FIN 301 exam notecards from part 1 and 2
5) If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should A) increase the market value of the firmʹs common stock. B) positively affect profits. C) either increase or have no effect on the value of the firmʹs common stock. D) accomplish all of the above.
A
A commercial bank will loan you $17,500 for two years to buy a car. The loan must be repaid in 24 equal monthly payments. The annual interest rate on the loan is 6% of the unpaid balance. What is the amount of the monthly payments? A) $775.61 B) $1,394.98 C) $688.11 D) $3779.39
A
A firm currently has the following capital structure which it intends to maintain. Debt: $3,000,000 par value of 9% bonds outstanding with an annual before‐tax yield to maturity of 7.67% on a new issue. The bonds currently sell for $115 per $100 par value. Common stock: 46,000 shares outstanding currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends, which it expects to continue indefinitely. The firmʹs marginal tax rate is 40%. The company has no plans to issue new securities. The after‐tax cost of debt is A) 4.60%. B) 5.40%. C) 6.20%. D) 3.80%.
A
A firm currently has the following capital structure which it intends to maintain. Debt: $3,000,000 par value of 9% bonds outstanding with an annual before‐tax yield to maturity of 7.67% on a new issue. The bonds currently sell for $115 per $100 par value. Common stock: 46,000 shares outstanding currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends, which it expects to continue indefinitely. The firmʹs marginal tax rate is 40%. The company has no plans to issue new securities. The current total value of the firm is A) $5,750,000. B) $3,250,000. C) $4,950,000. D) $6,450,000.
A
Common stockholders are essentially A) owners of the firm. B) managers of the firm. C) creditors of the firm. D) all of the above.
A
Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non‐depreciation expenses by $3,000 annually. Due to the sales increase, Delta will need to increase working capital by $1,000 at the beginning of the project. Delta will depreciate the machine using the straight‐line method over the projectʹs five year life to a salvage value of zero. The machineʹs purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The initial investment for this decision is A) $21,000. B) $20,000. C) $27,000. D) $23,000.
A
Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non‐depreciation expenses by $3,000 annually. Due to the sales increase, Delta will need to increase working capital by $1,000 at the beginning of the project. Delta will depreciate the machine using the straight‐line method over the projectʹs five year life to a salvage value of zero. The machineʹs purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The machineʹs IRR is A) greater than 12 percent. B) less than 0. C) equal to 12 percent. D) less than 12 percent.
A
Francis Peabody just won the $89,000,000 California State Lottery. The lottery offers the winner a choice of receiving the winnings in a lump sum or in 26 equal annual installments to be made at the beginning of each year. Assume that funds would be invested at 7.65%. Francis is trying to decide whether to take the lump sum or the annual installments. What is the amount of the lump sum that would be exactly equal to the present value of the annual installments? Round off to the nearest $1.
A
Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,800. Year 1 2 3 Net Cash Flow $1,000 $750 $500 A)14% B)25% C)8% D)12%
A
Mass Waste Disposal Inc. is considering the construction f a facility at a cost of $20 million. The project will produce positive cash flows of $7 million per year for the next 4 years but the 5th and final year will have a net negative cash flow of $5 million. If the discount rate is 10%, the MIRR of this project is ________ and the project should be ________. A) 8.16%, rejected. B) 7.40, rejected C) 9.11% , accepted D) 8.16 accepted.
A
Project Sigma requires an investment of $1 million and has a NPV of $10. Project Delta requires an investment of $500,000 and has a NPV of $150,000. The projects involve unrelated new product lines. amounts of capital. A) Both projects should be accepted because they have positive NPVʹs. B) Only project Delta should be accepted. Alphaʹs NPV is too low for the investment. C) The company should look at other investment criteria, not just NPV. D) Neither project should be accepted because they might compete with one another.
A
Tanzlin Manufacturingʹs common stock has a beta of 1.5. If the expected risk‐free return is 2% and the expected return on the market is 14%, what is the expected return on the stock? A) the proceeds of the sale will become a liability payable to the shareholders. B) the previous owner of the shares will bet the money and the buyer will get the shares. C) the proceeds of the sale will not affect the companyʹs balance. D) the proceeds of the sale will increase the companyʹs equity.
