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