FIN 534 Final Exam
1. An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
2. Suppose you believe that Basso Inc.’s stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share. If you buy this option for $3.10 and Basso’s stock price actually rises to $45, what would your pre-tax net profit be?
3. An option that gives the holder the right to sell a stock at a specified price at some future time is
4. Other things held constant, the value of an option depends on the stock’s price, the risk-free rate, and the
7. Which of the following statements is CORRECT? Assume a company’s target capital structure is 50% debt and 50% common equity.
8. To help them estimate the company’s cost of capital, Smithco has hired you as a consultant. You have been provided with the following data: D1 = $1.45; P0 = $22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of common from reinvested earnings?
9. Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?
10. As a consultant to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from reinvested earnings based on the DCF approach?
11. Adams Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm’s cost of common from reinvested earnings based on the CAPM?
12. Burnham Brothers Inc. has no retained earnings since it has always paid out all of its earnings as dividends. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?
16. Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?
17. Which of the following statements is CORRECT?
18. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
19. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?
21. Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses?24. Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects ?
25. A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?
26. Which of the following statements is CORRECT?
27. The term “additional funds needed (AFN)” is generally defined as follows:
28. Which of the following statements is CORRECT?
29. The capital intensity ratio is generally defined as follows:
30. The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?
Part 2
4. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
5. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows
6. Which of the following statements is CORRECT?
7. The WACC for two mutually exclusive projects that are being considered is 12%. Project K has an IRR of 20% while Project R’s IRR is 15%. The projects have the same NPV at the 12% current WACC. Interest rates are currently high. However, you believe that money costs and thus your WACC will soon decline. You also think that the projects will not be funded until the WACC has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?
8. Which of the following statements is NOT a disadvantage of the regular payback method?
9. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
10. Which of the following statements is CORRECT?
11. Projects S and L are both normal projects with an initial cost of $10,000, followed by a series of positive cash inflows. Project S’s undiscounted net cash flows total $20,000, while L’s total undiscounted flows are $30,000. At a WACC of 10%, the two projects have identical NPVs. Which project’s NPV is more sensitive to changes in the WACC?
12. Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is CORRECT?
16. Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses?
17. A firm is considering a new project whose risk is greater than the risk of the firm’s average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?
18. Which of the following statements is CORRECT?
19. Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?
20. Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects?
21. While developing a new product line, Cook Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Cook owns the building free and clear¾there is no mortgage on it. Which of the following statements is CORRECT?
22. Which of the following procedures best accounts for the relative risk of a proposed project?
23. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?
24. The CFO of Cicero Industries plans to calculate a new project’s NPV by estimating the relevant cash flows for each year of the project’s life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company’s overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?
25. Which of the following statements is CORRECT?
26. To increase productive capacity, a company is considering a proposed new plant. Which of the following statements is CORRECT?
27. Which of the following statements is CORRECT?
28. Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?
29. Which of the following statements is CORRECT ?
30. Which of the following statements is CORRECT?
