Mod 1Fin 302Final ExamTotal – 100

Question 1 To 50 = 1 Point eachQuestion 51 To 75 = 2 Points each

Student: ___________________________________________________________________________

1. Scenario analysis is defined as the: E. analysis of the effects that a project's terminal cash flows has on the project's NPV.

 

2. The change in revenue that occurs when one more unit of output is sold is referred to as: A. marginal revenue.

 

3. By definition, which one of the following must equal zero at the accounting break-even point? 

D. net income

 

4. Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as: E. capital rationing.

 

5. PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing: .D. marginal rationing.

 

6. Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? C. identifying the potential range of reasonable outcomes

 

7. Which of the following are inversely related to variable costs per unit?I. contribution margin per unitII. number of units soldIII. operating cash flow per unitIV. net profit per unit E. I, II, III, and IV

 

8. Which one of the following best defines the variance of an investment's annual returns over a number of years? E. The average squared difference between the actual returns and the arithmetic average return.

 

9. Which one of the following is defined by its mean and its standard deviation? C. normal distribution

 

10. Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market? E. efficient capital market

 

11. Which one of the following correctly describes the dividend yield? A. next year's annual dividend divided by today's stock price

 

12. Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: C. decreased proportionately with the dividend decrease.

 

13. Which one of the following statements related to capital gains is correct? 

B. An increase in an unrealized capital gain will increase the capital gains yield.

 

14. Which of the following statements is correct in relation to a stock investment?I. The capital gains yield can be positive, negative, or zero.II. The dividend yield can be positive, negative, or zero.III. The total return can be positive, negative, or zero.IV. Neither the dividend yield nor the total return can be negative. C. I and III only

 

15. Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? 

B. portfolio weight

 

16. Which one of the following is a risk that applies to most securities? C. systematic

 

17. The principle of diversification tells us that: E. spreading an investment across many diverse assets will eliminate some of the total risk.

 

18. Which one of the following is represented by the slope of the security market line? E. market risk premium

 

19. Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the: E. cost of capital.

 

20. The expected return on a stock computed using economic probabilities is: D. a mathematical expectation based on a weighted average and not an actual anticipated outcome.

 

21. The expected return on a portfolio considers which of the following factors?I. percentage of the portfolio invested in each individual securityII. projected states of the economyIII. the performance of each security given various economic statesIV. probability of occurrence for each state of the economy D. II, III, and IV only

 

22. When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach. C. divisional cost of capital

 

23. Which one of the following statements related to the SML approach to equity valuation is correct? Assume the firm uses debt in its capital structure. C. The model is dependent upon a reliable estimate of the market risk premium.

 

24. The aftertax cost of debt generally increases when:I. a firm's bond rating increases.II. the market rate of interest increases.III. tax rates decrease.IV. bond prices rise. B. II and III only

 

25. The cost of preferred stock: A. is equal to the dividend yield.

 

26. The aftertax cost of debt: E. has a greater effect on a firm's cost of capital when the debt-equity ratio increases.

 

27. All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2. E. a reduction in the risk-free rate

 

28. The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the: E. weighted average cost of capital.

 

29. Markley and Stearns is a multi-divisional firm that uses its WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to: E. prefer higher risk projects over lower risk projects.

 

30. Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called? D. rights offer

 

31. Soup Galore is a partnership that was formed three years ago for the purpose of creating, producing, and distributing healthy soups in a dried form. The firm has been extremely successful thus far and has decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called? E. initial public offering

 

32. Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering. The investment firm is serving as a(n): C. underwriter.

 

33. The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the: E. offer price.

 

34. Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale. The underwriters sold a total of 53,000 shares to the public. The additional 3,000 shares were purchased in accordance with which one of the following? A. Green shoe provision

 

35. Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights offering by this firm. As a result, Roy will most likely be subject to: C. dilution.

