FIN 571 Final Exam 3030 100%

1) Which of the following statements is true?

A. A security is a claim issued by a firm that pays ownersinterest, not dividends

B. A call option analyzes conflicts of interest and behavior in aprincipal-agent relationship

C. An agent-manager can never make bad decisions

D. The difference between the value of one action and the value ofthe best alternative is called an opportunity cost

2) Book value, or net book value, refers to

A. the statement of a firm’s financial position at one point intime, 
including its assets and the claims on those assets by creditorsand 
owners

B. the price for which something could be bought or sold in areasonable
length of time, where reasonable length of time is defined in termsof 
the item’s liquidity

C. an agent-manager never making bad decisions

D. the net of assets less liabilities shown in the accountingstatements

3) Assume that the par value of a bond is $1,000. Consider a bondwhere 
the coupon rate is 9% and the current yield is 10%. Which ofthe 
following statements is true?

A. The current yield was less than 9% when the bond was firstissued

B. The current yield was greater than 9% when the bond was firstissued

C. The market value of the bond is more than $1,000

D. The market value of the bond is less than $1,000

4) If the yield to maturity for a bond is less than the bond’scoupon rate, the market value of the bond is __________

A. greater than the par value

B. less than the par value

C. equal to the par value

D. cannot tell

5) For investors, the proper measure of a stock’s risk is its__________

A. nondiversifiable risk

B. specific risk

C. nonsystematic risk

D. standard deviation

6) A company’s beta is -1.5. If the overall stock market decreasesby 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 highestrate of return for the next 20 years?

A. U.S. Treasury bills

B. Long-term corporate bonds

C. Intermediate-term U.S. government bonds

D. Money market funds

8) Dimensions of risk include __________

A. uncertainty about the future outcome    

B. the certainty of a negative outcome

C. the impossibility of the same return

D. uncertainty about yesterday’s outcome

9) One problem with using negative values for the proportioninvested in
the riskless asset to represent a borrowed amount is that theimplied 
borrowing rate of interest is the same as the __________.

A. prime rate of interest

B. current rate of interest

C. lending rate of interest

D. nominal rate of interest

10) If you were willing to bet that the overall stock market washeading
up on a sustained basis, it would be logical to invest in

A. high beta stocks

B. low beta stocks

C. stocks with large amounts of unique risk

D. stocks that plot below the security market line

11) Stony Products has an inventory conversion period (ICP) ofabout 70 
days. The receivables collection period (RCP) is 30 days. Thepayables 
deferral period (PDP) is about 40 days. What is Stony’s cashconversion 
cycle (CCC)?

A. 100 days

B. 60 days

C. 140 days

D. 70 days

12) The main source of short-term operating capital is_________

A. trade credit

B. bank loans

C. bonds

D. sale of treasury stock

13) 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 beta

B. Selling any stock in this portfolio will lower the beta of theportfolio

C. An investor cannot change the risk of this portfolio by herchoice about personal leverage

D. Each stock in the portfolio will have a beta greater than 1

14) An all-equity-financed firm would __________.

A. not pay any income taxes, because interest would exactly offsetits taxable income

B. pay corporate income taxes, because it would have interestexpense

C. not pay corporate income taxes, because it would have nointerest expense

D. pay corporate income taxes if its taxable income is positive

15) If a firm wants to lower its weighted average cost of capital(WACC), one way to do so would be to

A. sell more common shares

B. sell more bonds

C. pay a cash dividend

D. issue a stock dividend

16) Boeing® is a world leader in commercial aircraft. In the faceof 
competition, Boeing® often faces a critical __________ decision:whether
to develop a new generation of passenger aircraft

A. present value

B. payback

C. capital budgeting

D. dividend

17) Ideas for capital budgeting projects come from all levelswithin an 
organization. The bottom-up process results in ideas moving__________ 
through the organization

A. downward

B. upward

C. sideways

D. any way

18) Which of the following statements is true?

A. A mutually exclusive project can be chosen independently ofother projects

B. When undertaking one project prevents investing in anotherproject, and vice versa, the projects have a positive payback

C. A conventional project has an initial cash outflow followed byone or more expected future cash inflows

D. Whenever projects are independent and conventional, the internalrate
of return (IRR) and net present value (NPV) methods willdisagree

19) In practice, the __________ rule is the preferred criteria toaccept or reject a capital investment project

A. NPV

B. profitability index

C. IRR

D. payback

20) The Jerome Inc. western regional branch has been looking toinstall a
new distribution center. The analysts have run the numbers onthe 
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 andtaxes 
at the end of each year. Jerome is in the 35% tax bracket andannual 
depreciation equates to $500,000 per year. The distributioncenter’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. -$1,238,328

B. $564,060

C. $1,825,731

D. -$66,776

21) The __________ method breaks down when evaluating projects inwhich the sign of the cash flow changes

A. IRR

B. NVP

C. PI

D. Payback

22) Studies show systematic differences in capital structuresacross 
industries. These are due primarily to differences in__________

A. a firm’s inventory turnover ratio

B. the ability of assets to support borrowing

C. accounting practices

D. management’s attitude toward what other industries are doing

23) Capital structure decisions refer to the

A. dividend yield of the firm’s stock

B. blend of equity and debt used by the firm

C. capital gains available on the firm’s stock

D. maturity date for the firm’s securities

24) Which of the following statements concerning preferred stock istrue?

A. Preferred stockholders have a prior claim on the income andassets of the firm, as compared to the claims of lenders

B. Preferred stock dividends per share are normally increased asthe earnings of the firm increase

C. Preferred dividends per share are usually not cut or suspendedunless the firm is faced with serious financial problems

D. Preferred stockholders are the ultimate owners of the firm

25) Mortgage bonds are __________

A. secured by a lien on the issuer’s general assets

B. secured by the lien on the issuer’s specific, real assets

C. usually secured by assets such as common shares of one of theissuer’s subsidiaries

D. a form of unsecured debt

26) __________ says to calculate the net advantage of leasing basedon 
the incremental after-tax benefits that leasing will provide

A. The capital market efficiency

B. The options principle

C. The principle of comparative advantage

D. The principle of incremental benefits

27) From the lessee’s viewpoint, the relevant discount rate forevaluating a lease versus buy decision is the __________

A. cost of issuing new common stock

B. pretax cost of issuing debt

C. after-tax cost of issuing debt

D. lessor’s cost of debt

28) The wholesale price for Captain John’s is $0.612 per loaf, andthe 
variable cost of production is $0.387 per loaf. Captain John’sexpects 
that expansion will allow them to sell an additional 4.5 millionloaves 
in the next 5 years. What additional revenues minus expenses willbe 
generated from expansion?

A. $912,500

B. $1,000,500

C. $1,012,500

D. $1,102,500

29) Which of the following statements is true?

A. Soft capital rationing refers to the rationing imposedexternally by limited funds for borrowing from outside sources

B. Hard capital rationing refers to the rationing imposedinternally by the firm

C. A post audit is a set of procedures for evaluating a capitalbudgeting decision after the fact

D. Few firms will engage in capital rationing

30) In efficient markets, as in the United States, market pricesare not expected to be __________

A. wrong

B. fair

C. followed by many analysts

D. incorporate all information