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California Coast Univ BAM 313 Finance Final Exam -Introduction to Financial Management (100 MCQs)




Question;Introduction to Financial Management1. Maximization of shareholder wealth as a goal is superior to profit maximiza-tion because:a. it considers the time value of the money.b. following the goal of shareholder wealth maximization will ensure high stockprices.c. it considers uncertainty.d. A and C2) Which of the following is NOT true for a limited partnership?a. Limited partners may sell their interest in the company.b. Limited partners can only manage the business.c. One general partner must exist who has unlimited liability.d. Only the name of general partners can appear in the name of the firm.3) Revenues are taxeda. to achieve socially desirable goals.b. to provide revenues for government expenditures.c. for economic stabilization.d. all of the above4) Which of the following categories of owners have unlimited liability?a. general partners in a limited partnershipb. sole proprietorsc. shareholders of a corporationd. both A and B5) Emery Inc. had $5 million of gross income, operating expenses of $1 million,paid $1 million of interest on borrowing of $10 million, and paid a dividendof $0.50 million. Emery Inc.?s taxable income isa. $4 million.b. $3 million.c. $3.5 million.d. $2.5 million.Multiple Choice Questions (Enter your answers on the enclosed answer sheet)2Final ExaminationIntroduction to Financial Management6) Given the following tax rate schedule, what is the tax liability for a corpora-tion with taxable income of $8 million?Corporate Tax Rates Taxable Income15% $0 - $50,00025% $50,001 - $75,00034% $75,001 - $10,000,00035% over $10,000,000Additional surtax of 5% on income between $100,000 and $335,000Additional surtax of 3% on income between $15,000,000 and $18,333,333a. $2,715,000b. $2,720,000c. $2,694,500d. $2,708,2507) Company A reports sales of $100,000 and net income of $15,000. CompanyB reports sales of $100,000 and net income of $10,000. Therefore:a. Company A?s cash flow may be higher or lower than Company B?s cash floweven though A?s net income is higher.b. Company B is creating less value for its shareholders than Company A.c. Company B?s accounts receivable must be higher than Company A?s accountsreceivable.d. Company A?s cash flow is $5,000 more than Company B?s cash flow.8) The CEO of High Tech International decides to change an accounting methodat the end of the current year. The change results in reported profits increas-ing by 5%, but the company?s cash flows are not changed. If capital marketsare efficient, then:a. The stock price will increase due to higher profits.b. The stock price will not be affected by the accounting change.c. The stock price will decrease because accounting method changes are notpermitted under generally accepted accounting principles.d. The stock price will increase only if the accounting change will also result inhigher profits in the next year.9) The curse of competitive marketsa. May be lessened by obtaining patents for new ideas that protect companiesfrom competitors.b. Implies that profitable industries will become smaller as companies drop outto avoid competition. Final Examination3Introduction to Financial Managementc. Means that money spent on innovation is wasted because competitors willrush in and eliminate any excess profits.d. Means that companies cannot earn exceptional profits.10) Which of the following statements best represents the ?Agency Problem??a. The agency problem results from the separation of management and the own-ership of the firm.b. The agency problem may interfere with the implementation of maximizingshareholder wealth.c. Managers might attempt to benefit themselves in terms of salary and perqui-sites at the expense of shareholders.d. all of the above11) U.S. corporations finance their activitiesa. mainly with equity because equity does not expire or need to be paid back.b. mainly with equity because the U.S. tax system favors equity over debt.c. mainly with corporate debt, partially because the U.S. tax system favors debtover equity.d. equally with debt and equity.12) All of the following securities are sold in money markets except:a. 6-month certificates of depositb. common stockc. commercial paperd. 