 

36. Suzie is a chemist who has been experimenting with fragrances in her home laboratory and feels that she now has three viable perfumes that could be successfully marketed. She knows a venture capitalist who has offered to finance her business to the point where she would be ready to begin the manufacturing and marketing stage. Which type of financing is Suzie being offered? A. syndicateB. introductionC. second-stageD. mezzanine-levelE. seed money

 

37. Homemade leverage is: C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage..

 

38. Which one of the following is the equity risk that is most related to the daily operations of a firm? B. systematic risk

 

39. By definition, which of the following costs are included in the term "financial distress costs"?I. direct bankruptcy costsII. indirect bankruptcy costsIII. direct costs related to being financially distressed, but not bankruptIV. indirect costs related to being financially distressed, but not bankrupt E. I, II, III, and IV

 

40. A firm should select the capital structure that: B. maximizes the value of the firm.

 

41. The optimal capital structure has been achieved when the: E. debt-equity ratio results in the lowest possible weighted average cost of capital.

 

42. Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Assume there are no taxes. A. At the break-even point, there is no advantage to debt.

 

43. Which of the following statements related to financial risk are correct?I. Financial risk is the risk associated with the use of debt financing.II. As financial risk increases so too does the cost of equity.III. Financial risk is wholly dependent upon the financial policy of a firm.IV. Financial risk is the risk that is inherent in a firm's operations. D. I, II, and III only

 

44. Bankruptcy: C. technically occurs when total equity equals total debt.

 

45. Assume that $1 is equal to ¥98 and also equal to C$1.21. Based on this, you could say that C$1 is equal to: C$1(¥98/C$1.21) = ¥80.99. The exchange rate of C$1 = ¥80.99 is referred to as the: B. cross-rate.

 

46. On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following Monday morning. Which one of the following is most likely the interest rate that will be charged on this loan? 

B. London Interbank Offer Rate

 

47. Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £0.62. The traders agree to settle this trade within two business day. What is this exchange called? E. spot trade

 

48. Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127? D. purchasing power parity

 

49. Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate? A. unbiased forward rates

 

50. Which one of the following supports the idea that real interest rates are equal across countries? C. international Fisher effect

 

51. Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, give or take 2 percent. What is the amount of the total costs per unit under the worst case scenario? E. $640.25

 

52. Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units, plus or minus 2 percent. The expected variable cost per unit is $11 and the expected fixed costs are $287,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent. What is the operating cash flow under the best case scenario? C. $107,146

 

53. Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units, plus or minus 2 percent. The expected variable cost per unit is $11 and the expected fixed costs are $287,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent. What is the net income under the worst case scenario? A. $8,578

 

54. Cantor's has been busy analyzing a new product. Thus far, management has determined that an OCF of $218,200 will result in a zero net present value for the project, which is the minimum requirement for project acceptance. The fixed costs are $329,000 and the contribution margin per unit is $216.40. The company feels that it can realistically capture 2.5 percent of the 110,000 unit market for this product. The tax rate is 34 percent and the required rate of return is 11 percent. Should the company develop the new product? Why or why not? 

B. Yes; The expected level of sales exceeds the required level of production.

 

55. Last year, you purchased a stock at a price of $47.10 a share. Over the course of the year, you received $2.40 per share in dividends while inflation averaged 3.4 percent. Today, you sold your shares for $49.50 a share. What is your approximate real rate of return on this investment? B. 6.79 percent

 

56. One year ago, you purchased 200 shares of a stock at a price of $54.18 a share. Today, you sold those shares for $40.25 a share. During the past year, you received total dividends of $164 while inflation averaged 4.2 percent. What is your approximate real rate of return on this investment? E. 24.20 percent

 

57. A stock had annual returns of 3.6 percent, -8.7 percent, 5.6 percent, and 11.1 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 20 percent or more in a single year? A. less than 0.1 percent

 

58. A stock has returns of 18 percent, 11 percent, -21 percent, and 6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year? 

C. -30.62 to 37.62 percent

 

59. You want your portfolio beta to be 0.95. Currently, your portfolio consists of $4,000 invested in stock A with a beta of 1.47 and $3,000 in stock B with a beta of 0.54. You have another $9,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset? D. $4,574.71

 

60. You are comparing stock A to stock B. Given the following information, what is the difference in the expected returns of these two securities?

    

B. 1.95 percent

 

61. If the economy is normal, Charleston Freight stock is expected to return 15.7 percent. If the economy falls into a recession, the stock's return is projected at a negative 11.6 percent. The probability of a normal economy is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock? 

B. 0.011925

 

62. The Shoe Outlet has paid annual dividends of $0.65, $0.70, $0.72, and $0.75 per share over the last four years, respectively. The stock is currently selling for $26 a share. What is this firm's cost of equity? 

