FIN 550 Final
The profitability index is most closely related to which one of the following?
Net present value
Which one of the following is an example of a sunk cost?
$2,000 paid last year to rent equipment
The degree of operating leverage is equal to:
1 + FC/OCF.
Which one of the following statements is correct?
A project can create a positive operating cash flow without affecting sales.
Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?
Accept Project B and reject Project A based on the NPVs
An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?
Accounts receivable
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?
Balance sheet
Assume you invest in a portfolio of long-term corporate bonds. Based on the period 1926-2019, what average annual rate of return should you expect to earn?
Between 6 and 7 percent
Boyd Leasing is analyzing a project that requires purchasing $210,000 of new fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $22,000. How is the $22,000 salvage value handled when computing the net present value of the project?
Cash inflow in the final year of the project
Which one of the following statements related to corporate income taxes is correct?
Corporations pay the same rate of taxes regardless of the amount of taxable income.
Which one of the following actions will increase the present value of an amount to be received sometime in the future?
Decrease in the interest rate
Which one of the following will decrease the value of a firm's net working capital?
Donating inventory to charity
Which one of the following accurately lists the three components of the DuPont identity?
Equity multiplier, net profit margin, and total asset turnover
Machlab Equipment is comparing three machines to determine which one to purchase. Each machine has a unique price, annual operating cost, and life span. Which one of the following computational methods should Machlab use as the basis for its decision?
Equivalent annual cost
Which one of the following applies to the dividend growth model?
Even if the dividend amount and growth rate remain constant, the value of a stock can vary.
Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?
Financial break-even
balance sheet
Financial statement showing a firm's accounting value on a particular date
Assume you are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?
Future value
The DuPont identity can be used to help managers answer which of the following questions related to a company's operations? I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generated per dollar of sales? IV. Does the company have the ability to meet its debt obligations in a timely manner?
I, II, and III only
When analyzing a project, scenario analysis is best suited to accomplishing which one of the following?
Identifying the potential range of reasonable outcomes
Which one of the following financial statements summarizes a firm's revenue and expenses during a period of time?
Income statement
Which one of the following statements related to an income statement is correct?
Income taxes reduce both net income and operating cash flow.
Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2019? Rank from highest to lowest.
Long-term government bonds, long-term corporate bonds, intermediate-term government bonds
You are viewing a graph that plots the NPVs of a project against the various discount rates that could be applied to the project's cash flows. What is the name given to this graph?
NPV profile
The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?
Opportunity cost
You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)
Option B has a higher present value at Time 0.
Which two methods of project analysis are the most biased towards short-term projects?
Payback and discounted payback
All else constant, if a firm decreases its operating costs, which one of the following will also decrease?
Price-earnings ratio
Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?
Reject Project A and accept Project B
When analyzing the best-case scenario, which of the following variables will be forecast at their highest expected level?
Salvage value and units sold
Symone sold shares of Naraghi Corporation stock to Aleena. The stock is listed on the NYSE. This trade occurred in which one of the following?
Secondary, auction market
Public offerings of debt and equity must be registered with the:
Securities and Exchange Commission.
A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the most critical aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why?
Sensitivity analysis; to identify the key variable that affects a project's profitability
Which one of the following is a working capital management decision?
Should the firm require immediate payment from customers or offer credit terms?
The coding system established by the U.S. government to classify companies by the nature of their business operations is known as the:
Standard Industrial Classification codes.
Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium?
Stock with a beta of 1.24
Assuming accrual accounting is employed, which one of the following statements is correct?
The costs of acquiring a product are expensed when the product is sold.
A positive cash flow to stockholders indicates which one of the following with certainty?
The dividends paid exceeded the net new equity raised.
Given independent projects with conventional cash flows, which one of the following statements would generally be considered as accurate?
The payback decision rule could override the net present value decision rule should cash availability be limited.
Assume you deposited $6,000 into a retirement savings account today. The account will earn 8 percent interest per year, compounded annually. You will not withdraw any principal or interest until you retire in 48 years. Which one of the following statements is correct?
The present value of this investment is equal to $6,000.
All else constant, an increase in which of the following must increase the return on equity?
Total asset turnover and debt-equity ratio
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:
accepted because the profitability index is greater than 1.
Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.
annual percentage
Gutierrez Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:
capital rationing.
When the operating cash flow of a project is equal to zero, the project is operating at the:
cash break-even point.
The cash flow that is available for distribution to a corporation's creditors and stockholders is called the:
cash flow from assets.
