FIN 370 Finance For Business
FINAL EXAM (Set 3)
1.
A sunk cost is:
2.
Around Town Movers
recently purchased a new truck costing $97,000. The firm financed this purchase
at 8.25 percent interest with monthly payments of $2,379.45. How many years
will it take the firm to pay off this debt?
3.
The stock of Uptown
Men's Wear is expected to produce the following returns given the various
states of the economy. What is the expected return on this stock?
4.
One year ago, you
purchased a 7 percent coupon bond with a face value of $1,000 when it was
selling for 99.8 percent of par. Today, you sold this bond for 100.5 percent of
par. What is your total dollar return on this investment?
5.
The goal of financial
management is to increase the:
6.
Given the following
information, what is the standard deviation for this stock?
7.
The amount of systematic
risk present in a particular risky asset relative to that in an average risky
asset is called the:
8.
Wes' Trucking just
revised its capital structure from a debt-equity ratio of .25 to a debt-equity
ratio of .40. The firm's shareholders who prefer the old capital structure
should:
9.
The equity risk that
derives from a firm's daily operations is referred to as:
10. Roy purchased 3,400 shares of Ernst stock for $194,888 one year
ago. The stock pays annual dividends of $.60 a share. Today, he sold all of his
shares for $82.50 a share. What is his total return on this investment?
11. The average compound return earned per year over a multiyear
period is called the _____ return.
12. You want to create a $75,000 portfolio comprised of two stocks
plus a risk-free security. Stock A has an expected return of 13.6 percent and
stock B has an expected return of 11.4 percent. You want to own $30,000 of
stock B. The risk-free rate is 4 percent and the expected return on the market
is 10 percent. If you want the portfolio to have an expected return equal to
that of the market, how much should you invest in the risk-free security?
13. The return on a risky asset that is anticipated in the future is
called the:
14. Over the past five years, a stock returned 9.8 percent, -22.6
percent, -3.8 percent, 19.2 percent and 4.6 percent. What is the variance of
these returns?
15. The lower the standard deviation of a security, the _____ the
expected rate of return and the _____ the risk.
16. The positive linear function depicting the relationship between beta
and the expected return is called the:
17. Darnell Electric has sales of $173,000, total assets of $160,000,
net income of $15,000, and dividends paid of $3,000. What is the internal
growth rate?
18. Hob-Nob is an all-equity firm that has 65,000 shares of stock
outstanding. Kurt, the financial vice-president, is considering borrowing
$240,000 at 8.5 percent interest to repurchase 15,000 shares. Ignoring taxes,
what is the value of the firm?
19. The NPV rule states that you should accept an investment if the
NPV:
20. The level of financial risk to which a firm is exposed is
dependent upon the firm's:
21. Junior's has a new project in mind that will increase accounts
receivable by $27,000, increase accounts payable by $19,000, increase fixed
assets by $46,000, and decrease inventory by $17,000. What is the amount the
firm should use as the initial cash flow attributable to net working capital
when it analyzes this project?
22. Southside, Inc. has beginning long-term debt of $47,500, which is
the principal balance of a loan payable to The North Savings Bank. During the
year, the company paid a total of $19,000 to the bank, including $3,800 of
interest. The company also borrowed $7,000. What is the value of the ending
long-term debt?
23. The IRR decision rule states that a project should be accepted if
its IRR:
24. Which one of the following statements concerning financial
leverage is correct?
25. A 7 percent bond has a yield to maturity of 6.75 percent, 10 years
to maturity, a face value of $1,000, and semiannual interest payments. What is
the amount of each coupon payment?
26. A firm that uses its weighted average cost of capital as the
required return for all of its projects will:
27. You own a portfolio consisting of the securities listed below. The
expected return for each security is as shown. What is the expected return on
the portfolio?
28. The internal growth rate is best described as the _____ growth
rate achievable _____.
29. Hazelton Bakers is an all-equity firm with a total market value of
$650,000. The firm has 130,000 shares of stock outstanding. Management is
considering issuing $250,000 of debt at an interest rate of 8 percent and using
the proceeds to repurchase shares. The projected earnings before interest and
taxes are $60,000. What are the anticipated earnings per share if the debt is
issued? Ignore taxes.