3-month U.S. Treasury Bills13) Which of the following is an advantage of organized stock exchanges?a. Only profitable companies may issue new securities on an organized ex-change.b. screening companies to ensure only low risk stocks are soldc. providing a continuous marketd. increased stock price volatility14) An example of a secondary market transaction involving a capital marketsecurity is:a. The transfer of a previously-issued security with a very long maturity.b. The transfer of a previously-issued security with a very short maturity.c. A new issue of a security with a very short maturity.d. A new issue of a security with a very long maturity.4Final ExaminationIntroduction to Financial Management15) Money market transactions include which of the following?a. Securities that have a maturity of less than one yearb. All securities paid for with the proceeds of a money market accountc. 30-year U.S. Treasury bondsd. Any security that is paid for with cash16) Private placements area. especially appealing to new, small, and medium-sized companies.b. limited to equity securities.c. available for both debt and equity securities, but the market is dominated byequity issues.d. limited to debt securities.17) The Sarbanes-Oxley Act of 2002, in order to protect investors, requires ahigher level of accountability for which of the following groups?a. corporate officersb. boards of directorsc. public accountantsd. all of the above18) What was the average annual rate of return on 3-month U.S. Treasury billsduring the period 1981 to 2005?a. 10.4%b. 5.68%c. 3.84%d. 6.99%19) Which of the following securities will likely have the highest default risk pre-mium?a. U.S. Treasury Billb. Bbb-rated corporate bond maturing in 2020 actively traded on a major ex-changec. Aaa-rated corporate bond maturing in 2015 not actively tradedd. U.S. Treasury Bond maturing in 202720) The real rate of return is the return earned above thea. variability of returns measured by standard deviation.b. inflation risk premium.c. default risk premium.d. risk-adjusted return. Final Examination5Introduction to Financial Management21) Li Retailing reported the following items for the current year: Sales =$2,000,000, Cost of Goods Sold = $1,200,000, Depreciation Expense =$140,000, Administrative Expenses = $170,000, Interest Expense =$40,000, Marketing Expenses = $60,000, and Taxes = $20,000. Li?s grossprofit is equal to:a. $410,000b. $800,000c. $490,000d. $430,00022) Which of the following statements concerning net income is most correct?a. Negative net income reduces a company?s cash balance.b. Net income represents sales minus operating expenses at a specific point intime.c. Net income represents cash available to pay dividends.d. Net income represents income that may be reinvested in the firm or distrib-uted to its owners.Table 3-1Jones Company Financial InformationDecember 2007 December 2008Net income $2,000 $5,000Accounts receivable 750 750Accumulated depreciation 1,000 1,500Common stock 4,500 5,000Paid-in capital 7,500 8,000Retained earnings 1,500 2,500Accounts payable 750 75023) Based on the information in Table 3-1, assuming that no common stock wasrepurchased during the year, the firm issued how much new common stockduring 2008?a. $1,500b. $1,000c. $2,000d. $50024) What information does a firm?s balance sheet provide to the viewing public?a. A complete listing of all of a firm?s cash receipts and cash expenditures for adefined period of time.b. A report of revenues and expenses for a defined period of time. 6Final ExaminationIntroduction to Financial Managementc. A report of investments made and their cost for a specific period of time.d. An itemization of all of a firm?s assets, liabilities, and equity as of the balancesheet date.25) Which of the following accounts does NOT belong on the asset side of a bal-ance sheet?a. Cashb. Accounts receivablec. Accumulated depreciationd. Accruals26) Which of the following accounts does NOT belong in the liability section of abalance sheet?a. Accumulated depreciationb. Long-term debtc. Accrualsd. Accounts payable27) Which of the following accounts belongs in the equity section of a balancesheet?a. Dividendsb. Retained earningsc. Long-term debtd. CashTable 3-1Jones Company Financial InformationDecember 2007 December 2008Net income $2,000 $5,000Accounts receivable 750 750Accumulated depreciation 1,000 1,500Common stock 4,500 5,000Paid-in capital 7,500 8,000Retained earnings 1,500 2,500Accounts payable 750 75028) Based on the information in Table 3-1, calculate the after tax cash flow fromoperations for 2008 (no assets were disposed of during the year, and therewas no change in interest payable or taxes payable). Final Examination7Introduction to Financial Managementa. $6,500b. $3,375c. $3,750d. $5,50029) Which of the following best describes free cash flow?a. After-tax cash flows from operations, minus the increase in operating workingcapital, minus the increase in fixed and other assetsb. EBIT, minus interest expense, minus income taxesc. Gross profit, minus EBITd. Operating profit, minus