Corporate Finance Final Exam

Lew's Metals has a machine sitting idle in its warehouse. The machine originally cost $213,000, has a current book value of $32,300, has a scrap metal value of $13,000, and a market value of $46,900. The machine is totally paid for. What value should be placed on this machine if it is used for a new project?

$46,900

Which of these is a capital budgeting decision?

Deciding whether to buy a new machine or repair the old machine.

If a firm pays taxes, which one of these will reduce net income but increase cash flow?

Depreciation Expense

The currency yield of a bond can be calculated by:

Dividing the annual coupon payments by the price.

An interest rate that has been annualized using compound interest is termed the:

Effective annual interest rate.

The average of beta values for all individual stocks is:

Exactly 1.0; these stocks represent the market.

Venture capitalists generally provide sufficient up-front funding in one lump sum to take a new firm to the point where it can go public.

False

Sensitivity Analysis

Forces the manager to identify underlying factors.

One of the easiest methods of diversifying away firm-specific risks is to:

purchase the shares of an index fund.

A primary market would be utilized when:

securities are initially issued.

For a company that pays no corporate taxes, its WACC will be equal to:

the expected return on its assets.

The higher the standard deviation of a stocks returns, the:

wider the dispersion of those returns over time.

What happens to a firm's net worth as it uses cash to repay accounts payable?

Net worth remains constant.

If Apple Computer Inc. is used as the model, then new firms should expect to raise capital in which one of these orders? Start with the first money raised.

Owners, suppliers, venture capitalists, public investors.

Which of the following statements is correct for a project with a positive NPV?

The IRR must be greater than 0.

Operating leverages increases with fixed cost.

True

Present values decline as the time to the cash flow increases.

True

Previously issued securities are traded among investors in the secondary markets.

True

Shares of stock that have been issued and subsequently repurchased by the issuer are known as treasury stock.

True

The required rate of return on an equity security is comprised of a dividend yield and a capital gains yield.

True

The statement of cash flows shows the firm's cash inflows and outflows from operations as well as from its investments and financing activities.

True

The total depreciation tax shield equals the product of depreciation and the tax rate.

True

When using a profitability index to select projects, a high value is preferred over a low value.

True

You should never compare cash flows occurring at different times without first discounting them to a common date.

True

The most important function of an underwriter is to:

buy the securities issue from the firm and resell the securities to the public.

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because the market portfolio:

diversifies risk.

An asset's liquidity measures its:

ease and cost of being converted to cash.

The majority of an established firm's capital is generated:

internally.

If a company has a healthy current ratio, but a significantly lower quick ratio, then you can assume that:

inventory represents a large portion of the firm's current assets.

The company cost of capital:

measures the return that investors require from the company.

The statement "we've got too much invested in that project to pull out now" possibly illustrates the need to:

Be reacquainted with the concept of sunk costs.

Which of the following is fixed for the life of a given bond?

Coupon rate

The coupon rate of a bond equals:

A defined percentage of its face value.

A bond's par value can also be called its:

Face value

A major disadvantage of partnerships is that they have double taxation of profits.

False

All market risk can be eliminated in a stock portfolio through diversification?

False

An increase in the accounts receivable balance increases the cash flow of a firm.

False

Investors are willing to purchase stocks having high P/E ratios because they expect these shares to offer higher dividend payments.

False

Opportunity costs are evaluated for investment decisions at their historical cost (that is, book cost).

False

Speculative-grade bonds have default risk; investment grade bonds do not.

False

The level of sales that produces a zero project NPV is referred to as the accounting break-even point.

False

The liability of sole proprietors is limited to the amount of their investment in the company.

False

The mix of a company's short-term financing is referred to as capital structure:

False

Which of the following values treats the firm as a going concern:

Market value

Which of the following appears to be the most appropriate goal for corporate management?

Maximizing market value of the company's shares.

Short-term financing transactions commonly occur in the:

Money Markets.

The concept of compound interest refers to:

Payment of interest on previously earned interest

Which of the following is a disadvantage to incorporating a business?

Profits taxed at the corporate level and the shareholder level.

Given a positive discount rate, which one of the following changes would increase the NPV of a project?

Reducing the amount of working capital that is needed.

Projects that are calculated as having negative NPV should be:

Rejected or abandoned.

When valuing stock with the dividend discount model, the present value of future dividends will:

Remain constant regardless of the time horizon selected.

Which of the following techniques may be more appropriate to analyze projects with interrelated variables?

Scenario analysis

What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?

The individual stocks standard deviation will be higher.

If two projects offer the same positive NPV, then:

They add the same amount of value to a firm.

Which of the following statements about depreciation is correct?

To calculate the cash produced by the business, it is necessary to add the depreciation charge back to accounting profits.

A financial intermediary invests in financial assets rather than real assets.

True

A project with a low NPV would still be considered acceptable as long as the rate of return exceeds the cost of capital.

True

Assuming a project has the same risk and financing as the firm, it will have a positive NPV if its rate of return is greater than the firm's WACC.

True

Beta measures a stock's sensitivity to market risks.

True

Bonds rated BBB or better by S&P are called investment grade.

True

Different classes of stock often have different coding rights.

True