A bond is quoted at a price of $1,037. This price is referred to as the:
clean price
The interest earned on both the initial principal and the interest reinvested from prior periods is called:
compound interest.
According to the statement of cash flows, an increase in interest expense will ______ the cash flow from ______ activities.
decrease; operating
The most important reason to diversify a portfolio is to:
eliminate asset-specific risk.
An ordinary annuity is best defined as:
equal payments paid at the end of regular intervals over a stated time period.
The CFO of Shelby & Muhammad receives frequent capital funding requests from the firm's division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is:
facing hard rationing.
Reyes Events wants to commence a new project but is unable to obtain the financing. This firm is facing:
hard rationing.
Graphing the crossover point helps explain:
how decisions concerning mutually exclusive projects are derived.
Forecasting risk is defined as the possibility that:
incorrect decisions will be made due to erroneous cash flow projections.
The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return.
inflation
Which one of the following is an expense for accounting purposes, but is not an operating cash flow for financial purposes?
interest expense
The cash coverage ratio directly measures the ability of a company to meet its obligation to pay:
interest to a lender.
A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) ____ loan.
interest-only
Net present value:
is the best method of analyzing mutually exclusive projects.
When developing a common-size balance sheet to evaluate last year's performance, all accounts are expressed as a percentage of:
last year's total assets.
Mortgage lenders probably have the most interest in the ______ ratios.
long-term debt and times interest earned
The price-sales ratio is especially useful when analyzing firms that have:
negative earnings.
The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.
strong
According to the ________, the expected return on a risky asset depends only on that asset's nondiversifiable risk.
systematic risk principle
You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ________ quarter(s) of dividends when the next dividend is paid.
3
The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?
50 percent plus one vote
Natalie is retired and is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?
7-year income bond
Which one of the following statements is correct?
Given a positive rate of inflation, the real rate must be less than the nominal rate.
You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?
Long-term; zero coupon
Net working capital formula
NWC = Current assets − Current liabilities
The bid price always assumes which one of the following?
The net present value of the project is zero.
Jonathan has researched Tejeda Tech and believes the firm is poised to vastly increase in value. He has decided to purchase Tejeda Tech bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish?
Warrant
Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the:
cost of equity.
The equivalent annual cost considers all of the following except the:
costs of research conducted to identify equipment choices.
Scenario analysis is defined as the:
determination of changes in NPV estimates when what-if questions are posed.
Corporate bylaws:
determine how a corporation regulates itself.
Assume a firm has a debt-equity ratio of .48. The firm's cost of equity is:
directly related to the risk level of the firm.
Operating leverage is the degree of dependence a firm places on its:
fixed costs
A firm owned by two or more people who each have unlimited liability for all of the firm's debts is called a:
general partnership.
Net capital spending:
is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.
The Baker Supply would like to offer special sale prices to the firm's best customers under the following terms: The prices will apply only to units purchased in excess of the quantity normally purchased by a customer. The units purchased must be paid for in cash at the time of sale. The total quantity sold under these terms cannot exceed the excess capacity of the firm. The net profit of the firm should not be affected. The prices will be in effect for one week only. Given these conditions, the special sale price should be set equal to the:
marginal cost of all variable inputs.
Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.
overestimate; underestimate
Thornton Homes has multiple divisions which operate as separate lines of business and face risks unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. Accordingly, each division within the firm will tend to:
prefer higher risk projects over lower risk projects.
National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar per share long into the future. Given this, one share of the firm's stock is:
priced the same as a $1 perpetuity.
If a borrower receives money today and must repay the loan in a single lump sum on a future date, the loan is called a(n) ________ loan.
pure discount
The entire repayment of a(n) _____ loan is calculated by computing one single future value.
pure discount
The most acceptable method of evaluating the financial statements is to compare the company's current financial:
ratios to the company's historical ratios.
With an interest-only loan the principal is:
repaid in one lump sum at the end of the loan period.
The dividend growth model:
requires the growth rate to be less than the required return.
To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.
risk-free rate
A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:
sales.
Ultimately, the ______ control(s) the corporation.
shareholders
Preferred stock may have all of the following characteristics in common with bonds with the exception of:
tax-deductible payments.
The internal rate of return is:
tedious to compute without the use of either a financial calculator or a computer.
The bottom-up approach to computing the operating cash flow applies only when:
the interest expense is equal to zero.
When determining a firm's cost of capital, the most important determinant is the:
use of the funds raised.
Activities of a firm that require the spending of cash are known as:
uses of cash
Variable costs can be defined as the costs that:
vary directly with sales.