A
The Blackburn Group has recently issued 20‐year, unsecured bonds rated BB by Moodyʹs. These bonds yield 443 basis points above the U.S. Treasury yield of 2.76%. The yield to maturity on these bonds is A) 7.19% B) 4.43%. C) 12.23% D) mortgage bonds.
A
What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1). A) $429 B) $833 C) $893 D) $3,106
A
What is the yield to maturity of a nine‐year bond that pays a coupon rate of 20% per year, has a $1,000 par value, and is currently priced at $1,407? Assume annual coupon payments. A) $790 .79 B) $813.80 C) $1,011.00 D) $320 .66
A
You are considering buying some stock in Continental Grain. Which of the following is an example of nondiversifiable risk? A) Risk resulting from a general decline in the stock market B) Risk resulting from an impending lawsuit against Continental C) Risk resulting from an explosion in a grain elevator owned by Continental D) Risk resulting from a news release that several of Continentalʹs grain silos were tainted
A
You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years? A) $31,060 B) $25,000 C) $38,720 D) $34,310
A
You wish to borrow $2,000 to be repaid in 12 monthly installments of $170.30. The annual interest rate is A) $775.61 B) $1,394.98 C) $688.11 D) $3779.39
A
20) Fitchminster Armored Car can purchase a new vehicle for $200,000 that will provide annual net cash flow over the next five years of $40,000, $45,000, $50,000, $55,000, $60,000. The salvage value of the vehicle will be $25,000. Assume that the vehicle is sold at the end of year 5. Calculate the NPV of the ambulance if the required rate of return is 9%. (Round your answer to the nearest $1.) A) $19,483 B) $7,390 C) $6,048 D) $6,780
B
A $1,000 par value 10‐year bond with a 10% coupon rate recently sold for $900. The yield to maturity A) is less than 10%. B) is greater than 10%. C) is 10%. D) cannot be determined.
B
A Max, Inc. deposited $2,000 in a bank account that pays 12% interest annually. What will the dollar amount be if the interest is compounded semiannually for those four years? A) $3,240 B) $3,188 C) $3,290 D) $3,100
B
A firm currently has the following capital structure which it intends to maintain. Debt: $3,000,000 par value of 9% bonds outstanding with an annual before‐tax yield to maturity of 7.67% on a new issue. The bonds currently sell for $115 per $100 par value. Common stock: 46,000 shares outstanding currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends, which it expects to continue indefinitely. The firmʹs marginal tax rate is 40%. The company has no plans to issue new securities. The after‐tax cost of common stock is A) 12.41%. B) 14.67%. C) 11.65%. D) 13.23%.
B
Butler, Inc.ʹs return on equity is 17% and management retains 75% of earnings for investment purposes. Based on this information, what will be the firmʹs growth rate? A) 44.12% B) 12.75% C) 4.25% D) 22.67%
B
Date Cash Received 1/1/17 1/1/18 1/1/19 1/1/20 Amount of Cash $100$100$500$100 What is the value on January 1 2016 of the above cash flows? Use an 8% discount rate, and round your answer to the nearest $1.00. (Hint: Draw the timeline.) A) $601 B) $649 C) $740 D) $800
B
Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non‐depreciation expenses by $3,000 annually. Due to the sales increase, Delta will need to increase working capital by $1,000 at the beginning of the project. Delta will depreciate the machine using the straight‐line method over the projectʹs five year life to a salvage value of zero. The machineʹs purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The machineʹs incremental after‐tax cash inflow for year 1 is A) $6,420. B) $5,980. C) $7,980. D) $8,620.
B
Evidence that agency costs exists A) because underperforming CEOʹs are frequently voted out by shareholders. B) because stock prices increase when an underperforming CEO is unexpectedly replaced. C) because they are shown in footnotes to the financial statements. D) because management often pursues risky but profitable opportunities rather than safer, less profitable opportunities.
