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DeVry BUSN 379 Final Exam

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1.(TCO 4) Which of the following is true regarding the evaluation of projects?(Points :
4)

sunk costs should be included

erosion effects should be considered

financing costs need to be included

opportunity costs are irrelevant

Question 2.2.(TCO 4) Which of the following investment ranking methods does not
consider the time value of money?(Points : 4)

net present value method

payback method

internal rate of return method

all of these are time-adjusted methods

Question 3.3.(TCO 3 and 4) You can ensure that an investment is expected to create
value for(Points : 4)

have a PI equal to zero.

produce negative rates of return.

have positive AARs.

have positive IRRs.

have positive NPVs.

Question 4.4.(TCO 3 and 4) What is the net present value of a project with the
following cash flows, if the discount rate is 10 percent?

Year
0
Cash
flow
$32,000
(Points : 4)

$1,085.25

$1,193.77

$3,498.28

$4,102.86

$4,513.15

1
$9,00
0

2
$10,00
0

3
$15,20
0

4
$7,80
0

Question 5.5.(TCO 4) Howard Company is considering a new project that will require
an initial cash investment of $575,000. The project will produce no cash flows for the
first three years. The projected cash flows for years 4 through 8 are $73,000,
$112,000, $124,000, $136,000, and $145,000, respectively. How long will it take the
firm to recover its initial investment in this project?(Points : 4)

5.81 years

6.05 years

6.96 years

7.90 years

This project never pays back

Question 6.6.(TCO 4) The postponement of a project until conditions are more

favorable:(Points

: 4)

is a valuable option.

is referred to as the option to extend.

could not cause a negative net present value project to become a positive net present value project.

will generally cause the internal rate of return for a project to decline.

Question 7.7.(TCO 4)___________, occurs when a firm cannot raise financing for a
project under any circumstances.(Points : 4)

contingency planning.

hard rationing.

soft rationing.

capital constraint.

scenario analysis.

Question 8.8.(TCO 4) ABC Cameras is considering an investment that will have a cost of
$10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in
year 3. Assume the cost of capital is 10%. Which of the following is true regarding this
investment? (Points : 4)

The net present value of the project is approximately $1,011

This project should be accepted because it has a negative net present value

This projects payback period is 10 years or more

All of the above are true

Question 9.9.(TCO 4) Assume Company X plans to invest $60,000 in industrial


equipment. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first
year depreciation amount under MACRS?(Points : 4)

$12,000

$8,574

$19,800

None of the above

Question 10.10.(TCO 1 and 4) Assume a corporation has earnings before depreciation,


and taxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax
bracket. What are the after-tax cash flows for the company?(Points : 4)

$82,000

$110,000

$42,000

none of these

Question 11.11.(TCO 8) Which of the following statements is true regarding systematic


risk? (Points : 4)

is diversifiable

is the total risk associated with surprise events

it is measured by beta

it is measured by standard deviation

Question 12.12.(TCO 8) Which statement is true regarding risk?(Points : 4)

the expected return is usually the same as the actual return

akey to assess risk is determining how much risk an investment adds to a portfolio

risks can always be decreased or mitigated by the financial manager

the higher the risk, the lower the return investors require for the investment

Question 13.13.(TCO 8) The stock of Chocolate Galore is expected to produce the


following returns, given the various states of the economy. What is the expected
return on this stock?

State of
Economy
Recession
Normal
Boom
(Points : 4)

7.33 percent

9.82 percent

11.26 percent

11.33 percent

11.50 percent

Probability of State of
Economy
.02
.88
.10

Rate of
Return
-.06
.11
.17

Question 14.14.(TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600
in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of
stock D?(Points : 4)

17.68 percent

17.91 percent

18.42 percent

19.07 percent

19.46 percent

Question 15.15.(TCO 8)You currently own a portfolio valued at $24,000 that has a
beta of 1.1. You have another $8,000 to invest, and would like to invest it in a manner
such that the risk of the new portfolio matches that of the overall market. What does
the beta of the new security have to be?(Points : 4)

.46

.55

.61

.70

.90

1.(TCO 8)If the financial markets are strong form efficient, then:(Points : 4)

only the most talented analysts can determine the true value of a security.

only company insiders have a marketplace advantage.

technical analysis provides the best tool to gain a marketplace advantage.

no one person has an advantage in the marketplace.

every security offers the same rate of return.

