FIN370 MULTIPLE choice questions use it as a guide only6
FIN370 MULTIPLE choice questions use it as a guide only6
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Date Created: 11/13/15
1 The true owners of the corporation are the A holders of debt issues of the firm B preferred stockholders C common stockholders D board of directors of the firm 2 In terms of organizational costs which of the following sequences is correct moving from lowest to highest cost A Corporation limited partnership general partnership sole proprietorship B General partnership sole proprietorship limited partnership corporation C Sole proprietorship general partnership limited partnership corporation D Sole proprietorship general partnership corporation limited partnership 3 Which of the following best describes the goal of the firm A The maximization of the total market value of the firm s common stock B Profit maximization C Risk minimization D None of the above 4 is a method of offering securities to a limited number of investors A Public offering B Initial public offering C Private placement D Syndicated underwriting 5 Money market instruments include A corporate bonds B bwers acceptances C preferred stock D common stock 6 When public corporations decide to raise cash in the capital markets what type of financing vehicle is most favored A Common stock B Retained earnings C Preferred stock D Corporate bonds 7 According to the agency problem represent the principals of a corporation A employees B shgreholders C managers D suppliers 8 Difficulty in finding profitable projects is due to A ethical dilemmas B social responsibility C competitive markets D opportunity costs 9 Which of the following is NOT a principle of basic financial management A Efficient capital markets B Riskreturn tradeoff C Incremental cash ow counts D Pro t is king 10 Marshall Networks Inc has a total asset turnover of 25 and a net profit margin of 35 The firm has a return on equity of 175 Calculate Marshall s debt ratio A 30 B 40 C 60 D 50 11 The accounting rate of return on stockholders investments is measured by A return on assets B return on eauitv C realized rate of in ation D operating income return on investment 12 Which of the following financial ratios is the best measure of the operating effectiveness of a firm s management A Current ratio B Gross profit margin C Return on investment D Quick ratio 13 Northwest Bank pays a quoted annual nominal interest rate of 475 However it pays interest compouned daily using a 365day year What is the effective annual rate of return APY A 475 B 502 C 486 D 361 14 Suppose that you wish to save for your child39s college education by opening up an educational IRA You plan to deposit 100 per month into the IRA for the next 18 years Assume that you will be able to earn 10 compounded monthly on your investment How much will you have accumulated at the end of 18 years A 21600 B 54719 C 60 056 D 85920 E 33548 15 You have 10000 to invest You do not want to take any risk so you will put the funds in a savings account at the local bank Of the following choices which one will produce the largest sum at the end of 22 years A An account that compounds interest annually B An account that compounds interest dailv C An account that compounds interest monthly D An account that compounds interest quarterly 16 The primary purpose of a cash budget is to A provide a detailed plan of future cash flows B determine the level of investment in current and fixed assets C determine accounts payable D determine the estimated income tax for the year 17 Which of the following is NOT a basic function of a budget A Budgets compare historical costs of the rm with its current cost performance B Budgets indicate the need for future financing C Budgets provide the basis for corrective action when actual figures differ from the budgeted figures D Budgets allow for performance evaluation 18 Which of the following statements about the percentofsales method of financial forecasting is true A It involves estimating the level of an expense asset or liability for a future period M percent of the forecast for sales revenues B It is the least commonly used method of financial forecasting C It is a much more precise method of financial forecasting than a cash budget would be D It projects all liabilities as a fixed percentage of sales 19 Which of the following is a noncash expense A Packaging costs B Depreciation expen C Interest expense D Administrative salaries 20 A plant can remain operating when sales are depressed A in an effort to cover at least some of the variable cost B if the selling price per unit exceeds the variable cost per unit C to help the local economy D unless variable costs are zero when production is zero 21 The breakeven model enables the manager of a firm to A determine the QUMtV of output that must be sold to cover all Operatin2 costs B calculate the minimum price of common stock for certain situations C set appropriate equilibrium thresholds D determine the optimal amount of debt financing to use 22 How long will it take 750 to double at 8 compounded annually A 9 years B 65 years C 48 months D 12 years 23 Which of the following is the formula for compound value FVn Pg 1iE FVn 1iP FVn P1i39 FVn P1i 24 The present value of a single future sum AJCC increases as the number of discount periods increas CC is generally larger than the future sum increases as the discount rate increases depends upon the number of discount periods 25 Which of the following is NOT considered a permanent source of nancing Corporate bonds Common stock Commercial paper Preferred stock 26 A toy manufacturer following the hedging principle will generally nance seasonal inventory buildup prior to the Christmas season with common stock selling equipment preferred stock trade credit 27 Which of the following is considered to be a spontaneous source of nancing Operating leases Accounts receivable Accounts payable Inventory multiplying the IRR by the cost of capital dividing the present value of the annual aftertax cash ows by the cost of capital multiplying the cash in ow by the IRR dividing the present value of the annual aftertax cash ows by the cost of the proiect 29 Your company is considering a project with the following cash ows Initial outlay 174880 Cash ows Years 1 6 500 Compute the IRR on the project 30 For the NPV