interest and depreciation30) Higher inventory turnover suggests thata. the company?s inventory is more liquid.b. the company?s inventory is somewhat obsolete.c. the company has a higher inventory balance.d. the company?s sales are higher.31) The current ratio of a firm would be increased by which of the following?a. Inventories are sold for cash.b. Equipment is purchased, financed by a long-term debt issue.c. Land held for investment is sold for cash.d. Inventories are sold on a credit basis.32) The current ratio of a firm would be decreased by which of the following?a. Inventories are sold on a long-term credit basis.b. Equipment is purchased, financed by a long-term debt issue.c. Inventories are sold for cash.d. Land held for investment is sold for cash.33) Given an accounts receivable turnover of 20 and annual credit sales of$400,000, the average collection period is:a. 20 daysb. 45.625 daysc. 17.49 daysd. 18.25 days 8Final ExaminationIntroduction to Financial ManagementTable 4-1Garland Company Balance SheetAssets:Cash and marketable securities $500,000Accounts receivable 800,000Inventories 1,350,000Prepaid expenses 50,000Total current assets $2,700,000Fixed assets 5,000,000Less: accum. depr. (2,000,000)Net fixed assets $3,000,000Total assets $5,700,000Liabilities:Accounts payable $400,000Notes payable 900,000Accrued taxes 75,000Total current liabilities $1,375,000Long-term debt 1,200,000Owner?s equity 3,125,000Total liabilities and owner?s equity $5,700,000Net sales (all credit) $8,000,000Less: Cost of goods sold (3,500,000)Selling and administrative expense (2,000,000)Depreciation expense (250,000)Interest expense (150,000)Earnings before taxes 2,100,000Income taxes (700,000)Net income $1,400,000Common stock dividends $500,000Common Shares Outstanding 1,000,00034) Based on the information in Table 4-1, the debt ratio is:a. 21.1%b. 48.8%c. 45.2%d. 22.6% Final Examination9Introduction to Financial Management35) Based on the information in Table 4-1, the operating profit margin is:a. 32.4%b. 28.1%c. 17.5%d. 44.8%Table 4-3Lesli CorporationBalance Sheet Income StatementAssets:Cash $150,000 Sales (all credit) $6,000,000Accounts receivable 350,000 Cost of goods sold (3,000,000)Inventory 600,000 Operating expenses (900,000)Net fixed assets 1,900,000 Interest expense (750,000)Total assets 3,000,000 Income taxes (500,000)Net income 850,000Liabilities and owners? equity:Accounts payable $150,000Notes payable 250,000Long-term debt 1,200,000Owners? Equity 1,400,000Total L. + O.E. 3,000,00036) Based on the information in Table 4-3, assuming that the firm has no pre-ferred stock, and paid $250,000 in common dividends, the firm?s return onequity was:a. 61%b. 32%c. 43%d. 79Final ExaminationIntroduction to Financial Management37) The two principal sources of financing for corporations are:a. debt and accounts payableb. cash and common equityc. common equity and preferred equityd. debt and equity38) Which of the following ratios would be the most useful to assess the risk as-sociated with a firm being able to pay off its short-term line of credit?a. Return on equity.b. The fixed asset turnover.c. The operating profit margin.d. The acid test ratio.39) You deposit $4,500 per year at the end of each of the next 25 years into anaccount that pays 10% compounded annually. How much could you withdrawat the end of each of the 20 years following your last deposit if all withdraw-als are the same dollar amount? (The twenty-fifth and last deposit is made atthe beginning of the 20-year period. The first withdrawal is made at the endof the first year in the 20-year period.)a. $51,983b. $22,128c. $45,987d. $38,323Final Examination11Introduction to Financial Management40) It is your 5th birthday today. You have a trust fund with $50,000 that is earn-ing 8% per year. You expect to withdraw $20,000 per year for 4 years starting on your 21st birthday for graduate school. How much money will be leftin the trust fund after your last withdrawal (rounded to the nearest $10)?a. $135,780b. $91,30c. $125,660d. You will not have enough money to pay for graduate school.41) How much money must you pay into an account at the end of each of 20years in order to have $100,000 at the end of the 20th year? Assume thatthe account pays 6% per year, and round to the nearest $1.a. $2,718b. $2,195c. $1,840d. $2,02842) How much money must you pay into an account at the beginning of each of20 years in order to have $10,000 at the end of the 20th year? Assume thatthe account pays 12% per year, and round to the nearest $1.a. $124b. $111c. $1,195d. $13943) Auto Loans R Them loans you $24,000 for four years to buy a car. The loanmust be repaid in 48 equal monthly payments. The