FIN 370 Examination Answers
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1 What are reasons for the firm to
go abroad?
- Lower production cost
- Diversification
- All of the above
- Access to raw materials
2
Suppose that Model Nails, Inc.’s
capital structure features 60 percent equity, 40 percent debt, and that its
before-tax cost of debt is 6 percent, while its cost of equity is 10 percent.
If the appropriate weighted average tax rate is 28 percent, what will be Model
Nails’ WACC?
- 8.40 percent
- 7.73 percent
- 16.00 percent
- 8.00 percent
3
A firm is expected to pay a dividend
of $2.00 next year and $2.14 the following year. Financial analysts believe the
stock will be at their target price of $75.00 in two years. Compute the value
of this stock with a required return of 10 percent.
- $79.14
- $66.67
- $65.57
- $65.40
4
What’s the current yield of a 6
percent coupon corporate bond quoted at a price of 101.70?
- 5.9 percent
- 6.1 percent
- 6.0 percent
- 10.2 percent
5
We call the process of earning
interest on both the original deposit and on the earlier interest payments:
- multiplying.
- compounding.
- computing.
- discounting.
6
We can estimate a stock’s value
by__________.
- discounting the future dividends and future stock price
appreciation
- using the book value of the total assets divided by the
number of shares outstanding
- compounding the past dividends and past stock price
appreciation
- using the book value of the total stockholder equity section
7
You are trying to pick the
least-expensive machine for your company. You have two choices: machine A,
which will cost $50,000 to purchase and which will have OCF of -$3,500 annually
throughout the machine’s expected life of three years; and machine B, which
will cost $75,000 to purchase and which will have OCF of -$4,900 annually
throughout that machine’s four-year life. Both machines will be worthless at
the end of their life. If you intend to replace whichever type of machine you
choose with the same thing when its life runs out, again and again out into the
foreseeable future, and if your business has a cost of capital of 14 percent,
which one should you choose?
- Neither machine A nor B
- Machine B
- Both machines A and B
- Machine A
8
Which of these is the process of
estimating expected future cash flows of a project using only the relevant
parts of the balance sheet and income statements?
- Incremental cash flows
- Pro forma analysis
- Substitutionary analysis
- Cash flow analysis
9
We commonly measure the risk-return
relationship using which of the following?
- Standard deviation
- Expected returns
- Correlation coefficient
- Coefficient of variation
10
Which of these ratios show the
combined effects of liquidity, asset management, and debt management on the
overall operation results of the firm?
- Financial
- Profitability
- Liquidity
- Coverage
11
Which of these provide a forum in
which demanders of funds raise funds by issuing new financial instruments, such
as stocks and bonds?
- Money markets
- Investment banks
- Secondary markets
- Primary markets
12
When firms use multiple sources of
capital, they need to calculate the appropriate discount rate for valuing their
firm’s cash flows as__________.
- a weighted average of the capital components costs
- a sum of the capital components costs
- they apply to each asset as they are purchased with
their respective forms of debt or equity
- a simple average of the capital components costs
13
Five years ago, Jane invested $5,000
and locked in an 8 percent annual interest rate for 25 years (ending 20 years
from now). James can make a 20-year investment today and lock in a 10 percent
interest rate. How much money should he invest now in order to have the same
amount of money in 20 years as Jane?
- $3,464.11
- $5,089.91
- $3,160.43
- $7,346.64
14
Which of these is the term for
portfolios with the highest return possible for each risk level?
- Total portfolios
- Optimal portfolios
- Efficient portfolios
- Modern portfolios
15
Which of the following is a true
statement?
- If interest rates fall, no bonds will enjoy rising
values.
- If interest rates fall, U.S. Treasury bonds will have
decreasing values.
- If interest rates fall, all bonds will enjoy rising values.
- If interest rates fall, corporate bonds will have
decreasing values.
16
Which of these statements is true
regarding divisional WACC?
- Using a divisional WACC versus a WACC for the firm’s
current operations will result in quite a few incorrect decisions.
- Using a firm wide WACC to evaluate new projects would
have no impact on projects that present less risk than the firm’s average
beta.
- Using a simple firm wide WACC to evaluate new projects
would give an unfair advantage to projects that present less risk than the
firm’s average beta.
- Using a simple firm wide WACC to evaluate new projects
would give an unfair advantage to projects that present more risk than the
firm’s average beta.
17
Which of these does NOT perform
vital functions to securities markets of all sorts by channeling funds from
those with surplus funds to those with shortages of funds?
- Secondary markets
- Commercial banks
- Insurance companies
- Mutual funds
18
Financial plans include which of the
following?
- Pro forma Income Statement, Balance Sheet
- Schedule of Sales, Expenses, and Capital Expenditure
- All of the above
- Short Term and Long Term Plan
19
Will’s Wheels, Inc. reported a
debt-to-equity ratio of 0.65 times at the end of 2013. If the firm’s total debt
at year-end was $5 million, how much equity does Will’s Wheels have?
- $5 million
- $0.65 million
- $3.25 million
- $7.69 million
20
Which financial statement reports a
firm’s assets, liabilities, and equity at a particular point in time?
- Statement of retained earnings
- Statement of cash flows
- Income statement
- Balance sheet
22
Which financial statement reports
the amounts of cash that the firm generated and distributed during a particular
time period?
- Income statement
- Statement of cash flows
- Balance sheet
- statement of retained earnings
21
The top part of Mars, Inc.’s 2013
balance sheet is listed as follows (in millions of dollars).
What are Mars, Inc.’s current ratio,
quick ratio, and cash ratio for 2013?
-
3333, 0.5556, 0.1111
-
5, 6.0, 1.0
-
2, 1.0, 0.2
-
0.1111, 0.5556, 0.2
23
Which financial statement shows the
total revenues that a firm earns and the total expenses the firm incurs to
generate those revenues over a specific period of time — generally one year?
- Statement of cash flows
- Statement of retained earnings
- Income statement
- Balance sheet
24
Which of the following can create
ethical dilemmas between corporate managers and stockholders?
- Auditors
- Venture Capitalist
- Agency relationship
- Board of directors
25
Which of the following terms means
that during periods when interest rates change substantially, bondholders
experience distinct gains and losses in their bond investments?
- Credit quality risk
- Liquidity rate risk
- Interest rate risk
- Reinvestment rate risk
26
What are the tools available for the
manager in financial planning?
- Reducing collection period and delaying disbursement of
cash
- Delaying disbursement of cash and cash management
- Increasing inventory turnover and reducing collection
period
- Delaying disbursement of cash, reducing collection
period, cash management, and Increasing inventory turnover
27
The overall goal of the financial
manager is to__________.
- maximize earnings per share
- maximize net income
- maximize shareholder wealth
- minimize total costs
28
As new capital budgeting projects
arise, we must estimate__________.
- the float costs for financing the project
- when such projects will require cash flows
- the cost of the stock being sold for the specific
project
- the cost of the loan for the specific project
29
The Rule of 72 is a simple
mathematical approximation for__________.
the number of years required to
double an investment
- the payments required to double an investment
- the present value required to double an investment
- the number of years required to double an investment
- the future value required to double an investment
30
Which of these is used as a measure
of the total amount of available cash flow from a project?
- Operating cash flow
- Investment in operating capital
- Sunk cash flow
- Free cash flow
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