finance exam three

Which one of the following has lost the most importance in recent years because of the SuperDOT system of trading? A) commission broker B) specialist C) floor broker D) floor trader E) market maker

C

You are advising Peter who is attempting to decide whether or not to drop one of the college courses he is currently enrolled in. If he drops the course, he will forfeit half of the money spent on tuition. If he stays in the class, he will have to give up his part-time job. His textbook is being replaced by a new edition, so is worthless at this time. Which of the following conclusions is consistent with capital budgeting principles? I. Remaining in the class incurs an opportunity cost. II. The entire tuition is irrelevant because it is a sunk cost. III. The cost of the book is a sunk cost. A) I only B) I and II only C) I and III only D) II and III only E) I, II, and III

C

A company that has a policy of making only cash sales is considering allowing customers to buy on credit. Which one of the following will probably occur? A) The accounts receivable will likely increase. B) The change will provide a source of funds. C) Total sales will likely decrease. D) Net working capital will decrease if funding needs are met with long-term liabilities. E) Expenses will decrease due to monthly billing and collection efforts.

A

A firm that only accepts projects for which the internal rate of return (IRR) is equal to the firm's required return will, on average, neither create nor destroy wealth for its shareholders. A) True B) False

A

A manager will prefer the internal rate of return (IRR) rule over the net present value (NPV) rule if the manager: A) prefers to talk in terms of rates of return. B) can accurately forecast future cash flows. C) dislikes the payback analysis. D) also prefers use of payback analysis. E) is considering mutually exclusive projects.

A

A project should be accepted according to the average accounting return (AAR) whenever the AAR: A) exceeds the firm's required AAR. B) exceeds the IRR. C) is greater than 100 percent. D) is positive. E) is less than the IRR.

A

According to the constant growth model, the dividend yield is equal to the required return minus the dividend growth rate. A) True B) False

A

The Sedgwick Company estimates sales of a new product at 5,000 units and $3.00 per unit. Management feels the sales quantity is accurate within a 10 percent plus-or-minus range while the sales price is accurate within a 5 percent plus-or-minus range. What dollar amount should the company use for total sales in their worst-case scenario analysis of this product? A) $12,150 B) $12,825 C) $13,500 D) $14,250 E) $15,000

B

Two projects that are mutually exclusive are said to be independent. A) True B) False

B

You undertake a project that requires an initial investment of $9,000. You expect to receive $3,100 a year for the next 4 years. If the required return is 15 percent, what is the net present value (NPV)? A) -$235.26 B) -$149.57 C) -$7.58 D) $4.63 E) $9.44

B

Your company just bought a new distillation unit for $175,000 to be used for research and development. Such equipment has a 3-year MACRS classification. The MACRS percentages are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent, respectively. What is the book value of the distillation unit at the end of year 2? A) $12,968.00 B) $38,902.50 C) $49,833.50 D) $77,770.00 E) $116,673.50

B

Given the following information and assuming straight-line depreciation to zero, what is the payback period for this project? The project requires an initial investment of $900,000; has a life of 6 years; produces cost savings of $190,000 per year; has a tax rate of 35 percent; and a discount rate of 9 percent. The fixed assets will be sold for $50,000 at the end of year 6. A) 2.54 years B) 3.67 years C) 3.93 years D) 5.10 years E) The project never pays back.

D

Over the past four years, a company has paid dividends of $1.00, $1.10, $1.20, and $1.30 respectively. This pattern is expected to continue into the future. This is an example of a company paying a: A) dividend that grows by 10 percent each year. B) dividend that grows at a constant rate. C) dividend that grows by a decreasing amount. D) dividend that grows at a decreasing rate. E) preferred stock dividend.

D

The management of a firm wishes to accept projects with a high degree of liquidity; wishes to avoid the higher forecasting error associated with cash flows a long way into the future; and wishes to avoid projects that require a large amount of research and development. The firm would be justified in using the _____ to evaluate its projects. A) internal rate of return (IRR) B) net present value (NPV) C) average accounting return (AAR) D) payback method E) profitability index (PI)

D

Which of the following is (are) correct? I. Net present value (NPV) is one of the two or three most important concepts in finance. II. NPV is the difference between the market value of an investment and its cost. III. The financial manager acts in the shareholders' best interests by identifying and taking positive NPV projects. IV. NPVs can normally be directly observed in the market. A) I and II only B) II and III only C) I and IV only D) I, II, and III only E) I, III, and IV only

D

Which one of the following is true about the differences between debt and common stock? A) Debt is ownership in a firm but equity is not. B) Creditors have voting power while stockholders do not. C) Periodic payments made to either class of security are tax deductible for the issuer. D) Interest payments are promised while dividend payments are not. E) Both stockholders and bondholders have voting privileges.

D

You are trying to choose between two projects as you do not have sufficient funding to accept both projects. Each project costs $80,000. Project A pays $25,000 a year for 4 years and project B pays $20,000 a year for 5 years. If your required return is 14 percent, which project should you choose and why? A) A; because it pays back sooner B) A; because it has a higher IRR C) B; because it has a higher NPV D) You should reject both projects. E) You are indifferent between the two projects because each project pays back the same amount.

D

Your firm needs a computerized line-boring machine that costs $90,000 and requires $16,000 in maintenance costs for each year of its 3-year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. The MACRS percentages for each year are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent, respectively. Assume a tax rate of 35 percent and a discount rate of 10 percent. Assume the machine can be sold for $12,000 at the end of year 3. What is the aftertax salvage value of the machine? A) $5,633 B) $7,800 C) $7,920 D) $10,134 E) $10,678

D

Your firm's CFO presents you with two capital budgeting proposals: one that involves buying a new delivery truck and one that involves building additional warehouse space. You are to determine which, if either, or both, of these projects should be accepted. This is an example of a decision involving: A) mutually exclusive projects. B) crossover rates. C) interdependent projects. D) independent projects. E) longitudinal projects.

