hedging principle will generally finance seasonal
inventory build-up prior to the Christmas season with:
a. common stock.
b. selling equipment.
c. trade credit.
Page 8 of 11

d. preferred stock.
39.

Accounts receivable and inventory self-liquidate through the __________ cycle.


a. spontaneous account
b. net working capital
c. cash conversion
d. sales-to-receivables collection

40.

Given that short-term interest rates typically fluctuate more than long-term rates,
interest rate risk is least for:
a. Treasury bills.
b. common stock.
c. long-term government bonds.
d. medium-term corporate bonds.

41.

If you compare the yield of a municipal bond with that of a Treasury bond, what is
the equivalent before-tax yield of a municipal bond yielding 6% per year for an
investor in the 36% tax bracket (round to nearest .1%)?
a. 9.4%
b. 8.1%
c. 7.7%
d. 6.3%

42.

Carrying cost on inventory includes:


a. the required rate of return on investment in total assets.
b. wages of warehouse employees.
c. cost associated with inventory shrinkage.
d. both b and c.
e. all of the above.

43.

The TQM view argues that:


a. the costs of achieving higher quality are more than economists projected.
b. better quality products drive higher sales.
c. lost sales result from a poor-quality reputation.
d. both b and c.
e. all of the above.

44.

A spot transaction occurs when one currency is:


a. deposited in a foreign bank.
b. immediately exchanged for another currency.
c. exchanged for another currency at a specified price.
d. traded for another at an agreed-upon future price.
Page 9 of 11

45.

Exchange rate risk:


a. arises from the fact that the spot exchange rate on a future date is a random
variable.
b. applies only to certain types of international businesses.
c. has been phased out due to recent international legislation.
d. both a and b.

Use the following information to answer questions 46-47. Below is an excerpt from Table 22-1,
The Globalization of Product and Financial Markets, that appears in your text. Values are foreign
exchange rates reported in The Wall Street Journal.
U.S. $ equivalent
Currency per U.S. $
Country
Mon.
Mon.
India (Rupee)
0.03137
31.88
Britain (Pound)
1.5615
30-day Forward
1.5609
90-day Forward
1.5605
180-day Forward
1.5603
Canada (Dollar)
0.7265
1.3765
30-day Forward
0.7256
1.3782
90-day Forward
0.7236
1.3820
180-day Forward
0.7196
1.3896
Sweden (Koruna)
0.18848
5.3055
30-day Forward
0.18829
5.3110
90-day Forward
0.18809
5.3167
180-day Forward
0.18795
5.3205
46.

To buy one Indian Rupee you would need:


a. 3.137 cents.
b. 31.88 dollars.
c. 18.848 cents.
d. 5.3055 dollars.

47.

The number of pounds you can purchase per U.S. dollar is:
a. 1.5609.
b. 0.6207.
c. 0.6404.
d. 1.5615.
Page 10 of 11

48.

Which of the following statements about a financial lease is generally true?


a. The entire lease payment is used as an income tax deduction.
b. Only the portion of the lease payment that reduces the principal may be used as an
income tax deduction.
c. It has no income tax deductibility.
d. Only the portion of the lease payment that is applied to interest is tax-deductible.

49.

Which of the following most likely would cause a lease to be classified as a capital
lease?
a. The lease is for five or more years.
b. The lease is for $1 million or more.
c. The lease permits the lessee to purchase the equipment at the end of the lease for its
fair market value.
d. The present value of the lease payments, calculated at the lessees typical rate of
interest for a similar purchase loan, is more than the original purchase price of the
equipment.

50.

What price must a company typically pay to buy another company? The price will:
a. include some premium over the current market value of the targets equity.
b. be the market value of the targets equity.
c. be the book value of the targets equity.
d. include some discount relative to the current market value of the targets equity.

Page 11 of 11