B
If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return? A) 15% B) 13% C) 14% D) 12%
B
LIBOR last week was 1.88%, this week it is 1.91%. SC Corp. has borrowed $1,000,000 from North Pole Bank at a rate of one half a percentage point above LIBOR with cap of 2.5% and a floor of 2.0%. What interest was charged to SC last week? A) 2.0% B) 2.38%. C) 2.48% D) 2.5%
B
Madison was hired to design and decorate the offices of a large pharmaceutical company.report indicating that a new drug had just been approved by the Food and Drug administration. She immediately bought the companyʹs stock which doubled in price over the following week. This outcome is inconsistent with A) the semi‐strong form efficient market hypothesis. B) the strong form efficient market hypothesis. Her action was probably illegal. C) the weak‐form efficient market hypothesis. D) all of the above.
B
Roddy Richards invested $12014.88 in Wolverine Meat Distributors (W.M.D.) five years ago. The investment had yearly arithmetic returns of ‐9.7%, ‐8.1%, 15%, 7.2%, and 15.4%. What is the arithmetic average return of Roddy Richardʹs investment? A) 5.18% B) 3.96% C) 15.1% D) 2.42%
B
Schiller Construction Inc. has estimated the following revenues and expenses related to phase I of a proposed new housing development. Incremental sales= $5,000,000, total cash operating expenses $3,500,000, depreciation $500,000, taxes 35%, interest expense, $200,000. Operating cash flow equals A) $650,000. B) $1,150,000. C) $1,000,000. D) $975,000.
B
The expected return on ZV next year is 12% with a standard deviation of 20%. The expected return on TNA next year is 24% with a standard deviation of 30%. The correlation between the two stocks is ‐.6. If Hannah makes equal investments in ZV and TNA, what is the standard deviation of her portfolio? A) 16.00%. B) 12.04% C) 22.47%. D) 1.45%.
B
The owner of a convenience store is considering adding a take‐out sandwich section to her offerings. The new activity will occupy 25% of the space and account for 30% of total revenues. Property insurance on the building is $9,000 per year and will not change because of the new activity. How much of the insurance premium should be allocated to the new product line? A) $2,475 B) $0.00 C) $2,250 D) $2,700
B
The principal participants in in the financial markets are A) dealers, brokers, regulators. B) borrowers, savers, financial institutions. C) mutual finds, hedge funds, investment bankers. D) businesses, banks, government.
B
What is the value of a bond that has a par value of $1,000, a coupon rate of 8% (paid annually), and matures in 11 years? Assume a required rate of return of 11%. A) $790 .79 B) $813.80 C) $1,011.00 D) $320 .66
B
Which of the following sequences is arranged in the correct order, from highest long‐term returns to lowest? A) Government bonds, emerging market equities, treasury bills B) International equities, U.S. government bonds, treasury bills C) Corporate bonds, treasury bills, international equities D) International equities, U.S. government bonds, U.S. equities
B
A firm currently has the following capital structure which it intends to maintain. Debt: $3,000,000 par value of 9% bonds outstanding with an annual before‐tax yield to maturity of 7.67% on a new issue. The bonds currently sell for $115 per $100 par value. Common stock: 46,000 shares outstanding currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends, which it expects to continue indefinitely. The firmʹs marginal tax rate is 40%. The company has no plans to issue new securities. The proportion of debt in this firmʹs capital structure is A) 50%. B) 70%. C) 60%. D) 40%.
C
Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non‐depreciation expenses by $3,000 annually. Due to the sales increase, Delta will need to increase working capital by $1,000 at the beginning of the project. Delta will depreciate the machine using the straight‐line method over the projectʹs five year life to a salvage value of zero. The machineʹs purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The machineʹs NPV is A) $2,123.99. B) $2,556.56. C) $1,123.99. D) $1,556.56.
C
Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non‐depreciation expenses by $3,000 annually. Due to the sales increase, Delta will need to increase working capital by $1,000 at the beginning of the project. Delta will depreciate the machine using the straight‐line method over the projectʹs five year life to a salvage value of zero. The machineʹs purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The machineʹs after‐tax incremental cash flow in year five is A) $5,980. B) $7,120. C) $6,980. D) $8,620.
