FIN 571 Final Exam / 100% correct answers

FIN 571 Final Exam / 100% correct answers1) Which of the following statements is true?A. A security is a claim issued by a firm that pays owners interest, not dividendsB. A call option analyzes conflicts of interest and behavior in a principal-agent relationshipC. An agent-manager can never make bad decisionsD. The difference between the value of one action and the value of the best alternative is called an opportunity cost2) Book value, or net book value, refers toA. the statement of a firm’s financial position at one point in time, including its assets and the claims on those assets by creditors and ownersB. the price for which something could be bought or sold in a reasonable length of time, where reasonable length of time is defined in terms of the item’s liquidityC. an agent-manager never making bad decisionsD. the net of assets less liabilities shown in the accounting statements3) Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the current yield is 10%. Which of the following statements is true?A. The current yield was less than 9% when the bond was first issuedB. The current yield was greater than 9% when the bond was first issuedC. The market value of the bond is more than $1,000D. The market value of the bond is less than $1,0004) If the yield to maturity for a bond is less than the bond’s coupon rate, the market value of the bond is __________A. greater than the par valueB. less than the par valueC. equal to the par valueD. cannot tell5) For investors, the proper measure of a stock’s risk is its __________A. nondiversifiable riskB. specific riskC. nonsystematic riskD. standard deviation6) A company’s beta is -1.5. If the overall stock market decreases by 5%, what is the expected change in the firm’s stock price?A. Share price decreases by 5%B. Share price decreases by 6.5%C. Share price increases by 7.5%D. Share price decreases by 7.5%7) Which of these investments would you expect to have the highest rate of return for the next 20 years?A. U.S. Treasury billsB. Long-term corporate bondsC. Intermediate-term U.S. government bondsD. Money market funds8) Dimensions of risk include __________A. uncertainty about the future outcome    B. the certainty of a negative outcomeC. the impossibility of the same returnD. uncertainty about yesterday’s outcome9) One problem with using negative values for the proportion invested in the riskless asset to represent a borrowed amount is that the implied borrowing rate of interest is the same as the __________.A. prime rate of interestB. current rate of interestC. lending rate of interestD. nominal rate of interest10) If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest inA. high beta stocksB. low beta stocksC. stocks with large amounts of unique riskD. stocks that plot below the security market line11) Stony Products has an inventory conversion period (ICP) of about 70 days. The receivables collection period (RCP) is 30 days. The payables deferral period (PDP) is about 40 days. What is Stony’s cash conversion cycle (CCC)?A. 100 daysB. 60 daysC. 140 daysD. 70 days12) The main source of short-term operating capital is _________A. trade creditB. bank loansC. bondsD. sale of treasury stock13) An investor’s risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?A. Each stock in the portfolio has its own betaB. Selling any stock in this portfolio will lower the beta of the portfolioC. An investor cannot change the risk of this portfolio by her choice about personal leverageD. Each stock in the portfolio will have a beta greater than 114) An all-equity-financed firm would __________.A. not pay any income taxes, because interest would exactly offset its taxable incomeB. pay corporate income taxes, because it would have interest expenseC. not pay corporate income taxes, because it would have no interest expenseD. pay corporate income taxes if its taxable income is positive15) If a firm wants to lower its weighted average cost of capital (WACC), one way to do so would be toA. sell more common sharesB. sell more bondsC. pay a cash dividendD. issue a stock dividend16) Boeing® is a world leader in commercial aircraft. In the face of competition, Boeing® often faces a critical __________ decision: whether to develop a new generation of passenger aircraftA. present valueB. paybackC. capital budgetingD. dividend17) Ideas for capital budgeting projects come from all levels within an organization. The bottom-up process results in ideas moving __________ through the organizationA. downwardB. upwardC. sidewaysD. any way18) Which of the following statements is true?A. A mutually exclusive project can be chosen independently of other projectsB. When undertaking one project prevents investing in another project, and vice versa, the projects have a positive paybackC. A conventional project has an initial cash outflow followed by one or more expected future cash inflowsD. Whenever projects are independent and conventional, the internal rate of return (IRR) and net present value (NPV) methods will disagree19) In practice, the __________ rule is the preferred criteria to accept or reject a capital investment projectA. NPVB. profitability indexC. IRRD. payback20) The Jerome Inc. western regional branch has been looking to install a new distribution center. The analysts have run the numbers on the distribution center costs and annual inflow from the investment. The project will cost $5 million at the beginning of the first year. The project will generate $1 million in earnings before interest and taxes at the end of each year. Jerome is in the 35% tax bracket and annual depreciation equates to $500,000 per year. The distribution center’s end of the fifth year’s salvage equals its book value, or $2,500,000. Compute the project’s NPV, assuming Jerome’s WACC equals 12%.A. -$1,238,328B. $564,060C. $1,825,731D. -$66,77621) The __________ method breaks down when evaluating projects in which the sign of the cash flow changesA. IRRB. NVPC. PID. Payback22) Studies show systematic differences in capital structures across industries. These are due primarily to differences in __________A. a firm’s inventory turnover ratioB. the ability of assets to support borrowingC. accounting practicesD. management’s attitude toward what other industries are doing23) Capital structure decisions refer to theA. dividend yield of the firm’s stockB. blend of equity and debt used by the firmC. capital gains available on the firm’s stockD. maturity date for the firm’s securities24) Which of the following statements concerning preferred stock is true?A. Preferred stockholders have a prior claim on the income and assets of the firm, as compared to the claims of lendersB. Preferred stock dividends per share are normally increased as the earnings of the firm increaseC. Preferred dividends per share are usually not cut or suspended unless the firm is faced with serious financial problemsD. Preferred stockholders are the ultimate owners of the firm25) Mortgage bonds are __________A. secured by a lien on the issuer’s general assetsB. secured by the lien on the issuer’s specific, real assetsC. usually secured by assets such as common shares of one of the issuer’s subsidiariesD. a form of unsecured debt26) __________ says to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will provideA. The capital market efficiencyB. The options principleC. The principle of comparative advantageD. The principle of incremental benefits27) From the lessee’s viewpoint, the relevant discount rate for evaluating a lease versus buy decision is the __________A. cost of issuing new common stockB. pretax cost of issuing debtC. after-tax cost of issuing debtD. lessor’s cost of debt28) The wholesale price for Captain John’s is $0.612 per loaf, and the variable cost of production is $0.387 per loaf. Captain John’s expects that expansion will allow them to sell an additional 4.5 million loaves in the next 5 years. What additional revenues minus expenses will be generated from expansion?A. $912,500B. $1,000,500C. $1,012,500D. $1,102,50029) Which of the following statements is true?A. Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from outside sourcesB. Hard capital rationing refers to the rationing imposed internally by the firmC. A post audit is a set of procedures for evaluating a capital budgeting decision after the factD. Few firms will engage in capital rationing30) In efficient markets, as in the United States, market prices are not expected to be __________A. wrongB. fairC. followed by many analystsD. incorporate all information