Question 2.2.(TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be
financed with debt at a cost of 9 percent(after-tax) and common equity at a cost of 16
percent. Assume debt and common equity each represent 50 percentof the firm's
capital structure. What is the weighted average cost of capital?(Points : 4)

between 4.5% and 8%

more than 13%

between 12 and 13%

between 13 and 14%

none of the above

Question 3.3.(TCO 5, 6 and 7) An issue of common stock is expected to pay a


dividend of $4.80 at the end of the year. Its growth rate is equal toeight percent. If
the required rate of return is 13 percent, what is its current price?(Points : 4)

$103.68

$36.92

$96.00

none of these

Question 4.4.(TCO 5, 6 and 7) Which of the following is not true regarding the cost of
debt? (Points : 4)

It is the return that the firms creditors demand on new borrowing.

It is the interest rate that the firm pays on current/existing borrowing.

An appropriate method to compute the cost of debt is using the YTM of current bonds
outstanding.

It needs to be converted into an after-tax cost.

Question 5.5.(TCO 5) Which of the following is not true regarding the cost of retained
earnings?(Points : 4)

it is relevant to the WACC

does not require new funds to be raised

has associated flotation costs

has a cost, which is the opportunity cost associated with stockholder funds

Question 6.6.(TCO 4) A project has the following cash flows. What is the internal rate
of return?

Year
0
Cash
flow
$195,600
(Points : 4)

1
$99,80
0

less than 5%

between 5 and 15%

2
$87,60
0

3
$75,30
0

between 15 and 18%

more than 21%

Question 7.7.(TCO 5, 6 and 7) Which one of the following is a correct statement


regarding a firm's weighted average cost of capital (WACC)?(Points : 4)

the WACC can be used as the required return for all new projects.

the WACC of a leveraged firm will decrease when the tax rate decreases.

an increase in the market risk premium will tend to decrease a firm's WACC.

the WACC is a starting point for the subjective approach to setting discount rates.

areduction in the risk level of a firm will tend to increase the firm's WACC.

Question 8.8.(TCO 5, 6 and 7) Thesix percentpreferred stock of FKH Manufacturing is


selling for $62 a share. What is the firm's cost of preferred stock, if the tax rate is 34
percent and the par value per share is $100?(Points : 4)

5.98%

7.06%

8.05%

9.68%

10.10%

Question 9.9.(TCO 2) Which one of the following occurs if a firm files for Chapter 7
bankruptcy, but does not generally occur if the firm files for Chapter 11
bankruptcy?(Points : 4)

a petition is filed in federal court

administrative fees are incurred

a list of creditors is compiled

pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the

firm

a trustee-in-bankruptcy is elected by the creditors

Question 10.10.(TCO 5) Which of the following statements is false regarding the cost of
capital? (Points : 4)

The cost of capital should consider the flotation costs.

All other being equal, it is preferable to use market value weights than book value
weights.

The WACC is the most appropriate discount rate for all projects.

Should include the cost of retained earnings.

Question 11.11.(TCO 2) Select any actions that do not affect the cash account. (Points : 4)

Goods are sold cash

An interest payment on a notes payable is made

A payment due is received from a client

Dividends are paid to shareholders

Inventory is purchased and paid for with credit

Question 12.12.(TCO 2) Which of the following statements is true?(Points : 4)

There is an opportunity cost associated with not offering credit.

The costs of the credit application process and the costs expended in the collection

processare not carrying costs of granting credit.

Character, refers to the ability of a firm to meet its credit obligations out its

operating cash flows.

The optimal credit policy, is the policy that produces the largest amount of sales for a

firm.

Question 13.13.(TCO 2) Which one of the following industries is most apt to have the
shortest cash cycle?(Points : 4)

electric utility company

airplane manufacturer

fast-food restaurant

furniture store

clothing manufacturer

Question 14.14.(TCO 2) Delphinia's has the following estimated quarterly sales for
next year. The accounts receivable period is 30 days. What is the expected accounts
receivable balance at the end of the second quarter? Assume each month has 30
days.
Q1
Sale $1,80
s
0
(Points : 4)

$567

$600

$821

$1,134

$1,200

Q2
$1,70
0

Q3
$2,10
0

Q4
$1,90
0

Question 15.15.(TCO 1) Why is maximization of the current value per share a more
appropriate financial management goal than profit maximization?(Points : 4)

Because by maximizing the current stock value, you also maximize the companys

profit for the year.

Because this criterion is non-ambiguous.

Because financial managers always act in the best interest of shareholders.

Because it creates short-term gains in the financial statements.

6.(TCO 1) Provide three examples of recent well-known unethical behavior cases. Explain

the situation in one or two paragraphs. How do you believe that this behavior affected the
firms value?(Points : 10)
7.(TCO 4) What are sunk costs? Provide at least two real-life examples of sunk costs for a

project. Should sunk costs be included as incremental cash flows? Why or why not? Explain
your rationale.(Points : 10)
8.(TCO 8) What is the difference between business risk and financial risk? If Company A has

a higher business risk than Company B, should its cost of capital be higher? Why or why
not? Explain your rationale.(Points : 10)
9.(TCO 2) What are some important factors to consider when conducting a credit evaluation

and scoring?(Points : 10)


0.(TCO 6 and 7) Do you believe that it is appropriate for some industries to be more

leveraged than others? Explain your rationale.(Points : 10)

1.(TCO 1) Which of the following are capital structure concerns?