E. 11.79 percent

 

63. Highway Express has paid annual dividends of $1.16, $1.20, $1.25, $1.10, and $0.95 over the past five years respectively. What is the average dividend growth rate? C. 2.28 percent

 

64. Miller's Dry Goods is an all equity firm with 45,000 shares of stock outstanding at a market price of $50 a share. The company's earnings before interest and taxes are $128,000. Miller's has decided to add leverage to its financial operations by issuing $250,000 of debt at 8 percent interest. The debt will be used to repurchase shares of stock. You own 400 shares of Miller's stock. You also loan out funds at 8 percent interest. How many shares of Miller's stock must you sell to offset the leverage that Miller's is assuming? Assume you loan out all of the funds you receive from the sale of stock. Ignore taxes. 

C. 44.4 shares

 

65. You currently own 600 shares of JKL, Inc. JKL is an all equity firm that has 75,000 shares of stock outstanding at a market price of $40 a share. The company's earnings before interest and taxes are $140,000. JKL has decided to issue $1 million of debt at 8 percent interest. This debt will be used to repurchase shares of stock. How many shares of JKL stock must you sell to unlever your position if you can loan out funds at 8 percent interest? 

E. 250 shares

 

66. Jefferson & Daughter has a cost of equity of 14.6 percent and a pre-tax cost of debt of 7.8 percent. The required return on the assets is 13.2 percent. What is the firm's debt-equity ratio based on M&M II with no taxes? A. 0.26

 

67. L.A. Clothing has expected earnings before interest and taxes of $48,900, an unlevered cost of capital of 14.5 percent, and a tax rate of 34 percent. The company also has $8,000 of debt that carries a 7 percent coupon. The debt is selling at par value. What is the value of this firm? B. $223,333.33

 

68. Jenningston Mills has a market value equal to its book value. Currently, the firm has excess cash of $1,200, other assets of $5,800, and equity valued at $3,750. The firm has 250 shares of stock outstanding and net income of $420. What will the new earnings per share be if the firm uses 25 percent of its excess cash to complete a stock repurchase? E. $2.08

 

69. Blasco's has a market value equal to its book value. Currently, the firm has excess cash of $1,332, other assets of $11,674, and equity of $7,200. The firm has 600 shares of stock outstanding and net income of $838. Blasco's has decided to spend one-third of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed? 

D. 578 shares

 

70. The equity of Blooming Roses has a total market value of $16,000. Currently, the firm has excess cash of $1,200 and net income of $15,400. There are 750 shares of stock outstanding. What will be the percentage change in the stock price per share if the firm pays out all of its excess cash as a cash dividend? 

D. -2.75 percent

 

71. Josh's, Inc. has 7,000 shares of stock outstanding with a par value of $1.00 per share and a market value of $32 a share. The balance sheet shows $76,000 in the capital in excess of par account, $7,000 in the common stock account, and $64,800 in the retained earnings account. The firm just announced a 10 percent stock dividend. What is the value of the capital in excess of par account after the dividend? B. $54,300

 

72. You just returned from some extensive traveling throughout the Americas. You started your trip with $20,000 in your pocket. You spent 3.4 million pesos while in Chile and 16,500 bolivares in Venezuela. Then on the way home, you spent 47,500 pesos in Mexico. How many dollars did you have left by the time you returned to the U.S. given the following exchange rates? (Note: Multiple symbols are used to designate various currencies. For example, the U.S. dollar is notated as "$" or as "USD".)

    A. 1,113 USD

 

73. Today, you can get either 121 Canadian dollars or 1,288 Mexican pesos for 100 U.S. dollars. Last year, 100 U.S. dollars was worth 115 Canadian dollars or 1,291 Mexican pesos. Which one of the following statements is correct given this information? A. $100 converted into Canadian dollars last year would now be worth $105.22.

 

74. Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1952. The nominal risk-free rate in Canada is 3 percent while it is 4 percent in the U.S. Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S. E. $0.018

 

75. You are expecting a payment of 480,000PLN three years from now. The risk-free rate of return is 3 percent in the U.S. and 4 percent in Poland. The inflation rate is 2.5percent in the U.S. and 3 percent in Poland. Currently, you can buy 277PLN for 100USD. How much will the payment three years from now be worth in U.S. dollars? D. $1,317,269