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Finance 370 Final Exam

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									Finance 370 Final Exam
Instructor: Tim Gould
Ch 1, 3, 4,5,9,10,12,14,15,16,18,19,20,22,23,24
There are 50 questions worth 0.2 points each for a total possible of 10 points toward your class
grade.
Please highlight the answer you want to give for each question in BOLD and yellow as follows:
       a. All of the above.

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

2.   Diversification increases when ________ decreases.
     a. variability
     b. return
     c. risk
     d. a and c
     e. all of the above

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

4.   Which of the following is true regarding an initial public offering?
     a. The corporation gets proceeds from the investor.
     b. Investors get proceeds from other investors.
     c. The security is sold for the first time to the public.
     d. Both a and c.
     e. All of the above.

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

Smith Company Balance Sheet

                                            Assets:
Cash and marketable securities              $300,000
Accounts receivable                                 2,215,000
Inventories                                         1,837,500
Prepaid expenses                                     24,000
Total current assets                           $3,286,500
Fixed assets                                        2,700,000
Less: accumulated depreciation                  1,087,500
                                                                                     Page 1 of 11
Net fixed assets                                    $1,612,500
Total assets                                         $4,899,000
Liabilities:
Accounts payable                                       $240,000
Notes payable                                             825,000
Accrued taxes                                                                42,500
Total current liabilities                            $1,107,000
Long-term debt                                           975,000
Owner’s equity                                         2,817,000
Total liabilities and owner’s equity                $4,899,000
Net sales (all credit)                                $6,375,000
Less: Cost of goods sold                               4,312,500
Selling and administrative expense                   1,387,500
Depreciation expense                                     135,000
Interest expense                                          127,000
Earnings before taxes                                   $412,500
Income taxes                                               225,000
Net income                                               $187,500
Common stock dividends                                   $97,500
Change in retained earnings                               $90,000

5.   Based on the information in Table 1, the current ratio is:
      a.   2.97.
      b.   1.46.
      c.   2.11.
      d.   2.23.

6.   Based on the information in Table 1, the debt ratio is:
      a.   0.70.
      b.   0.20.
      c.   0.74.
      d.   0.42.

7.   Based on the information in Table 1, the net profit margin is:
     a. 4.61%
     b. 2.94%.
     c. 1.97%.
     d. 5.33%.

8.   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.

9.   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 Marshall’s debt ratio.
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      a.   30%
      b.   40%
      c.   50%
      d.   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

10.   Banner’s projected current assets for 2005 are:
      a.   $1,000,000.
      b.   $1,120,000.
      c.   $1,500,000.
      d.   $1,260,000.


11.   Banner’s projected accounts payable balance for 2005 is:
      a.   $160,000.
      b.   $120,000.
      c.   $200,000.
      d.   $300,000.

12.   Banner’s projected fixed assets for 2005 are:
      a.   $1,120,000.
      b.   $1,260,000.
      c.   $1,000,000.
      d.   $2,380,000.



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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 project’s payback would be less than the profitability index.
      d. The project’s IRR would have to be less that the firm’s discount rate.

19.   The IRR is:

                                                                                          Page 4 of 11
      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 firm’s tax rate is 40%, what is the cost of
      debt to J & B?
      a. 12.0%
      b. 14.0%

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      c. 8.4%
      d. 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: debt–10%; preferred stock–11%; and common stock–18%. 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 firm’s stock is 15% and its marginal tax rate is 40%, compute the firm’s 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
      industry.
      a. FTC
      b. SEC

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      c. FRB
      d. SCC

28.   A firm’s business risk is influenced by the:
      a. competitive position of the firm within the industry.
      b. demand characteristics of the firm’s 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 firm’s 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
      Units sold                           200,000
      Fixed costs                         $800,000

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      Interest expense                      $ 50,000
32.   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.
      d. preferred stock.

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

                                                                                    Page 8 of 11
      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.

45.   Exchange rate risk:
      a. arises from the fact that the spot exchange rate on a future date is a random

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         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.

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.

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      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 lessee’s 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 target’s equity.
      b. be the market value of the target’s equity.
      c. be the book value of the target’s equity.
      d. include some discount relative to the current market value of the target’s equity.


This is the end of the exam. Please make sure you have answered all 50 questions with a bold
and highlight of the answer you want for each question.




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