FIN370 Final Exam (30 Multiple Choice Questions)

1. You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with \$12,000 of income. Option A pays \$2,000 the first year followed by two annual payments of \$5,000 each. Option B pays three annual payments of \$4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate.

1. Both options are of equal value since they both provide \$12,000 of income.
2. Option A is an annuity.
3. Option A has the higher future value at the end of year three.
4. Option B is a perpetuity.
5. Option B has a higher present value at time zero.

2. Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is \$260 and the expected fixed costs are \$589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is \$129,000. The sales price is estimated at \$750 per unit, give or take 2 percent. The tax rate is 35 percent. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of \$755. What is the operating cash flow based on this analysis?

1. \$293,089
2. \$354,874
3. \$86,675
4. \$337,975
5. \$368,015

3. Nadine’s Home Fashions has \$2.12 million in net working capital. The firm has fixed assets with a book value of \$31.64 million and a market value of \$33.9 million. The firm has no long-term debt. The Home Centre is buying Nadine’s for \$37.5 million in cash. The acquisition will be recorded using the purchase accounting method. What is the amount of goodwill that The Home Centre will record on its balance sheet as a result of this acquisition?

1. \$1.48 million
2. \$5.86 million
3. \$3.74 million
4. \$4.14 million
5. \$3.34 million

4. George and Pat just made an agreement to exchange currencies based on today’s exchange rate. Settlement will occur tomorrow. Which one of the following is the exchange rate that applies to this agreement?

1. Triangle rate
2. Cross rate
3. Spot exchange rate
4. Forward exchange rate
5. Current rate

5. You are doing some comparison shopping. Five stores offer the product you want at basically the same price but with differing credit terms. Which one of these terms is best-suited to you if you plan to forgo the discount?

1. 2/10, net 30
2. 2/5, net 30
3. 1/10, net 45
4. 2/5, net 20
5. 1/5, net 15

6. The common stock of Dayton Repair sells for \$43.19 a share. The stock is expected to pay \$2.28 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 2.15 percent annually and expects to continue doing so. What is the market rate of return on this stock?

1. 59 percent
2. 43 percent
3. 14 percent
4. 67 percent
5. 28 percent

7. Phillips Equipment has 75,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 6 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for \$64 a share and has a par value of \$100. The common stock has a beta of 1.21 and sells for \$44 a share. The U.S. Treasury bill is yielding 2.3 percent and the return on the market is 11.2 percent. The corporate tax rate is 34 percent. What is the firm’s weighted average cost of capital?

1. 18 percent
2. 30 percent
3. 64 percent
4. 00 percent
5. 56 percent

8. The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

1. The international Fisher effect.
2. The unbiased forward rates condition.
3. Interest rate parity.
4. Uncovered interest rate parity.
5. Purchasing power parity.

9. When utilizing the percentage of sales approach, managers:

1. Estimate company sales based on a desired level of net income and the current profit margin.
2. Consider only those assets that vary directly with sales.
3. III. Consider the current production capacity level.
4. Can project both net income and net cash flows.
1. II and III only
2. II, III, and IV only
3. I, III, and IV only
4. III and IV only
5. I and II only

10. Which one of the following is a source of cash?

1. Payment to a supplier
2. Granting credit to a customer
3. Acquisition of debt
4. Purchase of inventory
5. Repurchase of common stock

11. Fresno Salads has current sales of \$6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income?

1. \$438.70
2. \$303.33
3. \$405.60
4. \$441.10
5. \$327.18

12. Chelsea Fashions is expected to pay an annual dividend of \$1.10 a share next year. The market price of the stock is \$21.80 and the growth rate is 4.5 percent. What is the firm’s cost of equity?

1. 55 percent
2. 91 percent
3. 54 percent
4. 77 percent
5. 24 percent

13. The plowback ratio is:

1. Equal to one minus the retention ratio.
2. The percentage of net income available to the firm to fund future growth.
3. The change in retained earnings divided by the dividends paid.
4. Equal to net income divided by the change in total equity.
5. The dollar increase in net income divided by the dollar increase in sales.

14. The Dry Dock is considering a project with an initial cost of \$118,400. The project’s cash inflows for years 1 through 3 are \$37,200, \$54,600, and \$46,900, respectively. What is the IRR of this project?

1. 48 percent
2. 22 percent
3. 04 percent
4. 42 percent
5. 56 percent

15. Al invested \$7,200 in an account that pays 4 percent simple interest. How much money will he have at the end of five years?