annual interest rate onthe loan is 9 percent. What is the monthly payment?a. $500.92b. $597.24c. $543.79d. $563.82 12Final ExaminationIntroduction to Financial Management44) If you put $10,000 in an investment that returns 14 percent compoundedmonthly what would you have after 12 years (round to nearest $10)?a. $11,490b. $53,140c. $48,180d. $61,27045) If you want to have $5,000 in 10 years, how much money must you put in asavings account today? (Assume that the savings account pays 4% and it iscompounded daily, round to the nearest $1).a. $3,370b. $4,102c. $4,207d. $3,35246) You discover an antique in your attic that you purchased at an estate sale 10years ago for $400. You auction it on EBay and receive $8,000 for your item.What annual rate of return did you earn?a. 20.00%b. 34.93%c. 30.47%d. 200.00%47) Assume that you have $165,000 invested in a stock that is returning11.50%, $85,000 invested in a stock that is returning 22.75%, and$235,000 invested in a stock that is returning 10.25%. What is the expectedreturn of your portfolio?a. 18.3%b. 15.6%c. 12.9%d. 14.8%48) You are considering investing in a project with the following possible outcomes:Probability of InvestmentStates Occurrence ReturnsState 1: Economic boom 18% 20%State 2: Economic growth 42% 16%State 3: Economic decline 30% 3%State 4: Depression 10% -25%Final Examination13Introduction to Financial ManagementCalculate the expected rate of return and standard deviation of returns forthis investment, respectively.a. 2.18%, 1.69%b. 8.72%, 12.99%c. 7.35%, 12.99%d. 3.50%, 1.69%49) Assume that an investment is forecasted to produce the following returns: a20% probability of a $1,200 return, a 50% probability of a $5,600 return,and a 30% probability of a $9,500 return. What is the expected amount ofreturn this investment will produce?a. $7,136b. $6,125c. $5,890d. $4,53350) You are considering investing in Ford Motor Company. Which of the followingare examples of diversifiable risk?I. Risk resulting from possibility of a stock market crash.II. Risk resulting from uncertainty regarding a possible strike against Ford.III. Risk resulting from an expensive recall of a Ford product.IV. Risk resulting from interest rates decreasing.a. I onlyb. I, II, III, IVc. I and IVd. II, III51) Portfolio risk is typically measured by ________ while the risk of a singleinvestment is measured by ________?a. beta, slope of the characteristic lineb. security market line, standard deviationc. standard deviation, betad. beta, standard deviation52) You are going to add one of the following three projects to your already well-diversified portfolio.14Final ExaminationIntroduction to Financial ManagementPROJECT 1 PROJECT 2Standard StandardProbability Return Deviation Beta Probability Return DeviationBeta50% Chance 22% 12% 1.2 30% Chance 36% 19.5% 0.850% Chance -4% 40% Chance 10.5%30% Chance -20%PROJECT 3StandardProbability Return Deviation Beta10% Chance 28% 12% 2.070% Chance 18 % Chance -8%Assume the risk-free rate of return is 2% and the market risk premium is 8%. Ifyou are a risk averse investor, which project should you choose?a. Either Project 2 or Project 3 because the higher expected return onproject 3 offsets its higher risk.b. Project 2c. Project 1d. Project 353) The beta of ABC Co. stock is the slope of:a. The arbitrage pricing line.b. The security market line.c. The characteristic line for a plot of returns on the S&P 500 versusreturns on short-term Treasury bills.d. The characteristic line for a plot of ABC Co. returns against the returnsof the market portfolio for the same period.54) Assume that WhirledCom has an issue of 15-year $1,000 par valuebonds that pay 6% interest, semi-annually. Further assume that to-day?s required rate of return on these bonds is 9%. How much wouldthese bonds sell for today? Round off to the nearest $1.a. $1,321b. $1,066 Final Examination15Introduction to Financial Managementc. $756d. $86455) The yield to maturity on a bond is the rate of return that equates the presentvalue of the bond?s future cash flows with the bond?sa. book value.b. liquidation value.c. face value.d. market value.56) A corporate bond has a coupon rate of 9%, a face value of $1,000, and ma-tures in 15 years. Which of the following statements is most correct?a. An investor with a required return of 10% will value the bond at more than$1,000.b. An investor who buys the bond for $900 will have a yield to maturity on thebond greater than 9%.c. An investor who buys the bond for $900 and holds the bond until maturitywill have a capital loss.d. If the bond?s market price is $900, then the annual interest payments on thebond will be $81.57) A $1,000 par value 12-year bond with a 9 percent coupon rate recently soldfor $980. The yield to maturity is:a. 8.8%b. less than 8%c. 9 percentd. greater than 9 percent58) If the market price of a bond decreases, thena. the coupon rate increases.b. the yield to maturity increases.c. the yield to maturity decreases.d. the coupon rate decreases.59) What is the yield to maturity of a corporate bond with 10 years to maturity,a coupon rate of 6% per year, a $1,000 par value, and a current market priceof $1,147? Assume semi-annual coupon payments.a. 4.7% 16Final ExaminationIntroduction to Financial Managementb. 