FIN 370 Finance for business Final exam

1. The Securities Investor Protection Corporation protects individuals from

·       brokerage firm failures

·       making poor investment decisions

·       fraud by corporations

·       other investors who fail to make delivery

2. You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?

·       $38,720

·       $39,720

·       $31,060

·       $25,000

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3. When calculating the weighted average cost of capital, which of the following has to be adjusted for taxes?

·       Debt

·       Preferred stock

·       Retained earnings

·       Common stock

4. Buying and selling in more than one market to make a riskless profit is called:

·       profit maximization.

·       globalization

·       arbitrage.

·       international trading.

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5. Which of the following is true about bonds?

·       They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.

·       At maturity of the bond, the investor receives the market price of the bond.

·       They are obligations from the investor to the corporation.

·       Their interest rate always varies with the Consumer Price Index

6. Compute the payback period for a project with the following cash flows, if the company's discount rate is 12%.

Initial outlay = $450

Cash flows:     Year 1 = $325

                          Year 2 = $65

                          Year 3 = $100

·       3.17 years

·       2.6 years

·       2.88 years

·       3.43 years

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7. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?

·       Cash flows have a greater present value than accounting profits.

·       Cash flows improve the tax position of a firm more than accounting profits.

·       Cash flows are more stable than accounting profits.

·       Cash flows reflect the timing of benefits and costs more accurately than accounting profits.

8. Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta expects its working capital to increase $1,000 during the life of the project. Delta will depreciate the machine using the straight-line method over the project's five year life to a salvage value of zero. The machine's purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The machine's initial cash outflow is:

·       $23,000.

·       $20,000.

·       $27,000.

·       $21,000.

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9. Which of the following is most likely to occur if a firm over-invests in net working capital?

·       The return on investment will be lower than it should be.

·       The times interest earned ratio will be lower than it should be.

·       The current ratio will be lower than it should be.

·       The quick ratio will be lower than it should be.

10. Metals Corp. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common equity. Metals Corp.'s after-tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Metals Corp.'s weighted average cost of capital?

·       8.32%

·       6.56%

·       10.84%

·       12.78%

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11. Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?

·       Return on investment

·       Gross profit margin

·       Current ratio

·       Quick ratio

12. We compute the profitability index of a capital-budgeting proposal by Initial outlay = $1,748.80

·       dividing the present value of the annual after-tax cash flows by the cost of capital.

·       multiplying the cash inflow by the IRR. 

·       multiplying the IRR by the cost of capital.

·       dividing the present value of the annual after-tax cash flows by the cost of the project. 

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13. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?

·       $15,000

·       $35,000

·       $25,000

·       $45,000

14. Which of the following could offset the higher risk exposure a company would face if it’s current ratio and net working capital were relatively low?

·       Its accounts receivable collection policy could increase the average collection period.

·       It could offer no discounts for early payment by its customers.

·       It could buy back some of its shares in the open market in order to reduce its equity.

·       Its current assets would need to be highly liquid.

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15. The Oviedo Thespians are planning to present performances of their Florida Revue on 2 consecutive nights in January. It will cost them $5,000 per night for theater rental, event insurance and professional musicians. The theater will also take 10% of gross ticket sales. How many tickets must they sell at $10.00 per ticket to raise $1,000 for their organization?

·       1,314 tickets

·       1,112 tickets

·       1,223 tickets

·       1000 tickets

16. Aspects of demand risk controllable by the firm include:

·       product quality.

·       interest rates.

·       entry of external competitors.

·       status of the regional and national economy.

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17. Which of the following is true regarding Investment Banks?

·       As of 2010, stand alone Investment banks are numerous.

·       Under the Glass-Steagal act, commercial banks were allowed to operate as Investment banks.

·       As a result of the financial crisis of 2008, all stand-alone Investment banks either failed, were merged into commercial banks, or became commercial banks.

·       When Glass-Steagal was repealed in 1999, commercial banks and Investment banks had to be separate entities.

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18. Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is

·       60 days.

·       75 days

·       90 days.

·       45 days.

19. When the impact of taxes is considered, as the firm takes on more debt

·       there will be no change in total cash flows.

·       cash flows will increase because taxes will decrease.

·       the weighted average cost of capital will increase.

·       both taxes and total cash flow to stockholders and bondholders will decrease.

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20. If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years?

·       $5,008.76

·       $3,525.62

·       $3,408.88

·       $2,465.78

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21. Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2014; sales were $3,450,000 in fiscal 2013. Assume the following figures for the fiscal year ending 2013: cash $70,000; accounts receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts payable $235,000; and accruals $155,000. Use the percent-of-sales method to forecast cash for the fiscal year ending 2014.

·       $75,003

·       $216,418

·       $120,725

·       $319,604

22. If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should:

·       maximize sales revenues

·       either increase or have no effect on the value of the firm's common stock.

·       increase the market value of the firm's common stock.

·       positively affect profits.

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23. Project Sigma requires an investment of $1 million and has a NPV of $10. Project Delta requires an investment of $500,000 and has a NPV of $150,000. The projects involve unrelated new product lines. What is your evaluation of these two projects?

·       Only project Delta should be accepted. Alpha's NPV is too low for the investment.

·       Neither project should be accepted because they might compete with one another

·       The company should look at other investment criteria, not just NPV.

·       Both projects should be accepted because they have positive NPV's

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24. Capital Structure Theory in general assumes that:

·       A firm's value is determined by discounting the firm's expected cash flows by the WACC.

·       A firm's cost of capital rises as a firm uses more financial leverage.

·       A firm's value is determined by capitalizing (discounting) the firm's expected net income by the firm's cost of equity.

·       A firm's cash flows will grow indefinitely at a constant rate.

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25. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?

·       Cash flows reflect the timing of benefits and costs more accurately than accounting profits.

·       Cash flows have a greater present value than accounting profits.

·       Cash flows improve the tax position of a firm more than accounting profits.

·       Cash flows are more stable than accounting profits.

26. Which of the following is not part of the underwriting process?

·       the syndicate

·       the prospectus

·       the Federal Reserve

·       the Securities and Exchange Commission

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27. Long-term financial plans typically encompass:

·       6 to 12 months.

·       5 to 10 years.

·       about 5 years.

·       the entire lifecycle of the corporation.

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28. Accounting break-even analysis solves for the level of sales that will result in:

·       IRR = Cost of Capital.

·       net income = $0.00.

·       Free cash flow = $0.00.

·       NPV = $0.00.

29. Which of the following statements best represents what finance is about?

·       How political, social, and economic forces affect corporations

·       Reducing risk 

·       Creation and maintenance of economic wealth

·       Maximizing profits

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30. Which of the following goals is in the best long-term interest of stockholders?

·       Risk minimization

·       Maximizing of the market value of the existing shareholders' common stock

·       Maximizing sales revenues

·       Profit maximization

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