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FIN 571 Final Exam Guide (New)
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FIN 571 Final Exam Guide (New)

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1.A proxy fight occurs when:    

the board of directors disagree on the members of the management team.

 

2. A stakeholder is any person or entity:

 

3.Which one of the following is least apt to help convince managers to work in the best interest of the stockholders?

threat of a proxy fight

pay raises based on length of service

implementation of  a stock option plan

 

4.Financial managers primarily create firm value by:

maximizing current sales.

investing in assets that generate cash in excess of their cost.

 

5.First City Bank pays 7 percent simple interest on its savings account balances, whereas Second City Bank pays 7 percent interest compounded annually.

 

If you made a $59,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 9 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

12299.09

 

6.What is the future value of $3,136 invested for 12 years at 6.50 percent compounded annually?

 

7.What is the present value of $12,750 to be received 3 years from today if the discount rate is 5.50 percent?

use this website: http://www.moneychimp.com/calculator/present_value_calculator.htm

 

8. Six months ago, you purchased 1,200 shares of ABC stock for $21.20 a share and have received total dividend payments of $.60 a share. Today, you sold all of your shares for $22.20 a share. What is your total dollar return on this investment?

 

9.Six months ago, you purchased 100 shares of stock in ABC Co. at a price of $43.89 a share. ABC stock pays a quarterly dividend of $.10 a share. Today, you sold all of your shares for $45.13 per share. What is the total amount of your capital gains on this investment?

 

10.Which one of these accounts is classified as a current asset on the balance sheet?

 

11.Shelton, Inc., has sales of $395,000, costs of $183,000, depreciation expense of $48,000, interest expense of $29,000, and a tax rate of 40 percent. (Do not round intermediate calculations.)

 

What is the net income for the firm?

 

 

 12.On a balance sheet, deferred taxes are classified as:

 

 13. Which one of these equations is an accurate expression of the balance sheet?

 

14.Galaxy United, Inc.

2009 Income Statement

 

15. The Purple Martin has annual sales of $4,600, total debt of $1,230, total equity of $2,500, and a profit margin of 6 percent. What is the return on assets?

 

 16.Galaxy United, Inc.

2009 Income Statement

 

 17.Reliable Cars has sales of $3,850, total assets of $3,350, and a profit margin of 5 percent. The firm has a total debt ratio of 41 percent. What is the return on equity?

 

18. A firm has net working capital of $344, net fixed assets of $2,292, sales of $6,000, and current liabilities of $800. How many dollars worth of sales are generated from every $1 in total assets?

 

 19.One of the primary weaknesses of many financial planning models is that they:

ignore the goals and objectives of senior management.

ignore the size, risk, and timing of cash flows.

are iterative in nature.

rely too much on financial relationships and too little on accounting relationships.

ignore cash payouts to stockholders.

 

 20.The external funds needed (EFN) equation projects the addition to retained earnings as:

 

 

21.Which account is least apt to vary directly with sales?

accounts payable

inventory

accounts receivable

notes payable

cost of goods sold

 

 22. The Wintergrass Company has an ROE of 15.1 percent and a payout ratio of 40 percent.

 

What is the company’s sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

23. If the Hunter Corp. has an ROE of 7 and a payout ratio of 15 percent, what is its sustainable growth rate?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

24.The length of time between the acquisition of inventory and its sale is called the:

operating cycle.

accounts receivable period.

inventory period.

accounts payable period.

cash cycle.

 

 

25.The most common means of financing a temporary cash deficit is a:

long-term secured bank loan.

long-term unsecured bank loan.

short-term secured bank loan.

short-term issue of corporate bonds.

short-term unsecured bank loan.

 

 

26. Consider the following financial statement information for the Rivers Corporation:

 

27.Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32. Input all amounts as positive values):

 

 

Ancient Industries just paid a dividend of $1.03 a share. The company announced today that it expects to pay $.90 a share next year and a final liquidating dividend of $18.44 in two years. What is one share of this stock worth today if the required rate of return is 16 percent?

 

28.The relationship between nominal rates, real rates, and inflation is known as the:

Gordon growth model.

term structure of interest rates.

Miller and Modigliani theorem.

interest rate risk premium.