5.3%c. 6.0%d. 4.2%60) What is the value of a preferred stock that pays a $3.50 dividend to an inves-tor with a required rate of return of 9% (round your answer to the nearest$1)?a. $23b. $39c. $31.50d. $1761) Preferred stock differs from common stock in thata. preferred stock dividends are fixed.b. common stock investors have a required return and preferred stock investorsdo not.c. preferred stock investors have a higher required return than common stockinvestors.d. preferred stock usually has a maturity date.62) Linen Supply Co. paid a dividend of $3.25 on its common stock yesterday.The company?s dividends are expected to grow at a constant rate of 5.5%indefinitely. The required rate of return on this stock is 17.5%. You observe amarket price of $27.50 for the stock. Should you purchase this stock?a. Yes, the market price is below the intrinsic value of the stock.b. Yes, but only if you can keep the stock for at least 5 years.c. No, the growth rate in dividends is too far below the required return.d. No, the market price is above the intrinsic value of the stock.63) Chambers Corporation?s ROE is 18%. Their dividend payout ratio is 80%.The last dividend, just paid, was $2.20. If dividends are expected to grow bythe company?s internal growth rate indefinitely, what is the current value ofChambers common stock if its required return is 20%?a. $12.89b. $12.56c. $15.43d. $13.90 Final Examination17Introduction to Financial Management64) I-Sage, whose common stock is currently selling for $12 per share, is expect-ed to pay a $1.80 dividend, and sell for $14.40 one year from now. What arethe dividend yield, growth rate, and total rate of return, respectively?a. 15% 12% 27%b. 20% 15% 35%c. 15% 20% 35%d. 10% 5% 15%65) NewAge, Inc. paid a dividend yesterday of $2 per share. NewAge manage-ment expects the dividend to increase next year to $3 annually. If the divi-dend is expected to stay at $3 per year for the foreseeable future, what is thevalue of the stock to an investor with a required rate of return of 10%?a. $50.00b. $30.00c. $32.00d. $7.5066) Northwest Industries is considering a project with the following cash flows:Initial Outlay = $2,800,000After-tax operating cash flows for years 1-4 = $850,000 per yearAdditional after-tax terminal cash flow at end of Year 4 = $125,000Compute the net present value of this project if the company?s discount rateis 14%.a. $239,209b. $725,000c. -$138,561d. -$249,33567) Compute the payback period for a project with the following cash flows received uniformly within each year:Initial Outlay = $100Cash Flows: Year 1 = $40Year 2 = $50Year 3 = $60a. 2.17 yearsb. 3 yearsc. 4 yearsd. 3.17 years 18Final ExaminationIntroduction to Financial Management68) What is the net present value?s assumption about how cash flows are re-in-vested?a. They are reinvested at the IRR.b. They are reinvested only at the end of the project.c. They are reinvested at the APR.d. They are reinvested at the firm?s discount rate.69) Your firm is considering an investment that will cost $750,000 today. Theinvestment will produce cash flows of $250,000 in year 1, $300,000 inyears 2 through 4, and $100,000 in year 5. The discount rate that your firmuses for projects of this type is 13.25%. What is the investment?s profitabilityindex?a. 1.4b. 1.6c. 1.2d..270) If the NPV (Net Present Value) of a project with multiple sign reversals ispositive, then the project?s required rate of return ________ its calculated IRR(Internal Rate of Return).a. must be greater thanb. could be greater or less thanc. must be less thand. Cannot be determined without actual cash flows.71) Determine the five-year equivalent annual annuity of the following project ifthe appropriate discount rate is 16%:Initial Outflow = $150,000Cash Flow Year 1 = $40,000Cash Flow Year 2 = $90,000Cash Flow Year 3 = $60,000Cash Flow Year 4 = $0Cash Flow Year 5 = $80,000a. $8,520b. $7,058c. $9,872d. $9,454 Final Examination19Introduction to Financial Management72) Your company is considering the replacement of an old delivery van with anew one that is more efficient. The old van cost $30,000 when it waspurchased 5 