C
If you hold a portfolio made up of the following stocks: Stock A Stock B Stock C Investment Value Beta $2,000 1.5 $5,000 1.2 $3,000 .8 What is the beta of the portfolio? A) 1.32 B) 1.17 C) 1.14 D) Canʹt be determined from information given
C
In order to maximize firm value, management should invest in new assets when cash flows from the assets are discounted at the firmʹs ________ and result in a positive NPV. A) cost of debt used to finance the project B) internal rate of return C) cost of capital D) rate of return on equity
C
McDonaldʹs stock currently sells for $123. Itʹs expected earnings per share are $5.12. The average P/E ratio for the industry is 24. If investors expected the same growth rate and risk for McDonaldʹs as for an average firm in the same industry, itʹs stock price would A) rise. B) fall. C) stay about the same. D) there is not enough information.
C
P. Noel Companyʹs common stock has just paid a $2.00 dividend. If investors believe that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock? A) $22.22 B) $15.00 C) $23.33 D) $40.00
C
Roddy Richards invested $12014.88 in Wolverine Meat Distributors (W.M.D.) five years ago. The investment had yearly arithmetic returns of ‐9.7%, ‐8.1%, 15%, 7.2%, and 15.4%. How much money did Roddy Richards receive when he sold his shares of W.M.D.? A) $13,663.47 B) $12,014.88 C) $14,184.73 D) $12,398.42
C
The capital asset pricing model A) depicts the total risk of a security. B) provides a risk‐return trade‐off in which risk is measured in terms of the market returns. C) provides a risk‐return trade‐off in which risk is measured in terms of beta. D) measures risk as the correlation coefficient between a security and market rates of return.
C
The interest on corporate bonds is typically paid A) monthly. B) quarterly. C) semiannually. D) annually.
C
The market for short‐term debt is known as A) the notes market. B) the bond market.C) the money market. D) the capital market.
C
The present value of the total costs over a five year period for Project April is $50,000. The present value of total costs over the same 5 year period for Project October is $40,000. The company uses a discount rate of 9%. There are no positive cash flows for these projects, but one or the other is required to comply with government regulations. Which project should be chosen and why? A) Neither project because the NPVs are negative. B) April because it has a higher net present value (NPV). C) October because it has a lower net present cost. D) Both projects because they will add value to the company.
C
The true owners of the corporation are the A) preferred stockholders. B) holders of debt issues of the firm. C) common stockholders. D) board of directors of the firm.
C
What is the annual compounded interest rate of an investment with a stated interest rate of 6% compounded quarterly for seven years (round to the nearest .1%)? A) 10.9% B) 6.7% C) 6.1% D) 51.7%
C
Which of the basic financial statements is best used to answer the questions ʺWhat does the company own and how is it financed?ʺ A) Income statement B) Statement of shareholderʹs equity C) Balance sheet D) Cash flow statement
C
Which of the basic financial statements is best used to answer the questions ʺWhere did the companyʹs money come from and how was it spent over the preceding year?ʺ A) Income statement B) Balance sheet C) Cash flow statement D) Statement of shareholderʹs equity
C
Which of the following best describes a firmʹs cost of capital? A) The average cost of the firmʹs assets B) The average yield to maturity on debt C) The rate of return that must be earned on its investments in order to satisfy the firmʹs investors D) The coupon rate on preferred stock
C
Which of the following is NOT one of the categories for a projectʹs relevant after‐tax cash flows? A) Initial cash outflow B) Differential flows over the projectʹs life C) Financing flows D) Terminal cash flow
C
Which of the following statements best represents what finance is about? A) Maximizing profits B) Reducing risk C) The study of how people and businesses make investment decisions and how to finance those decisions. D) How political, social, and economic forces affect corporations
C
Your portfolio consists of $3,000 in ABC stock, $4,500 of DEF stock and $2,500 of GHI stock. Expected rates of return are ABC 5%, DEF 12%, and GHI 16%. What is the portfolio expected rate of return? A) 11.4% B) 16.0% C) 10.9% D) 12.0%
C
Which of the following factors is least important to capital budgeting decisions? A) Cash flows directly resulting from the decision B) The time value of money C) The risk‐return tradeoff D) Net income based on accrual accounting principles
D
Which of the following parties would be interested in an analysis of the firmʹs financial statements? A) investors B) creditors C) the firmʹs managers D) all of the above
D
2) The revenue recognition principle requires that A) only the amount of revenue for which cash will be received in the current fiscal year be recognized in the current year. B) revenue be recognized only after cash payment has been received. C) allows considerable latitude in the timing of revenue recognition. D) revenue be recognized in the period when the firm becomes entitled to payment for goods or services delivered.
