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FIN 571 Final Exam August 2017

FIN 571 Final Exam August 2017
1
Which one of the following is an example of a nondiversifiable risk?​
· Correct Answer
​A well-respected chairman of the Federal Reserve Bank suddenly resigns
· Correct Answer
​A poorly managed firm suddenly goes out of business due to lack of sales
· Correct Answer
​A well-respected president of a firm suddenly resigns
· Correct Answer
​A key employee suddenly resigns and accepts employment with a key competitor
· Correct Answer
​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?​
· Correct Answer
​15.22%
· Correct Answer
​16.38%
· Correct Answer
​8.06%
· Correct Answer
​11.12%
· Correct Answer
​8.55%
question3
Which term defines the tax rate that applies to the next dollar of taxable income earned?​
· Correct Answer
​Deductible
· Correct Answer
​Marginal
· Correct Answer
​Average
· Correct Answer
​Total
· Correct Answer
​Residual
question4
All else held constant, interest rate risk will increase when the time to maturity:​
· Correct Answer
​Increases or the coupon rate decreases.
· Correct Answer
​Decreases or the coupon rate increases.
· Correct Answer
​Increases or the coupon rate increases.
· Correct Answer
​Decreases or the coupon rate decreases.
· Correct Answer
​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.​
· Correct Answer
​Negotiated offer; competitive offer
· Correct Answer
​Firm commitment; best efforts
· Correct Answer
​Competitive offer; negotiated offer
· Correct Answer
​Best efforts; firm commitment
· Correct Answer
​Seasoned; unseasoned
question6
The underlying assumption of the dividend growth model is that a stock is worth:​
· Correct Answer
​An amount computed as the next annual dividend divided by the market rate of return.
· Correct Answer
​The present value of the future income that the stock is expected to generate.
· Correct Answer
​The same amount to every investor regardless of their desired rate of return.
· Correct Answer
​The same amount as any other stock that pays the same current dividend and has the same required rate of return.
· Correct Answer
​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:​
· Correct Answer
​Inflation premium.
· Correct Answer
​Risk premium.
· Correct Answer
​Arithmetic average return.
· Correct Answer
​Time premium.
· Correct Answer
​Geometric average return.
question8
Which one of these statements is correct concerning the cash cycle?​
· Correct Answer
​A positive cash cycle is preferable to a negative cash cycle.
· Correct Answer
​Increasing the accounts payable period increases the cash cycle.
· Correct Answer
​The longer the cash cycle, the more likely a firm will need external financing.
· Correct Answer
​The cash cycle can exceed the operating cycle if the payables period is equal to zero.
· Correct Answer
​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?
· Correct Answer
​If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year.
· Correct Answer
​Preferred stock usually has a stated liquidating value of $100 per share.
· Correct Answer
​Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense.
· Correct Answer
​There is no significant difference in the voting rights granted to preferred and common shareholders.
· Correct Answer
​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?
· Correct Answer
​$6,023.58
· Correct Answer
​$6,671.13
· Correct Answer
​$6,395.31
· Correct Answer
​$6,643.29
· Correct Answer
​$7,253.72
question11
The market price of a bond increases when the:​
· Correct Answer
​Coupon rate decreases.
· Correct Answer
​Par value decreases.
· Correct Answer
​Face value decreases.
· Correct Answer
​Discount rate decreases.
· Correct Answer
​Coupon is paid annually rather than semiannually.
question12
​The process of planning and managing a firm’s long-term assets is called:
· Correct Answer
​Capital structure.
· Correct Answer
​Financial depreciation.
· Correct Answer
​Working capital management.
· Correct Answer
​Agency cost analysis.
· Correct Answer
​Capital budgeting.
question13
The discount rate that makes the net present value of an investment exactly equal to zero is called the:​
· Correct Answer
​Profitability index.
· Correct Answer
​Average accounting return.
· Correct Answer
​External rate of return.
· Correct Answer
​Internal rate of return.
· Correct Answer
​Equalizer.
question14
The cash flow resulting from a firm’s ongoing, normal business activities is referred to as the:​
· Correct Answer
​Cash flow to investors.
· Correct Answer
​Operating cash flow.
· Correct Answer
​Additions to net working capital.
· Correct Answer
​Cash flow to retained earnings.