30. You recently sold an antique car you owned and valued greatly.
However, you needed money for other things and agreed to sell the car at a
price of $67,000, to be paid in monthly payments of $900 each for 48 months.
What interest rate did you charge on the financing of the sale?
31. The excess return required on a risky investment over that of a
risk-free investment is called the:
32. Which one of the following represents the best estimate for a
firm's pre-tax cost of debt?
33. Two years ago, Kelsey's issued twenty-year, 9 percent semiannual
coupon bonds at par. Today, the bonds are quoted at 102.5. What is Kelsey's
pre-tax cost of debt?
34. The coupon rate for a bond is best defined as the:
35. Harvest Foods is an all-equity firm that has projected perpetual
earnings before interest and taxes of $629,000. The current cost of equity is
15.7 percent and the tax rate is 35 percent. The company is in the process of
issuing $3 million of 7 percent coupon bonds at par that pay interest annually.
What is the levered value of the firm?
36. Capello's Deli traditionally pays an annual dividend of $1.65 per
share. The firm is projecting dividends of $1.80 and $2.05 over the next two
years, respectively. After that, the company expects to pay a constant dividend
of $2.25 a share. What is the maximum amount you are willing to pay for one
share of this stock if your required return is 10 percent?
37. Baker's Footwear has 8,000 shares of common stock outstanding at a
price per share of $64 and a rate of return of 15 percent. The firm has 2,000
shares of 6 percent preferred stock outstanding at a price of $54 a share. The
preferred stock has a par value of $100. The outstanding debt has a total face
value of $100,000 and a market price equal to 102 percent of face value. The
yield-to-maturity on the debt is 9.36 percent. What is the firm's weighted
average cost of capital if the tax rate is 35 percent?
38. Taylor has just received an insurance settlement of $58,400. She
wants to save this money until her oldest daughter goes to college. Taylor can
earn an average of 8.5 percent, compounded annually, on this money. How much
will she have saved for her daughter's college education if her daughter enters
college 14 years from now?
39. The amount by which a firm's tax bill is reduced as a result of
the depreciation expense is referred to as the depreciation:
40. The current value of future cash flows discounted at the
appropriate discount rate is called the:
41. The Laptop Company has sales of $874,000, a profit margin of 9
percent, a total asset turnover rate of .80, and an equity multiplier of 1.75.
What is the return on equity?
42. Amy found a bond lying in a street. She picked it up, detached the
appropriate bond coupon, and collected the current interest payment. Which type
of bond did Amy find?
43. Dr. McDougall just deposited $8,000 into his account at The Elite
Bank. The bank will pay 5 percent interest compounded annually on this money.
How much interest on interest will Dr. McDougall earn over the next 15 years?
44. The most widely used form of business entity in the U.S. is the:
45. A project has the following cash flows. What is the payback
period?
46. Which one of the following is the best example of systematic risk?
47. The change in a firm's future cash flows that results from adding
a new project are referred to as _____ cash flows.
48. The difference between an investment's market value and its cost
is called the:
49. Irwin Industries is currently considering a project that will
produce cash inflows of $9,000 a year for two years followed by $6,500 a year
for three more years. The cost of the project is $25,000. What is the
profitability index if the discount rate is 8 percent?
50. The capital structure of a firm refers to the firm's:
51. Kathy's Quilts is a brick-and-mortar quilt and fabric retailer.
The firm is considering expanding its operations to include Internet sales.
Which one of the following would be the best firm to use in a pure play
approach to this project?
52. Company insiders cannot earn excess profits based on the knowledge
they have related to their employer if the financial markets are:
53. Kurt's Kites has 17,500 shares of stock outstanding and no debt.
The new CFO is considering issuing $120,000 of debt and using the proceeds to
retire 2,500 shares of stock. The coupon rate on the debt is 9 percent. What is
the break-even level of earnings before interest and taxes between these two
capital structure options?
54. The payback period is the period of time it takes an investment to
generate sufficient cash flows to:
55. A project has the following cash flows. What is the internal rate
of return?