1. \$8,299
2. \$8,678
3. \$8,640
4. \$8,710
5. \$8,056

16. Three Corners Markets paid an annual dividend of \$1.37 a share last month. Today, the company announced that future dividends will be increasing by 2.8 percent annually. If you require a return of 11.6 percent, how much are you willing to pay to purchase one share of this stock today?

1. \$18.23
2. \$17.68
3. \$15.57
4. \$16.00
5. \$16.67

17. Which one of the following should earn the most risk premium based on CAPM?

1. Diversified portfolio with returns similar to the overall market.
2. Stock with a beta of 1.38.
3. Portfolio with a beta of 1.01.
4. Stock with a beta of 0.74.
5. S. Treasury bill.

18. A news flash just appeared that caused about a dozen stocks to suddenly drop in value by 20 percent. What type of risk does this news flash best represent?

1. Unsystematic
2. Portfolio
3. Market
4. Non-diversifiable
5. Total

19. Which one of the following terms is defined as the mixture of a firm’s debt and equity financing?

1. Cash management
2. Capital Structure
3. Cost analysis
4. Working Capital Management
5. Capital budgeting

20. Kelly’s Corner Bakery purchased a lot in Oil City six years ago at a cost of \$278,000. Today, that lot has a market value of \$264,000. At the time of the purchase, the company spent \$6,000 to level the lot and another \$8,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at \$1.03 million. What amount should be used as the initial cash flow for this project?

1. -\$1,308,000
2. -\$1,294,000
3. -\$1,322,000
4. -\$1,045,000
5. -\$1,308,000

21. Which one of these actions will increase the operating cycle? Assume all else held constant.

1. Decreasing the payables period.
2. Increasing the payables period.
3. Decreasing the receivables turnover rate.
4. Decreasing the average inventory level.
5. Increasing the inventory turnover rate.

22. Which one of the following is the financial statement that summarizes a firm’s revenue and expenses over a period of time?

1. Income statement
2. Statement of cash flows
3. Market value report
4. Tax reconciliation statement
5. Balance sheet

23. The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a \$1,000 face value. Currently, the bonds sell for \$1,032. What is the yield to maturity?

1. 87 percent
2. 20 percent
3. 92 percent
4. 08 percent
5. 48 percent

24. Andy deposited \$3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited \$3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?

1. Barb will earn more interest the second year than Andy.
2. Barb will earn more interest the first year than Andy will.
3. Andy will earn compound interest.
4. After five years, Andy and Barb will both have earned the same amount of interest.
5. Andy will earn more interest in year three than Barb will.

25. All of the following represent potential gains from an acquisition except the:

1. Diseconomies of scale related to increased labor demand.
2. Obtainment of a beachhead.
3. Use of surplus funds.
4. Lower costs per unit realized.
5. Tax loss carryovers acquired in the acquisition.

26. Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of \$81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of \$82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?

1. Accept both projects because both NPVs are positive.
2. Accept Project A because it has the shortest payback period.
3. Accept Project B and reject Project A based on the NPVs.
4. Accept Project A and reject Project B based on their AARs.
5. Accept Project A because it has the lower required return.

27. Oil Wells offers 6.5 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is \$1,000?

1. \$975.93
2. \$996.48
3. \$902.60
4. \$913.48
5. \$989.70

28. Which one of the following statements is correct concerning the cash cycle?

1. Accepting a supplier’s discount for early payment decreases the cash cycle.
2. Offering early payment discounts to customers will tend to increase the cash cycle.
3. The longer the cash cycle, the more likely a firm will need external financing.
4. The cash cycle can exceed the operating cycle if the payables period is equal to zero.
5. Increasing the accounts payable period increases the cash cycle.

29. Webster United is paying a dividend of \$1.32 per share today. There are 350,000 shares outstanding with a market price of \$22.40 per share prior to the dividend payment. Ignore taxes. Before the dividend, the company had earnings per share of \$1.68. As a result of this dividend, the:

1. Retained earnings will decrease by \$350,000.
2. Total firm value will not change.
3. Retained earnings will increase by \$462,000.
4. Earnings per share will increase to \$3.
5. Price-earnings ratio will be 12.55.

30. Operating leverage is the degree of dependence a firm places on its:

1. Fixed costs.
2. Sales
3. Depreciation tax shield.
4. Variable costs.
5. Operating cash flows.

Course: FIN370 Finance For Business
School: University of Phoenix

• 24/03/2018
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