criteria a project is acceptable if the NPV is M 9 24 11 while for the pro tability index a project is acceptable if the pro tability index is A greater than one greater than zero less than zero greater than the required return greater than zero less than one greater than zero greater than one 31 You have been asked to analyze a capital investment proposal The project s cost is 2775000 Cash in ows are projected to be 925000 in Year 1 1000000 in Year 2 1000000 in Year 3 1000000 in Year 4 and 1225000 in Year 5 Assume that your rm discounts capital projects at 155 What is the project s MIRR 1673 1262 1999 1044 It fails to utilize the time value of money It fails to properly rank capital projects It is not useful in accounting for risk in capital budgeting It could produce more Mn one rate of return 33 Most rms use the payback period as a secondary capitalbudgeting technique which in a sense allows them to control for risk A f True iij 55 False 34 ABC Service can purchase a new assembler for 15052 that will provide an annual net cash flow of 6000 per year for ve years Calculate the NPV of the assembler if the required rate of return is 12 Round your answer to the nearest 1 7621 1056 M 4568 the IRR is positive the payback is less than the IRR the NPV is greater than the discounted payback the profitability index is greater Mn 10 36 The NPV assumes cash ows are reinvested at the IRR NPV real rate of return cost of capital 37 The average cost associated with each additional dollar of nancing for investment projects is the incremental return the marginal cost of capital riskfree rate beta preferred stock new common stock debt retained earnings these bonds are essentially free of business risk theV capture the longterm inflation expectations of investors associated with investments in longterm assets these bonds are essentially free of interest rate risk none of the above 40 Shawhan Supply plans to maintain its optimal capital structure of 30 debt 20 preferred stock and 50 common stock far into the future The required return on each component is debt 10 preferred stock 11 and common stock 18 Assuming a 40 marginal tax rate what aftertax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged 180 M 100 142 41 Bender and Co is issuing a 1000 par value bond that pays 9 interest annually Investors are expected to pay 918 for the 10year bond Bender will have to pay 33 per bond in otation costs What is the cost of debt if the firm is in the m 901 923 1195 42 The XYZ Company is planning a 50 million expansion The expansion is to be nanced by selling 20 million in new debt and 30 million in new common stock The beforetax required rate of return on debt is 9 and the required rate of return on equity is 14 If the company is in the 40 tax bracket what is the marginal cost of capital 140 90 M 1 15 43 Zybeck Corp projects operating income of 4 million next year The rm s income tax rate is 40 Zybeck presently has 750000 shares of common stock which have a market value of 10 per share no preferred stock and no debt The rm is considering two alternatives to nance a new product a the issuance of 6 million of 10 bonds or b the issuance of 60000 new shares of common stock If Zybeck issues common stock this year what will projected EPS be next year 44 Lever Brothers has a debt ratio debt to assets of 40 Management is wondering if its current capital structure is too conservative Lever Brothers s present EBIT is 3 million and pro ts available to common shareholders are 1560000 with 342857 shares of common stock outstanding If the rm were to instead have a debt ratio of 60 additional interest expense would cause pro ts available to stockholders to decline to 1440000 but only 228571 common shares would be outstanding What is the difference in EPS at a debt ratio of 60 versus 40 450 200 175 45 Lever Brothers has a debt ratio debt to assets of 20 Management is wondering if its current capital structure is too conservative Lever Brothers s present EBIT is 3 million and pro ts available to common shareholders are 1680000 with 457143 shares of common stock outstanding If the firm were to instead have a debt ratio of 40 additional interest expense would cause pro ts available to stockholders to decline to 1560000 but only 342857 common shares would be outstanding What is the difference in EPS at a debt ratio of 40 versus 20 116 M 195 212 46 A bond sold simultaneously in several different foreign capital markets but denominated in a currency different from the country in which the bond is issued is oating bond Eurobond international capital bond world bond 47 Which of the following statements about exchange rates is true Exchange rates were fixed prior to establishing a oatingrate international currency system and all countries set a specific parity rate for their currency relative either to the Canadian or to the US dollar Daytoday uctuations in exchange rates currently are caused by changes in parity rates A oatingrate international currencv system has been operating since 1973 All of the choices 48 Capital markets in foreign countries if offer lower returns than those obtainable in the domestic capital markets Drovide international diversi cation in general are becoming less integrated due to the widespread availability of interest rate and currency swaps all of the choices 49 A spot transaction occurs when one currency is exchanged for another currency at a specified price traded for another at an agreedupon future price immediatelv exchanged for another currency deposited in a foreign bank 50 If the quote for a forward exchange contract is greater than the computed price the forward contract is a good buy at equilibrium undervalued overvalued 51 The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the interest rate Daritv theorv arbitrage markets theory balance of payments quantum theory purchasing power parity theory 52 One reason for international investment is to reduce portfolio risk beta risk priceearnings PE ratios advantages in a foreign country As political risk if maximizing the firm s profits Csil attaining a high international PE ratio all of the above 54 Buying and selling in more than one market to make a riskless profit is called profit maximization cannot be determined from the above information arbitrage international trading
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