D
A firm currently has the following capital structure which it intends to maintain. Debt: $3,000,000 par value of 9% bonds outstanding with an annual before‐tax yield to maturity of 7.67% on a new issue. The bonds currently sell for $115 per $100 par value. Common stock: 46,000 shares outstanding currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends, which it expects to continue indefinitely. The firmʹs marginal tax rate is 40%. The company has no plans to issue new securities. The firmʹs weighted average cost of capital is A) 9.29%. B) 10.47%. C) 7.71%. D) 8.63%.
D
Hi Sky Enterprises has total assets of $3 million, a debt ratio of 30%, and an after‐tax profit margin of 11.04% and sales of $2.5 million. What is Hi Skyʹs return on equity? A) 15% B) 35% C) 27% D) 13%
D
If a stock has a much higher than normal P/E ratio, investors probably expect A) large increases in the price of the stock. B) slow growth in earnings. C) a declining stock price D) rapid growth in earnings.
D
If you put $510 in a savings account at the beginning of each year for 30 years, how much money will be in the account at the end of the 30th year? Assume that the account earns 5%, and round to the nearest $100. A) $33,300 B) $32,300C) $33,900 D) None of the above
D
Incremental cash flows from a project = A) Firm cash flows without the project plus or minus changes in revenue with the project. B) Firm cash flows without the project plus or minus changes in net income. C) Firm cash flows with the project plus firm cash flows without the project. D) Firm cash flows with the project minus firm cash flows without the project.
D
Investors in common stock increase their wealth when the A) the market value of the stock goes up. B) when the stock pays a dividend. C) when the stock pays interest on the original investment. D) both A and B.
D
Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average. This outcome supports A) the semi‐strong form efficient market hypothesis. B) the weak‐form efficient market hypothesis. C) the strong form efficient market hypothesis. D) all of the above.
D
Roddy Richards invested $12014.88 in Wolverine Meat Distributors (W.M.D.) five years ago. The investment had yearly arithmetic returns of ‐9.7%, ‐8.1%, 15%, 7.2%, and 15.4%. What is the geometric average return of Roddyʹs Richardʹs investment? A) 8.78% B) 4.63% C) 6.96% D) 3.38%
D
Stephenʹs grandmother deposited $100 in an investment account for him when he was born, 25 years ago. The account is now worth $1,500. What was the average rate of return on the account? A) 6.00% B) 15.00% C) 16.67% D) 11.44%
D
The investorʹs required rate of return differs from the firmʹs cost of capital due to the A) firmʹs beta. B) CAPM. C) time value of money. D) tax deductibility of interest.
D
The yield to maturity on a bond A) is fixed in the indenture. B) is generally equal to the coupon interest rate. C) is lower for higher‐risk bonds. D) is the required return on the bond.
D
Webley Corp. is considering two expansion options, but does not have enough capital to undertake both. Project W requires an investment of $100,000 and has an NPV of $10,000. Project D requires an investment of $80,000 and has an NPV of $8,200. If Webley uses the profitability index to decide, it would A) choose W because it has a lower profitability index. B) choose D because it has a lower profitability index. C) choose W because it has a higher profitability index. D) choose D because it has a higher profitability index.
D
When a company has an initial public offering A) the proceeds of the sale will become a liability payable to the shareholders. B) the previous owner of the shares will bet the money and the buyer will get the shares. C) the proceeds of the sale will not affect the companyʹs balance. D) the proceeds of the sale will increase the companyʹs equity.
D
Which of the following are typical consequences of good capital budgeting decisions? A) The firm increases in value. B) The firm gains knowledge and experience that may be useful in future decisions. C) Good capital budgeting decisions help a company define its core competencies. D) All of the above.
D
You are considering investing in U.S. Steel. Which of the following is an example of nondiversifiable risk? A) Risk resulting from oil exploration by Marathon Oil (a U.S. Steel subsidy) B) Risk resulting from foreign expropriation of U.S. Steel property C) Risk resulting from a strike against U.S. Steel D) None of the above
D
Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firmʹs EBIT? A) $15,552,000 B) $58,000,000 C) $4,630,000 D) $5,110,000
D
