BUSN 379 Week 8 Final Exam

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

1

2

3

4

Cash flow

-$32,000

$9,000

$10,000

$15,200

$7,800

(Points : 4)

$1,085.25

$1,193.77

$3,498.28

$4,102.86

$4,513.15

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 project’s 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

a key 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

Probability of State of Economy

Rate of Return

Recession

.02

-.06

Normal

.88

.11

Boom

.10

.17

(Points : 4)

7.33 percent

9.82 percent

11.26 percent

11.33 percent

11.50 percent 

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 percent of 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 to eight 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 firm’s 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

1

2

3

Cash flow

-$195,600

$99,800

$87,600

$75,300

(Points : 4)

less than 5%

between 5 and 15%

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.

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

Question 8. 8. (TCO 5, 6 and 7) The six percent preferred 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 process are 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.