FIN571 Week 6 Final Exam SCORE 97 PERCENT

Question 1
Which one of these is a correct definition?

    Long-term debt is defined as a residual claim on a firm's assets.
    Tangible assets are fixed assets such as patents.
    Current assets are assets with short lives, such as inventory.
    Current liabilities are debts that must be repaid in 18 months or less.
    Net working capital equals current assets plus current liabilities.

Question 2
The primary goal of financial management is to:

    Minimize operational costs and maximize firm efficiency.
    Maintain steady growth in both sales and net earnings.
    Maximize the current value per share of the existing stock.
    Maximize current dividends per share of the existing stock.
    Avoid financial distress.

Question 3
Which one of the following statements about preferred stock is true?

    There is no significant difference in the voting rights granted to preferred and common shareholders.
    Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense.
    If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year.
    Preferred stock usually has a stated liquidating value of $100 per share.
    Dividends on preferred stock payable during the next twelve months are considered to be a corporate liability.

Question 4
A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every:

    $.53 in total assets.
    $1 in total equity.
    $.53 in total equity.
    $1 in fixed assets.
    $1 in current assets.

Question 5
The higher the inventory turnover, the:

    Lesser the amount of inventory held by a firm.
    Greater the amount of inventory held by a firm.
Less time inventory items remain on the shelf.
    Higher the inventory as a percentage of total assets.
    Longer it takes a firm to sell its inventory.

Question 6
The process of planning and managing a firm's long-term assets is called:

Capital budgeting.
    Working capital management.
    Agency cost analysis.
    Financial depreciation.
    Capital structure.

Question 7
All else equal, the contribution margin must increase as:

The variable cost per unit declines.
    Sales price per unit declines.
    The sales price minus the fixed cost per unit increases.
    Both the sales price and variable cost per unit increase.
    The fixed cost per unit declines.

Question 8
An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the _____ rate.

    Periodic interest
    Effective annual
    Stated interest
    Daily interest
    Compound interest

Question 9
Futures contracts contrast with forward contracts by:

    Providing an option for the buyer rather than an obligation.
    Allowing the parties to negotiate the contract size.
    Allowing the seller to deliver any day during the delivery month.
    Marking to the market on a weekly basis.
    Requiring contract fulfillment by the two originating parties.

Question 10
The discount rate that makes the net present value of an investment exactly equal to zero is called the:

    Equalizer.
    External rate of return.
Internal rate of return.
    Profitability index.
    Average accounting return.

Question 11
Book value:

    Is adjusted to market value whenever the market value exceeds the stated book value.
    Generally tends to exceed market value when fixed assets are included.
    Is equivalent to market value for firms with fixed assets.
    Is based on historical cost.
    Is more of a financial than an accounting valuation.

Question 12
A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and $700 for Years 1 to 4, respectively. What is the payback period?

    3.98 years
    2.97 years
    2.84 years
never
    3.92 years

Question 13
Lois is purchasing an annuity that will pay $5,000 annually for 20 years, with the first annuity payment made on the date of purchase. What is the value of the annuity on the purchase date given a discount rate of 7 percent?

    $56,677.98
    $56,191.91
    $66,916.21
    $52,970.07
    $54,282.98

Question 14
The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:

    Arithmetic average return.
    Risk premium.
    Geometric average return.
    Time premium.
    Inflation premium.

Question 15
Ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as:

    Asset management ratios.
    Profitability ratios.
    Market value ratios.
    Long-term solvency measures.
    Liquidity measures.

Question 16
Which term defines the tax rate that applies to the next dollar of taxable income earned?

    Total
    Deductible
    Marginal
    Residual
    Average

Question 17
Which one of the following statements is false?

    Investments in accounts receivable equal average daily sales times average collection period.
    Aging schedules are used to monitor accounts receivable.
    If sales are seasonal, the percentages shown on an aging schedule will vary during the year.
    An aging schedule includes only overdue accounts.
    Collection efforts may involve legal action.

Question 18
The underlying assumption of the dividend growth model is that a stock is worth:

    An amount computed as the next annual dividend divided by the required rate of return.
    The present value of the future income that the stock is expected to generate.
    The same amount as any other stock that pays the same current dividend and has the same required rate of return.
    The same amount to every investor regardless of their desired rate of return.
    An amount computed as the next annual dividend divided by the market rate of return.

Question 19
One disadvantage of the corporate form of business ownership is the:

    Limited liability protection provided for all owners.
Firms ability to raise cash.
Double taxation of profits.
    Unlimited life of the firm.
    Difficulties encountered when changing ownership.

Question 20
All else held constant, interest rate risk will increase when the time to maturity:

    Decreases or the coupon rate increases.
    Increases or the coupon rate increases.
    Decreases or the coupon rate decreases.
    Decreases and the coupon rate equals zero.
Increases or the coupon rate decreases.

Question 21
The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _____ costs.

    Flotation
    Capital structure
    Indirect bankruptcy
    Financial solvency
    Direct bankruptcy

Question 22
The market price of a bond increases when the:

    Discount rate decreases.
    Coupon is paid annually rather than semiannually.
    Coupon rate decreases.
    Par value decreases.
    Face value decreases.

Question 23
A firm has a debt-equity ratio of .64, a pretax cost of debt of 8.5 percent, and a required return on assets of 12.6 percent. What is the cost of equity if you ignore taxes?

    16.38%
    8.55%
    8.06%
    15.22%
    11.12%

Question 24
Under the _______ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _______ method, the underwriter does not purchase the shares but merely acts as an agent.

    Seasoned; unseasoned
Firm commitment; best efforts
    Best efforts; firm commitment
    Negotiated offer; competitive offer
    Competitive offer; negotiated offer

Question 25
The cash flow resulting from a firm's ongoing, normal business activities is referred to as the:

    Cash flow to retained earnings.
    Operating cash flow.
    Cash flow to investors.
    Net capital spending.
    Additions to net working capital.

Question 26
Which one of the following is an example of a nondiversifiable risk?

    A well-managed firm reduces its work force and automates several jobs
    A key employee suddenly resigns and accepts employment with a key competitor
    A well-respected president of a firm suddenly resigns
    A well-respected chairman of the Federal Reserve Bank suddenly resigns
    A poorly managed firm suddenly goes out of business due to lack of sales

Question 27
Which one of these statements is correct concerning the cash cycle?

    A positive cash cycle is preferable to a negative cash cycle.
    Adopting a more liberal accounts receivable policy will tend to decrease the cash cycle.
    Increasing the accounts payable period increases the cash cycle.
    The longer the cash cycle, the more likely a firm will need external financing.
    The cash cycle can exceed the operating cycle if the payables period is equal to zero.

Question 28
An efficient capital market is one in which:

    Security prices reflect all available information.
    Taxes are irrelevant.
    All investments earn the market rate of return.
    Brokerage commissions are zero.
    Securities always offer a positive NPV.

Question 29
You plan to invest $6,500 for three years at 4 percent simple interest. What will your investment be worth at the end of the three years?

    $7,280.00
    $6,941.11
    $7,250.00
    $7,311.62
    $6,760.00

Question 30
What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent?

    $6,671.13
    $7,253.72
    $6,643.29
$6,395.31
    $6,023.58