· Correct Answer
​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?​
· Correct Answer
​$66,916.21
· Correct Answer
​$54,282.98
· Correct Answer
​$56,191.91
· Correct Answer
​$52,970.07
· Correct Answer
​$56,677.98
question16
Which one of the following statements is false?​
· Correct Answer
​An aging schedule includes only overdue accounts.
· Correct Answer
​Investments in accounts receivable equal average daily sales times average collection period.
· Correct Answer
​Collection efforts may involve legal action.
· Correct Answer
​Aging schedules are used to monitor accounts receivable.
· Correct Answer
​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:​
· Correct Answer
​Minimize operational costs and maximize firm efficiency.
· Correct Answer
​Maximize current dividends per share of the existing stock.
· Correct Answer
​Avoid financial distress.
· Correct Answer
​Maximize the current value per share of the existing stock.
· Correct Answer
​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?​
· Correct Answer
​3.92 years
· Correct Answer
​2.97 years
· Correct Answer
​2.84 years
· Correct Answer
​3.98 years
· Correct Answer
​never
question19
Futures contracts contrast with forward contracts by:​
· Correct Answer
​Marking to the market on a weekly basis.
· Correct Answer
​Providing an option for the buyer rather than an obligation.
· Correct Answer
​Allowing the parties to negotiate the contract size.
· Correct Answer
​Requiring contract fulfillment by the two originating parties.
· Correct Answer
​Allowing the seller to deliver any day during the delivery month.
question20
All else equal, the contribution margin must increase as:​
· Correct Answer
​The variable cost per unit declines.
· Correct Answer
​The sales price minus the fixed cost per unit increases.
· Correct Answer
​Sales price per unit declines.
· Correct Answer
​The fixed cost per unit declines.
· Correct Answer
​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:​
· Correct Answer
​Market value ratios.
· Correct Answer
​Asset management ratios.
· Correct Answer
​Liquidity measures.
· Correct Answer
​Profitability ratios.
· Correct Answer
​Long-term solvency measures.
question22
The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _____ costs.
· Correct Answer
​Flotation
· Correct Answer
​Capital structure
· Correct Answer
​Financial solvency
· Correct Answer
​Direct bankruptcy
· Correct Answer
​Indirect bankruptcy
question23
An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the _____ rate.​
· Correct Answer
​Daily interest
· Correct Answer
​Compound interest
· Correct Answer
​Effective annual
· Correct Answer
​Periodic interest
· Correct Answer
​Stated interest
question24
The higher the inventory turnover, the:​
· Correct Answer
​Lesser the amount of inventory held by a firm.
· Correct Answer
​Longer it takes a firm to sell its inventory.
· Correct Answer
​Higher the inventory as a percentage of total assets.
· Correct Answer
​Greater the amount of inventory held by a firm.
· Correct Answer
​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?​
· Correct Answer
​$6,760.00
· Correct Answer
​$6,941.11
· Correct Answer
​$7,311.62
· Correct Answer
​$7,250.00
· Correct Answer
​$7,280.00
question26
​Which one of these is a correct definition?
· Correct Answer
​Tangible assets are fixed assets such as patents.
· Correct Answer
​Net working capital equals current assets plus current liabilities.
· Correct Answer
​Current assets are assets with short lives, such as inventory.
· Correct Answer
​Current liabilities are debts that must be repaid in 18 months or less.
· Correct Answer
​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:​
· Correct Answer
​Double taxation of profits.
· Correct Answer
​Difficulties encountered when changing ownership.
· Correct Answer
​Firms ability to raise cash.
· Correct Answer
​Limited liability protection provided for all owners.
· Correct Answer
​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:
· Correct Answer
​$1 in current assets.
· Correct Answer
​$1 in fixed assets.
· Correct Answer
​$.53 in total equity.
· Correct Answer
​$.53 in total assets.
· Correct Answer
​$1 in total equity.
question29
Book value:​
· Correct Answer
​Generally tends to exceed market value when fixed assets are included.
· Correct Answer
​Is based on historical cost.
· Correct Answer
​Is more of a financial than an accounting valuation.
· Correct Answer
​Is equivalent to market value for firms with fixed assets.
· Correct Answer
​Is adjusted to market value whenever the market value exceeds the stated book value.
question30
An efficient capital market is one in which:​
· Correct Answer
​All investments earn the market rate of return.
· Correct Answer
​Securities always offer a positive NPV.
· Correct Answer
​Security prices reflect all available information.
· Correct Answer
​Taxes are irrelevant.
· Correct Answer
​Brokerage commissions are zero.

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