Fin 370 Final Exam V 4

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1. The goal of the firm should be

b/ maximization of shareholder wealth

2. An example of a primary market transaction is

a. a new issue of common stock by AT&T

3. According to the agency problem, _________ represent the principals of a corporation.

b/ Managers

c/ Managers

4. Which of the following is a principle of basic financial management?

a.  Risk/return tradeoff

5. Another name for the acid test ratio is the

b/ quick ratio

6. The accounting rate of return on stockholders’ investments is measured by

c/ operating income return on investment

7. If you are an investor, which of the following would you prefer?

b/ Earnings on funds invested compound daily

8. The primary purpose of a cash budget is to

c/ provide a detailed plan of future cash flows

9. Which of the following is a non-cash expense?

a. Depreciation expenses

10. The break-even model enables the manager of a firm to

c/ determine the quantity of output that must be sold to cover all operating costs

11. A zero-coupon bond

d/ is sold at a deep discount at less than the par value

Actually this could be a and d

12. If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of 5 years?

b/ $5,008.76

20000/(1-(1/(1+8%)^5))/8%

13. At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?

a. 6%

716.40/400^(1/10)-1

14. The present value of a single future sum

d/ depends upon the number of discount periods

15. Which of the following is considered to be a spontaneous source of financing?

d/ Accounts payable

16. Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%.

Initial outlay = $450

Cash flows:
Year 1 = $325
Year 2 = $65
Year 3 = $100

d/ 2.6 years

450-325=125-65=60/100 = 2years +.6

17. For the NPV criteria, a project is acceptable if the NPV is __________, while for the profitability index, a project is acceptable if the profitability index is __________.

b/ greater than zero, greater than ones

18. Which of the following is considered to be a deficiency of the IRR?

b/ It could produce more than one rate of return.

For projects with negative cash flows, more than 1 IRR can be computed

19. The firm should accept independent projects if

b/ the profitability index is greater than 1.0

NPV > 0

20. The most expensive source of capital is

b/ new common stock

21. The cost associated with each additional dollar of financing for investment projects is

b/ the marginal cost of capital

22. The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital?

c/ 10.6%

9%(1-40%)*20/50+14%*30/50 = 10.56%

23. Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt–10%; preferred stock–11%; and common stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?

b/ 13.0%

10%*(1-40%)*30%+11%*20%+18%*50% = 13%

24. Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Lever...
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