I. how to obtain short-term financing


II. the company's financing mix
III. the cost of funds

IV. how and where to raise money(Points

I and II

I, II and III

II, III and IV

I, III and IV

All of the above

: 4)

Question 2.2.(TCO 1) Book values are different frommarket values because:(Points :


4)

Book values reflect the value of the asset based on generally-accepted accounting

principles.

Book values are used in the companys balance sheet.

Book values do not reflect the amount someone is willing to pay today for an asset.

All of the above

None of the above

Question 3.3.(TCO 1)Use the following tax table to answer this question:
Taxable Income
$0$50,001$75,001$100,001
$335,001
-

$50,000
75,000
100,000
335,000
10,000,00
0

Tax
Rate
15%
25
34
39
34

John has taxable income of $389,745. What is Johns average tax rate?(Points

33%

: 4)

34%

36%

37%

38%

Question 4.4.(TCO 3) Regional Bank offers you an APR of 19 percentcompounded


semiannually, and Local Bank offers you an EAR of 19.50 percentfor a new automobile
loan. You should choose ______________ because its _______ is lower.(Points : 4)

Regional Bank, APR

Local Bank, EAR

Regional Bank, EAR

Local Bank, APR

Question 5.5.(TCO 3) You deposited $11,000 in your bank account today. Which of the following will
decrease the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a
positive value. Select all that apply:(Points : 4)

a decrease in the interest rate

increasing the initial amount of your deposit

increasing the frequency of the interest payments

decreasing the length of the investment period

Question 6.6.(TCO 3) Amy needs to save $20,000 in cash to buy a new carfive years
from today. She expects to earn 6.5 percent, compounded annually, on her savings.
How much does she need to deposit today, if this is the only money she saves for this
purpose?(Points : 4)

$12,468.07

$12,502.14

$14,597.62

$17,044.32

$17,129.01

Question 7.7.(TCO 3) Paper Pro needed a new store. The company spent $65,000 to
refurbish an old shop and create the current facility. The firm borrowed 75 percent of
the refurbishment cost ateight percent interest for 11 years. What is the amount of
each monthly payment?(Points : 4)

$91.05

$284.13

$556.50

$682.87

$731.60

Question 8.8.(TCO 3)John borrowed $5,500 four years ago at an annual interest rate
of 10 percent. The loan term isseven years. Since he borrowed the money, Sonny has
been making annual payments of $550 to the bank. Which type of loan does John
have?(Points : 4)

interest-only

pure discount

compounded

amortized

complex

Question 9.9.(TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12
percentinterest. The bonds mature in 25 years. What is the current price of the bond,
if the YTM is 11 percent? Assume annual payments.(Points : 4)

$1080

$1085

$925

$1000

Question 10.10.(TCO 6) The market where one shareholder sells shares to another
shareholder is called the _____ market.(Points : 4)

primary

main

secondary

principal

dealer

Question 11.11.(TCO 7) Which one of the following statements concerning financial


leverage is correct?(Points : 4)

Financial leverage increases profits and decreases losses.

Financial leverage has no effect on a firm's return on equity.

Financial leverage, refers to the use of common stock.

Financial leverage magnifies both profits and losses.

Increasing financial leverage will always increase the earnings per share.

Question 12.12.(TCO 3) What is the approximate yield to maturity for a seven-year


bond that pays 11 percentinterest on a $1000 face value annually if the bond sells for
$952?(Points : 4)

10.5%

10.6%

11.5%

12.1%

Question 13.13.(TCO 8) Which of the following is true regarding bonds?(Points : 4)

Most bonds do not carry default risk.

Municipal bonds are free of default risk.

Bonds are not sensitive to changes in the interest rates.

Moodys and Standard and Poors provide information regarding a bonds interest

rate risk.

None of the above is true

Question 14.14.(TCO 8) Which one of the following bonds is the most sensitive to
interest rate movements?(Points : 4)

zero-coupon,five year

sevenpercent annual coupon,five year

zero-coupon, 10 year

fivepercent semi-annual coupon, 10 year

fivepercent annual coupon, 10 year

Question 15.15.(TCO 6) A sinking fund is an account managed by a bond trustee for


the sole purpose of:(Points : 4)

paying interest payments on a semi-annual basis.

redeeming bonds early.

repaying the face value at maturity.

paying the expenses required to reissue outstanding bonds.

paying the "balloon payment" at maturity.

DeVry BUSN 379 Final Exam

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