years ago. The old van is being depreciated using the simpli-fied straight-line method over a useful life of 10 years. The old van could besold today for $5,000. The new van has an invoice price of $75,000, and itwill cost $5,000 to modify the van to carry the company?s products. Costsavings from use of the new van are expected to be $22,000 per year for5 years, at which time the van will be sold for its estimated salvage valueof $15,000. The new van will be depreciated using the simplified straight-line method over its 5-year useful life. The company?s tax rate is 35%. Work-ing capital is expected to increase by $3,000 at the inception of the project,but this amount will be recaptured at the end of year five. What is the incre-mental free cash flow for year one?a. $22,250b. $18,850c. $21,305d. $19,90073) The recapture of net working capital at the end of a project willa. increase terminal year free cash flow by the change in net working capitaltimes the corporate tax rate.b. increase terminal year free cash flow.c. decrease terminal year free cash flow by the change in net working capitaltimes the corporate tax rate.d. have no effect on the terminal year free cash flow because the net workingcapital change has already been included in a prior year.74) A new machine can be purchased for $1,000,000. It will cost $65,000 toship and $35,000 to modify the machine. A $30,000 recently completedfeasibility study indicated that the firm can employ an existing factory ownedby the firm, which would have otherwise been sold for $150,000. The firmwill borrow $750,000 to finance the acquisition. Total interest expense for5-years is expected to approximate $250,000. What is the investment cost ofthe machine for capital budgeting purposes?a. $2,030,000b. $1,530,000c. $1,100,000d. $1,250,000e. $1,280,000 20Final ExaminationIntroduction to Financial Management75) PDF Corp. needs to replace an old lathe with a new, more efficient model.The old lathe was purchased for $50,000 nine years ago and has a currentbook value of $5,000. (The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs $100,000. It willcost the company $10,000 to get the new lathe to the factory and get itinstalled. The old machine will be sold as scrap metal for $2,000. The newmachine is also being depreciated on a straight-line basis over ten years.Sales are expected to increase by $8,000 per year while operating expensesare expected to decrease by $12,000 per year. PDF?s marginal tax rate is40%. Additional working capital of $3,000 is required to maintain the newmachine and higher sales level. The new lathe is expected to be sold for$5,000 at the end of the project?s ten-year life. What is the project?s terminalcash flow?a. $8,000b. $6,000c. $5,000d. $3,00076) Advantages of using simulation include:a. a range of possible outcomes presented.b. is good only for single period investments since discounting is not possible.c. adjustment for risk in the resulting distribution of net present values.d. graphically displays all possible outcomes of the investment.77) A company has preferred stock that can be sold for $28 per share. The pre-ferred stock pays an annual dividend of 5% based on a par value of $100.Flotation costs associated with the sale of preferred stock equal $1.50 pershare. The company?s marginal tax rate is 35%. Therefore, the cost of pre-ferred stock is:a. 18.87%b. 17.86%c. 11.61%d. 12.26%78) Which of the following differentiates the cost of retained earnings from thecost of newly-issued common stock?a. The flotation costs incurred when issuing new securities.b. The greater marginal tax rate faced by the now-larger firm.c. The larger dividends paid to the new common stockholders.d. The cost of the pre-emptive rights held by existing shareholders.Final Examination21Introduction to Financial Management79) General Bill?s will issue preferred stock to finance a new artillery line. Thefirm?s existing preferred stock pays a dividend of $4.00 per share and is sell-ing for $40 per share. Investment bankers have advised General Bill thatflotation costs on the new preferred issue would be 5% of the selling price.The General?s marginal tax rate is 30%. What is the relevant cost of newpreferred stock?a. 15.00%b. 7.37%c. 10.00%d. 10.53%e. 7.00%80) Cost of capital isa. a hurdle rate set by the board of directors.b. the average cost of the firm?s assets.c. the rate of return that must be earned on additional investment if firm valueis to remain unchanged.d. the coupon rate of debt.81) Burns and Nuble is considering an investment in a project which would re-quire an initial outlay of $320,000 and produce expected cash flows in years1-5 of $87,385 per year. You have