56. Outdoors sells specialty tents for mountain climbers. Its sales
for last year included $98,000 of tents and $146,000 of climbing gear. For next
year, management has decided to sell specialty sleeping bags also. As a result
of this change, sales projections for next year are $101,000 of tents, $158,000
of climbing gear, and $32,000 of sleeping bags. How much of next year's sales
are derived from the side effects of adding the new product to its sales
offerings?
57. The analysis of the effect that a single variable has on the net
present value of a project is called _____ analysis.
58. Locksmith's is expected to pay an annual dividend of $.75 this
month. The stock is selling for $10.90 a share and has a required return of 11
percent. What is the growth rate of the dividend?
59. A bond yielded a real rate of return of 4.79 percent for a time
period when the inflation rate was 1.96 percent. What was the actual nominal
rate of return?
60. The most valuable alternative that is forfeited if a particular
investment is undertaken is called:
61. Smith Motors reports the following account balances: inventory of
$33,100, equipment of $84,400, accounts payable of $16,900, cash of $5,000, and
accounts receivable of $22,600. How much does the firm have in net working
capital?
62. The discount rate that causes the net present value of a project
to equal zero is called the:
63. The valuation model that computes the current value of a stock by
dividing next year's dividend by the net of the discount rate minus the
dividend growth rate is called the _____ model.
64. Compound interest is defined as the interest earned:
65. A sole proprietorship is defined as a business:
66. Which one of the following is an annuity, but not a perpetuity?
67. Which one of the following is the primary determinant of the cost
of capital for a proposed project?
68. A project has an operating cash flow of $33,000. Initially, this
4-year project required $5,600 in net working capital, which is recoverable
when the project ends. The firm also spent $16,400 on equipment to start the
project. This equipment will have a book value of $2,800 at the end of year 4.
What is the cash flow for year 4 of the project if the equipment can be sold
for $4,500 and the tax rate is 35 percent?
69. Free cash flow is equal to:
70. A portfolio is a(n):
71. An expense that lowers net income but does not affect a firm's
cash flow is referred to as a(n):
72. Which one of the following is a breakdown of the ROE into its
three component parts?
73. Direct bankruptcy costs are defined to include which of the
following costs?
74. Hybrid Motors has paid increasing dividends of $.42, $.50, $.55,
$.65, and $.80 a share over the past five years, respectively. The firm
estimates that future increases in its dividends will be comparable to the
arithmetic average growth rate over these past five years. The stock is
currently selling for $41.50 a share. The risk-free rate is 3.5 percent and the
market risk premium is 8.6 percent. What is the cost of equity for Hybrid
Motors if the firm's beta is 1.42?
75. Boone Brothers purchased a parcel of land 8 years ago for
$392,500. At that time, the firm invested $127,000 modifying the site so that
it could be leased to an adjacent car dealer for displaying used car inventory.
The lease payment was $39,000 a year. Boone Brothers is now considering
building a hotel on the site as the auto dealer is relocating to make room for
a nearby shopping mall to expand. The current value of the land is $1.14
million. Boone Brothers has no loans or mortgages secured by the property. What
value should be included in the initial cost of the hotel project for the use
of this land?
76. Standard deviation measures the _____ of a security's returns over
time.
77. You earned 16.7 percent on your investments for a time period when
the risk-free rate was 6.1 percent and the inflation rate was 5.4 percent. What
was your real rate of return for the period?
78. Which one of the following is a perpetuity?
79. You are making a $50,000 investment and feel that a 13 percent
rate of return is reasonable given the nature of the risks involved. You feel
you will receive at least $8,000 in the first year, $21,000 in the second year,
$43,000 in the third year, and potentially could see a cash outflow of $7,000
in the fourth year. What is the net present value of this investment given your
expectations?
80. The primary market is defined as the market:
81. The return that lenders require on a firm's borrowed funds is
called the firm's:
82. Last week, Lester's Electronics paid an annual dividend of $2.10
on its common stock. The company has a longstanding policy of increasing its
dividend by 3 percent annually. This policy is expected to continue. What is
the firm's cost of equity if the stock is currently selling for $44.60 a share?
