Fin 571 final exam august 2017

FIN 571 Final Exam August 2017

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.

Fin 571 final exam august 2017

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