determined that the current after-tax costof the firm?s capital (required rate of return) for each source of financing is asfollows:Cost of Long-Term Debt 8%Cost of Preferred Stock 12%Cost of Common Stock 16%Long term debt currently makes up 20% of the capital structure, preferredstock 10%, and common stock 70%. What is the net present value of thisproject?a. -$13,876b. -$20,000c. $0d. $287,692e. $1,56882) Which of the following would be considered a variable cost in a manufactur-ing setting?a. Administrative salariesb. Rentc. Direct labord. Insurance 22Final ExaminationIntroduction to Financial Management83) Which of the following would not be a part of a firm?s capital structure?a. Long-term bondsb. Preferred stockc. Short-term notes payabled. Common stock84) A firm?s optimal capital structure occurs where?a. Stock price is maximized, and WACC is maximized.b. Stock price is maximized, and EPS are maximized.c. EPS are maximized, and WACC is minimized.d. WACC is minimized, and stock price is maximized.85) Which of the following would be considered the firm?s optimal capital struc-ture?a. Stock Price = $24, Earnings Per Share = $12, Cost of Equity Capital = 17%b. Stock Price = $23, Earnings Per Share = $11, Cost of Equity Capital = 18%c. Stock Price = $25, Earnings Per Share = $10, Cost of Equity Capital = 15%d. Stock Price = $20, Earnings Per Share = $12, Cost of Equity Capital = 20%86) The market value of a leveraged firm is equal to the market value of an unlev-eraged firma. minus the present value of tax shields minus the present value of financialdistress costs minus the present value of agency costs.b. plus the present value of tax shields minus the present value of financialdistress costs plus the present value of agency costs.c. plus the present value of tax shields plus the present value of financial dis-tress costs plus the present value of agency costs.d. plus the present value of tax shields minus the present value of financial dis-tress costs minus the present value of agency costs.87) JBC Corp. declared a dividend of $2 per share, which was an increase of25% from the prior year, yet JBC Corp. stock declined by 3% the day of theannouncement. RBG Corp. declared a dividend of $2 per share, which wasthe same as the prior year, and its stock increased in value by 2% on the dayof the announcement. These events could be most readily explained by thea. information effect.b. expectations theory.c. clientele effect.d. residual dividend theory.Final Examination23Introduction to Financial Management88) High dividends may increase stock values due to all of the following reasonsexcept:a. higher dividends allow companies to increase their proportion of externalequity financing.b. higher dividends are used to signal higher expected future earnings.c. dividends are more certain than capital gains.d. dividends are used as a tool to minimize agency costs.89) According to the clientele effect,a. even if capital markets are perfect, dividend policy still matters.b. companies should change their dividend policies to please their target groupof investors.c. companies should avoid making capricious changes in their dividend policies.d. companies should have dividend payout ratios of either 100% or 0%.90) While Captive, Inc. has been in business for over 50 years, newly developedproducts pushed the firm?s year-over-year growth rate to 35% during the lat-est three years. The firm is proud of its history of paying dividends, but thevigorous recent growth of the firm has left it cash challenged. Which of thefollowing policies/procedures would you consider best under the circumstanc-es?a. Substitute a stock dividend for the current cash dividend.b. Borrow long-term to pay the current dividend.c. Enter into a long-term stock repurchase program.d. Look seriously for a merger partner.91) All of the following are rationales given for a stock dividend or split except:a. the price will not fall proportionately to the share increase.b. an optimum price range does not exist.c. conservation of corporate cash.d. there is positive informational content associated with the announcement.92) Use the ?percent of sales method? of preparing pro forma financial state-ments to determine the projection for next year?s inventory. Make the follow-ing assumptions: current year?s sales are $24,500,000, current year?s cost ofgoods sold is $15,925,000, sales are expected to rise by 25%. The firm?sinvestment in inventory in the current year is $3,621,300. What is the pro-jection for next year?s inventory?a. $5,555,000b. $6,125,000 24Final ExaminationIntroduction to Financial Managementc. $4,526,600d. $3,98


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