FC 859 Midterm | Course Paper

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1) Financial breakeven point represents the level of earnings after interest and taxes

necessary for a firm to cover its fixed operating and financial changesthat is, the point

at which dividends per share is equal to zero.

2) In exchange for the tailor-made maturity date provided by the repurchase agreement,

a bank or security dealer provides a return slightly below than obtainable through

outright purchase of similar marketable securities.

3) Capital expenditure proposals are reviewed to assess their appropriateness in light of

a firm’s overall objectives and plans, and to evaluate their economic validity.

4) The economic order quantity (EOQ) is the order quantity which minimizes the

carrying costs per unit per period.

5) A call premium is the amount by which the call price exceeds the market price of the

bond.

6) In partnerships, partners can readily transfer their wealth to other partners.

7) Coefficient of variation is a measure of relative dispersion used in comparing the

risks of assets with differing expected return.

8) One function of breakeven analysis is to ________.

A) determine the profit attributable to each stockholder

B) evaluate the effect of leverage on a firm’s risks and returns

C) evaluate the profitability of various sales levels

D) determine the amount of financing needed by the firm

9) In the Gordon model, the value of a common stock is the ________.

A) net value of all assets which are liquidated for their exact accounting value

B) actual amount each common stockholder would expect to receive if the firm’s assets

are sold

C) present value of a non-growing dividend stream

D) present value of a constant growing dividend stream

10) The basic strategies that should be employed by a business firm in managing cash

includes ________.

A) paying accounts payable as early as possible

B) turning over inventory as quickly as possible, avoiding stockouts

C) operating in a fashion that requires maximum cash

D) extending the credit period allowed to customers

11) Table 12.6

Yong Importers, an Asian import company, is evaluating two mutually exclusive

projects, A and B. The relevant cash flows for each project are given in the table below.

The cost of capital for use in evaluating each of these equally risky projects is 10

percent.

Which project should be chosen using the Annualized NPV approach? (See Table 12.6)

A) Project A because its annualized NPV is higher

B) Project B because its NPV is higher

C) Project A because its IRR is higher

D) Project B because its annualized NPV is higher

12) Table 11.2

Computer Disk Duplicators, Inc. has been considering several capital investment

proposals for the year beginning in 2014. For each investment proposal, the relevant

cash flows and other relevant financial data are summarized in the table below. In the

case of a replacement decision, the total installed cost of the equipment will be partially

offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on

ordinary income and on long-term capital gains. The firm’s cost of capital is 15 percent.

________________________________________________________

*Not applicable

For Proposal 3, the tax effect on the sale of the existing asset results in ________. (See

Table 11.2)

A) $8,000 tax liability

B) $16,000 tax liability

C) $20,000 tax liability

D) $23,200 tax liability

13) Thelma is planning for her son’s college education to begin five years from today.

She estimates the yearly tuition, books, and living expenses to be $5,000 per year for a

four-year degree, assuming th expenses incur only at the end of the year. How much

must Thelma deposit today, at an interest rate of 8 percent, for her son to be able to

withdraw $5,000 per year for four years of college?

A) $20,000

B) $13,620

C) $39,520

D) $11,270

14) The risk resulting from the effects of changes in foreign exchange rates on the

firm’s value is ________.

A) economic exposure

B) macro political risk

C) accounting exposure

D) micro political risk

15) The primary activity of a financial manager is ________.

A) analyzing accrued earnings

B) making an investment decision

C) preparing organization charts

D) auditing financial statements

16) ADRs are ________.

A) securities, backed by American depositary shares (ADSs), that permit U.S. investors

to hold shares of non-U.S. companies and trade them in U.S. markets

B) securities, backed by Securities Exchange Commission (SEC), that permit all

investors to hold shares of U.S. companies and trade them in U.S. markets

C) securities, backed by American depositary shares (ADSs), that permit non-U.S.

investors to hold shares of U.S. companies and trade them in U.S. markets

D) securities, backed by Securities Exchange Commission (SEC), that permit U.S.

investors to hold shares of non-U.S. companies and trade them in international markets

17) Which of the following affects the cost of a bond?

A) maturity of a bond

B) dividend policy

C) fixed assets purchased from the proceeds of bond issue

D) money market regulations

18) The long-run effect on the earnings per share of the merged firm depends largely on

________.

A) the pre-merger P/E ratio

B) the ratio of exchange

C) the synergy of the merged firm

D) the tax considerations

19) For firms with high fixed costs, the percent-of-sales approach for preparing a pro

forma income statement tends to ________.

A) overestimate profits when sales are increasing

B) underestimate profits when sales are increasing

C) underestimate profits when assets are increasing

D) overestimate profits when assets are increasing

20) Cash flows and risk are the key determinants in share price. Increased risk, other