D

A project requires an initial investment of $220,000, which will be depreciated on a straight-line basis over 4 years to a zero book value. A 20 percent average accounting return (AAR) and a 15 percent internal rate of return (IRR) have been assigned to the project. The estimated annual net income from the project is $18,100, $20,500, $21,500, and $22,500, respectively. Which one of the following statements is correct concerning this project? A) The AAR exceeds the requirement, so the project should be accepted. B) The average book value that should be used in the AAR computation is $55,000. C) The AAR will be the same regardless of the depreciation method selected. D) The project should be accepted because the IRR exceeds the requirement. E) The project should be rejected based on the available information.

E

Which one of the following statements accurately describes an advantage of the average accounting return (AAR) method of analysis? A) The AAR method incorporates time value of money computations. B) The estimation of the appropriate cutoff rate for AAR is straightforward and easy. C) AAR relies on net income and not cash flows. D) AAR relies on book values and not market values. E) AAR is relatively easy to compute.

E

An advantage of the payback rule is that it is easy to understand. A) True B) False

A

Boomer Products, Inc., manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 3 percent annually forever. The firm just paid a dividend of $1.50. Given a required return of 12 percent, the stock should sell for: A) $9.70. B) $10.50. C) $15.00. D) $17.17. E) $32.50.

A

Consider a $10,000 machine that will reduce pretax operating costs by $3,000 per year over a 5-year period. Assume no changes in net working capital and a zero scrap value after five years. For simplicity, assume straight-line depreciation to zero, a marginal tax rate of 34 percent, and a required return of 10 percent. The net present value of acquiring this machine is: A) $83. B) $449. C) $689. D) $827. E) $1,235.

A

If net working capital grows from $1,000 to $1,500 as a result of taking on a new project, the $500 increase should be included in the initial outlay for the new project. A) True B) False

A

Most preferred stock has dividends that are cumulative. A) True B) False

A

Options for future, related business products or strategies are known as: A) strategic options. B) capital rationing options. C) options to expand. D) options to wait. E) contingent options.

A

The NASDAQ acts as both a primary market and a secondary market for shares of stock. A) True B) False

A

The net present value (NPV) decision rule is considered the best in theory. A) True B) False

A

To accurately reflect the costs associated with a project, you should exclude interest expenses in the computation of operating cash flows. A) True B) False

A

Which one of the following is a violation of the rights of one or more classes of a firm's stakeholders? A) paying common dividends when preferred dividends are in arrears B) paying preferred shareholders before common shareholders in a liquidation C) allowing preferred shareholders to place members on the board of directors when their dividends have not been paid for some time D) allowing common shareholders to vote by proxy when they are unable to attend a shareholders' meeting in person E) paying creditors before preferred shareholders in a liquidation

A

You are considering investing in a firm and wish to place a value on the common stock. The dividend on the firm's stock has not changed in the last five years. Absent any information suggesting future changes in the dividend rate, the most appropriate stock valuation model would be the _____ model. A) zero growth B) constant growth C) nonconstant growth D) growing perpetuity E) bond pricing

A

A broker and a dealer are the same thing. A) True B) False

B

A condominium developer buys three times as much land as is needed to build a planned 50-unit development so that, if things go well, two additional 50-unit developments can be built without having to acquire additional land. The developer is prepared to exercise the option to: A) quit. B) expand. C) abandon. D) wait. E) rebuild.

B

A firm must make its dividend payments to preferred shareholders before it makes any interest payments to its bondholders. A) True B) False

B

A project that requires an initial cash outlay and for which all remaining cash flows are inflows is said to be: A) independent. B) conventional. C) mutually exclusive. D) value-creating. E) short term.

B

A web site which allows investors to trade directly with each other is referred to as: A) the SuperDot system. B) an electronic communications network, or ECN. C) the NASDAQ. D) the order flow. E) the Philadelphia Exchange.

B

ABC's common stock dividend yield is 2.1 percent. The company just paid a dividend of $1, it is expected to pay a dividend of $1.07 one year from now, and dividends are expected to grow at this same rate indefinitely. What is the required rate of return on ABC's stock? A) 9.0 percent B) 9.1 percent C) 9.3 percent D) 10.6 percent E) 11.2 percent

B

Assume a project requires additions to net working capital in each year of its life, all of which will be recovered at the end of the project. In this case, the present value of the net working capital recovery will equal the total dollar outlays for net working capital. A) True B) False

B

For a cost cutting project, the net present value will generally be negative, but the project should still be accepted. A) True B) False

B

If a project has conventional cash flows, it may also have more than one IRR. A) True B) False

B

Sunk costs and opportunity costs are often the same thing. A) True B) False

B

It is important to identify and use only incremental cash flows in capital investment decisions: A) because they are the simplest to identify. B) only when the stand-alone principle fails to hold. C) because ultimately it is the change in a firm's overall future cash flows that matter. D) in order to accommodate unforeseen changes that might occur. E) whenever sunk costs are involved.

C

Suppose you own 250 shares of MIKO common stock. Two directors are to be elected. Since the firm uses cumulative voting, you can cast as many as _____ votes for a single director. A) 125 B) 250 C) 500 D) 750 E) 1,000

C

The dividend yield on a stock is similar to the current yield on a bond in that both: A) represent how much each security's price will increase in a year. B) incorporate the par value into their computation. C) represent the security's annual income divided by its price. D) are quarterly yields that must be annualized. E) are an accurate representation of the annual return an investor can expect to earn by owning the security.

C