FIN 571 Final Exam August 2017
1
Which one of the following is an example of a nondiversifiable risk?
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A well-respected chairman of the Federal Reserve Bank suddenly resigns
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A poorly managed firm suddenly goes out of business due to lack of sales
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A well-respected president of a firm suddenly resigns
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A key employee suddenly resigns and accepts employment with a key competitor
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A well-managed firm reduces its work force and automates several jobs
question2
A firm has a debt-equity ratio of .64, a pretax cost of debt of 8.5 percent, and a required return on assets of 12.6 percent. What is the cost of equity if you ignore taxes?
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15.22%
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16.38%
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8.06%
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11.12%
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8.55%
question3
Which term defines the tax rate that applies to the next dollar of taxable income earned?
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Deductible
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Marginal
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Average
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Total
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Residual
question4
All else held constant, interest rate risk will increase when the time to maturity:
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Increases or the coupon rate decreases.
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Decreases or the coupon rate increases.
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Increases or the coupon rate increases.
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Decreases or the coupon rate decreases.
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Decreases and the coupon rate equals zero.
question5
Under the _______ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _______ method, the underwriter does not purchase the shares but merely acts as an agent.
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Negotiated offer; competitive offer
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Firm commitment; best efforts
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Competitive offer; negotiated offer
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Best efforts; firm commitment
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Seasoned; unseasoned
question6
The underlying assumption of the dividend growth model is that a stock is worth:
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An amount computed as the next annual dividend divided by the market rate of return.
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The present value of the future income that the stock is expected to generate.
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The same amount to every investor regardless of their desired rate of return.
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The same amount as any other stock that pays the same current dividend and has the same required rate of return.
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An amount computed as the next annual dividend divided by the required rate of return.
question7
The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:
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Inflation premium.
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Risk premium.
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Arithmetic average return.
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Time premium.
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Geometric average return.
question8
Which one of these statements is correct concerning the cash cycle?
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A positive cash cycle is preferable to a negative cash cycle.
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Increasing the accounts payable period increases the cash cycle.
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The longer the cash cycle, the more likely a firm will need external financing.
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The cash cycle can exceed the operating cycle if the payables period is equal to zero.
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Adopting a more liberal accounts receivable policy will tend to decrease the cash cycle.
question9
Which one of the following statements about preferred stock is true?
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If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year.
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Preferred stock usually has a stated liquidating value of $100 per share.
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Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense.
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There is no significant difference in the voting rights granted to preferred and common shareholders.
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Dividends on preferred stock payable during the next twelve months are considered to be a corporate liability.
question10
What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent?
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$6,023.58
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$6,671.13
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$6,395.31
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$6,643.29
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$7,253.72
question11
The market price of a bond increases when the:
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Coupon rate decreases.
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Par value decreases.
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Face value decreases.
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Discount rate decreases.
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Coupon is paid annually rather than semiannually.
question12
The process of planning and managing a firm’s long-term assets is called:
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Capital structure.
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Financial depreciation.
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Working capital management.
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Agency cost analysis.
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Capital budgeting.
question13
The discount rate that makes the net present value of an investment exactly equal to zero is called the:
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Profitability index.
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Average accounting return.
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External rate of return.
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Internal rate of return.
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Equalizer.
question14
The cash flow resulting from a firm’s ongoing, normal business activities is referred to as the:
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Cash flow to investors.
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Operating cash flow.
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Additions to net working capital.
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Cash flow to retained earnings.
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Net capital spending.
question15
Lois is purchasing an annuity that will pay $5,000 annually for 20 years, with the first annuity payment made on the date of purchase. What is the value of the annuity on the purchase date given a discount rate of 7 percent?
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$66,916.21
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$54,282.98
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$56,191.91
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$52,970.07
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$56,677.98
question16
Which one of the following statements is false?
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An aging schedule includes only overdue accounts.
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Investments in accounts receivable equal average daily sales times average collection period.
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Collection efforts may involve legal action.
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Aging schedules are used to monitor accounts receivable.
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If sales are seasonal, the percentages shown on an aging schedule will vary during the year.
question17
The primary goal of financial management is to:
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Minimize operational costs and maximize firm efficiency.
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Maximize current dividends per share of the existing stock.
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Avoid financial distress.
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Maximize the current value per share of the existing stock.
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Maintain steady growth in both sales and net earnings.
question18
A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and $700 for Years 1 to 4, respectively. What is the payback period?
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3.92 years
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2.97 years
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2.84 years
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3.98 years
·
never
question19
Futures contracts contrast with forward contracts by:
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Marking to the market on a weekly basis.
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Providing an option for the buyer rather than an obligation.
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Allowing the parties to negotiate the contract size.
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Requiring contract fulfillment by the two originating parties.
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Allowing the seller to deliver any day during the delivery month.
question20
All else equal, the contribution margin must increase as:
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The variable cost per unit declines.
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The sales price minus the fixed cost per unit increases.
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Sales price per unit declines.
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The fixed cost per unit declines.
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Both the sales price and variable cost per unit increase.
question21
Ratios that measure a firm’s ability to pay its bills over the short run without undue stress are known as:
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Market value ratios.
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Asset management ratios.
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Liquidity measures.
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Profitability ratios.
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Long-term solvency measures.
question22
The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _____ costs.
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Flotation
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Capital structure
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Financial solvency
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Direct bankruptcy
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Indirect bankruptcy
question23
An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the _____ rate.
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Daily interest
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Compound interest
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Effective annual
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Periodic interest
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Stated interest
question24
The higher the inventory turnover, the:
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Lesser the amount of inventory held by a firm.
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Longer it takes a firm to sell its inventory.
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Higher the inventory as a percentage of total assets.
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Greater the amount of inventory held by a firm.
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Less time inventory items remain on the shelf.
question25
You plan to invest $6,500 for three years at 4 percent simple interest. What will your investment be worth at the end of the three years?
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$6,760.00
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$6,941.11
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$7,311.62
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$7,250.00
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$7,280.00
question26
Which one of these is a correct definition?
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Tangible assets are fixed assets such as patents.
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Net working capital equals current assets plus current liabilities.
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Current assets are assets with short lives, such as inventory.
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Current liabilities are debts that must be repaid in 18 months or less.
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Long-term debt is defined as a residual claim on a firm’s assets.
question27
One disadvantage of the corporate form of business ownership is the:
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Double taxation of profits.
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Difficulties encountered when changing ownership.
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Firms ability to raise cash.
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Limited liability protection provided for all owners.
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Unlimited life of the firm.
question28
A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every:
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$1 in current assets.
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$1 in fixed assets.
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$.53 in total equity.
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$.53 in total assets.
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$1 in total equity.
question29
Book value:
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Generally tends to exceed market value when fixed assets are included.
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Is based on historical cost.
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Is more of a financial than an accounting valuation.
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Is equivalent to market value for firms with fixed assets.
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Is adjusted to market value whenever the market value exceeds the stated book value.
question30
An efficient capital market is one in which:
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All investments earn the market rate of return.
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Securities always offer a positive NPV.
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Security prices reflect all available information.
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Taxes are irrelevant.
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Brokerage commissions are zero.