Fisher effect.

 

29.What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.36 per year? The required rate of return is 12.5 percent.

 

31.A newspaper listing of bond prices has an "Asked yield" column. This yield is based on the asked price and represents the:

coupon rate.

difference between the current yield and the yield to maturity.

 

32.Mullineaux Corporation has a target capital structure of 65 percent common stock and 35 percent debt. Its cost of equity is 14 percent, and the cost of debt is 8 percent. The relevant tax rate is 30 percent.

 

What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

 33.Filer Manufacturing has 8 million shares of common stock outstanding. The current share price is $50, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $69.4 million and a coupon rate of 6.7 percent and sells for 108.6 percent of par. The second issue has a face value of $59.4 million and a coupon rate of 7.2 percent and sells for 108.3 percent of par. The first issue matures in 9 years, the second in 26 years.

 

Suppose the company’s stock has a beta of 1.3. The risk-free rate is 2.8 percent, and the market risk premium is 6.7 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 40 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

34.A firm’s WACC can be correctly used to discount the expected cash flows of a new project when that project:

will be financed with the same proportions of debt and equity as those currently used by the overall firm.

will be financed solely with internal equity.

 

 

 35.The cost of preferred stock:

is set equal to the pretax cost of debt since it is a fixed income security.

is ignored by all firms when computing WACC.

is generally calculated using the overall firm’s beta.

is equal to the stock’s dividend yield.

should be adjusted for taxes when computing WACC.

 

36.When computing WACC, you should use the:

pretax cost of debt because most corporations pay taxes at the same tax rate.

aftertax cost of debt because interest is tax deductible.

pretax cost of debt because it is the actual rate the firm is paying bondholders.

current yield because it is based on the current market price of debt.

pretax yield to maturity because it considers the current market price of debt.

 

37.All else constant, the net present value of a typical investment project increases when:

all cash inflows occur during the last year instead of periodically throughout a project’s life.

each cash inflow is delayed by one year.

the initial cost of a project increases.

the discount rate increases.

the rate of return decreases.

 

 38.Graham and Harvey (2001) found that _____ were the two most popular capital budgeting methods.

IRR and payback

IRR and NPV

discounted payback and NPV

IRR and modified IRR

NPV and PI

 

 39.The primary reason that company projects with positive net present values are considered acceptable is that:

they return the initial cash outlay within three years or less.

the investment's cost exceeds the present value of the cash inflows.

they create value for the owners of the firm.

the project's rate of return exceeds the rate of inflation.

the required cash inflows exceed the actual cash inflows.

 

 

40.fitability index of an investment project is the ratio of the:

net present value of the project’s cash outflows divided by the net present value of its inflows.

net present value of every project cash flow to the initial cost.

present value of the Time 1 and subsequent cash flows to the initial cost.

internal rate of return to the current market rate of interest.

average net income to the average investment.

 

 

41.No matter how many forms of investment analysis you employ:

the internal rate of return will always produce the most reliable results.

only the first three years of a project ever affect its final outcome.

the actual results from a project may vary significantly from the expected results.

the initial costs will generally vary considerably from the estimated costs.

a project will never be accepted unless the payback period is met.

 

 

42.Wilson’s Market is considering two mutually exclusive projects that will not be repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $69,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and why?

Project B; because it has the largest total cash inflow

Project A; because its NPV is positive while Project B’s NPV is negative

Project B; because it has a negative NPV which indicates acceptance

neither project; because neither has an NPV equal to or greater than its initial cost

Project A; because it has the higher required rate of return

 

43.Flatte Restaurant is considering the purchase of a $11,000 soufflé maker. The soufflé maker has an economic life of four years and will be fully depreciated by the straight-line method. The machine will produce 2,500 soufflés per year, with each costing $2.90 to make and priced at $5.75. Assume that the discount rate is 16 percent and the tax rate is 34 percent.

 

What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

  NPV  $   

 

 

Should the company make the purchase?

 

No

 

Yes

 

44.Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,060,000 in annual sales, with costs of $755,000. The tax rate is 35 percent and the required return is 13 percent.

  

What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

  NPV  $   

 

45.What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.

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