FIN 571 Final Exam Guide (New, 2017)
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Question 1 The underlying assumption of the dividend growth model is that a stock is worth:
A. An amount computed as the next annual dividend divided by the required rate of return.
B. An amount computed as the next annual dividend divided by the market rate of return.
C. The same amount computed as any other stock that pays the same current dividend and has the same required rate of return.
D. The present value of the future income that the stock is expected to generate.
E. The same amount to every investor regardless of their desired rate of return.
• Question 2 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?
• Question 3 A firm has a debt-equity ratio of.64, a pre tax 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 ?
• Question 4 What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent ?
• Question 5 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.
A. Best efforts; firm commitment
B. Seasoned; unseasoned
C. Firm commitment; best efforts
D. Negotiated offer; competitive offer
E. Competitive offer; negotiated offer
Question 6 All else held constant, interest rate risk will increase when the time to maturity:
A. Increase or the coupon rate increases.
B. Increase or the coupon rate decreases.
C. Decrease and the coupon rate equals zero.
D. Decrease or the coupon rate increases.
E. Decrease or the coupon rate decreases.
Question 7 The process of planning and managing a firm’s long-term assets is called:
A. Agency cost analysis.
B. Working capital management.
C. Financial depreciation.
D. Capital structure.
E. Capital budgeting.
Question 8 An efficient capital market is one in which:
A. Securities always offer a positive NPV.
B. Taxes are irrelevant.
C. All investments earn the market rate of return.
D. Brokerage commissions are zero.
E. Security prices reflect all available information.
Question 9 Which one of these statements is correct concerning the cash cycle?
A. Increasing the accounts payable period increases all cash cycle.
B. A positive cash cycle is preferable to a negative cash cycle.
C. The cash cycle can exceed the operating cycle if the payables period is equal to zero.
D. The longer the cash cycle, the more likely a firm will need external financing.
E. A dopting a more liberal accounts receivable policy will tend to decrease the cash cycle.
Question 10 The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _______ costs.
A. Direct bankruptcy
B. Financial solvency
D. Indirect bankruptcy
E. Capital structure
Question 11 Which one of the following is an example of a nondiversifiable risk?
A. A well-respected president of a firm suddenly resigns
B. A well-respected chairman of the Federal Reserve Bank suddenly resigns
C. A poorly managed firm suddenly goes out of business due to lack of sales
D. A key employee suddenly resigns and accepts employment with a key competitor
E. A well-managed firm reduces its work force and automates several jobs
Question 12 One disadvantage of the corporate form of business ownership is the:
A. Limited liability protection provided for all owners.
B. Unlimited life of the firm.
C. Difficulties encountered when changing ownership.
D. Double taxation of profits.
E. Firms ability to raise cash.
Question 13 Which one of the following statements about preferred stock is true?
A. There is no significant difference in the voting rights granted to preferred and common shareholders.
B. If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year.
C. Preferred stock usually has a stated liquidating value of $100 per share.
D. Unlike dividends paid on common stock. Dividends paid on preferred stock are a tax-deductible expenses.
E. Dividends on preferred stock payable during the next twelve months are considered to be a corporate liability.
Question 14 Book value :
A. Is adjusted to market value whenever the market value exceeds the stated book value.
B. Is based on historical cost.
C. Is equivalent to market value for firms with fixed assets.
D. Generally tends to exceed market value when fixed assets are included.
E. Is more of a financial than an accounting valuation.
Question 15 The primary goal of financial management is to:
A. Avoid financial distress.
B. Maintain steady growth sales and net earnings.
C. Maximize the current value per share of the existing stock.
D. Minimize operational costs and maximize firm efficiency.
E. Maximize current dividends per share of the existing stock.
Question 16 Which term defines the tax rate that applies to the next dollar of taxable income earned ?
Question 17 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 ?
Question 18 The cash flow resulting from a firm’s ongoing, normal business activities is referred to as the:
A. Net capital spending.
B. Cash flow to investors.
C. Additions to net working capital.
D. Operating cash flow.
E. Cash flow to retained earnings.
Question 19 The market price of a bond increases when the:
A. Par value decreases.
B. Coupon rate decreases.
C. Discount rate decreases.
D. Face value decreases.
E. Coupon is paid annually rather than semiannually
Question 20 The excess return you earn by moving from a relatively risk-free investment to a risky investment is called :
A. Arithmetic average return.
B. Geometric average return.
C. Time premium.
D. Risk premium.
E. Inflation premium.
Question 21 A firn has a total debt ratio of . 47. This means the firn has 47 cents in debt for every:
A. $ 1 in fixed assets.
B. $ 53 in total equity.
C. $ 1 in total equity.
D. $ 1 in current assets.
E. $ 53 in total assets.
Question 22 A ll else equal, the contribution must increase as:
A. Both the sales price and variable cost per unit increase.
B. The variable cost per unit declines.
C. The fixed cost per unit declines.
D. Sales price per unit declines.
E. The sales price minus the fixed per unit increases.
Question 23 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 ?
A. 3.92 years
B. 2.84 years
D. 2.97 years
E. 3.98 years
Question 24 Ratios that measure a firm’s ability to pay its bills over the short run without undue stress are known as:
A. Liquidity measures.
B. Asset management ratios.
C. Long-term solvency measures.
D. Profitability ratios.
E. Market value ratios.
Question 25 The discount rate that makes the net present value of an investment exactly equal to zero is called the:
A. Profitability index.
B. External rate of return.
C. Averages accounting return.
E. Internal rate of return.
Question 26 An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the________ rate.
A. Compound interest
B. Stated interest
C. Effective annual
D. Periodic interest
E. Daily interest
Question 27 Which one of the following statements is false?
A. If sales are seasonal, the percentages shown on an aging schedule will vary during the year.
B. Aging schedules are used to monitor accounts receivable.
C. An aging schedule includes only overdue accounts
D. Investments in accounts equal average daily sales times average collection period.
E. Collection efforts may involve legal action.
Question 28 Which one of these is a correct definition ?
A. Long-term debt is defined as a residual claim on a firm’s assets.
B. Current assets are assets with short lives, such as inventory,
C. Tangible assets are fixed assets such as patents.
D. Current liabilities are debts that must be repaid in 18 months or less.
E. Net working capital equals current assets plus current liabilities.
Question 29 Futures contracts contrast with forward contracts by:
A. Allowing the seller to deliver any day during the delivery month.
B. Requiring contract fulfilment by the two originating parties.
C. Providing an option for the buyer rather than an obligation.
D. Marking to the market on a weekly basis.
E. Allowing the parties to negotiate the contract size.
Question 30 The higher the inventory turnover, the:
A. Lesser the amount of inventory held by a firm.
B. Higher the inventory as a percentage of total assets.
C. Less time inventory items remain on the shelf.
D. Greater the inventory of inventory help by a firm.
E. Longer it takes firm to sell its inventory.
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