February 26, 2019

Which one of the following best states the primary goal of financial management?

A. maximize current dividends per share

B. maximize the current value per share

C. increase cash flow and avoid financial distress

D. minimize operational costs while maximizing firm efficiency

E. maintain steady growth while increasing current profits

A project has an initial cost of $18,400 and produces cash inflows of $7,200, $8,900,

and $7,500 over three years, respectively. What is the discounted payback period if the

required rate of return is 16 percent?

A. 2.31 years

B. 2.45 years

C. 2.55 years

D. 2.62 years

E. never

Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no

debt. Penn believes the acquisition will increase its total aftertax annual cash flows by

$3.7 million indefinitely. The current market value of Teller is $103 million, and that of

Penn is $151.7 million. The appropriate discount rate for the incremental cash flows is 9

percent. Penn is trying to decide whether it should offer 44 percent of its stock of $133

million in cash to Teller's shareholders. The cost of the cash alternative is _____, while

the cost of the stock alternative is _____.

A. $103,000,000; $130,156,889

B. $103,000,000; $133,000,000

C. $133,000,000; $103,000,000

D. $133,000,000; $130,156,889

E. $236,000,000; $103,000,000

How much will you pay per pound for a September 130 orange juice futures call

option?

Orange juice - 15,000 lbs: U.S. cents per lb.

A. $0.0045

B. $0.0065

C. $0.0450

D. $0.0650

E. $0.1135

Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with

similar characteristics are yielding 6.75 percent. The company also has 750,000 shares

of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The

preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for

$42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market

is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted

average cost of capital?

A. 10.39 percent

B. 10.64 percent

C. 11.18 percent

D. 11.30 percent

E. 11.56 percent

Why is payback often used as the sole method of analyzing a proposed small project?

A. Payback considers the time value of money.

B. All relevant cash flows are included in the payback analysis.

C. It is the only method where the benefits of the analysis outweigh the costs of that

analysis.

D. Payback is the most desirable of the various financial methods of analysis.

E. Payback is focused on the long-term impact of a project.

Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance

limit of $95,000. The standard deviation of the disbursements is $14,600. The

applicable interest rate is 4.8 percent and the fixed cost of transferring funds is $50.

What is this firm's total cost of holding cash based on the BAT model?

A. $1,431

B. $2,862

C. $3,034

D. $4,912

E. $4,946

Mike is a stock broker and financial planner. Phil is one of Mike's clients. Phil prefers

to meet with Mike just once a year to review his investment portfolio. At their most

recent meeting, Phil stated he believes the stock market is going to decline in value over

the next six months. Thus, Phil instructed Mike to sell every stock he owns that is

currently worth more than what he paid to purchase it. Phil also instructed Mike to

retain any stock that would create a capital loss if sold. Phil is displaying the behavior

known as:

A. overconfidence.

B. arbitrage theory.

C. the disposition effect.

D. the house money effect.

E. a confirmation bias.

Which one of the following statements is correct concerning a portfolio beta?

A. Portfolio betas range between -1.0 and +1.0.

B. A portfolio beta is a weighted average of the betas of the individual securities

contained in the portfolio.

C. A portfolio beta cannot be computed from the betas of the individual securities

comprising the portfolio because some risk is eliminated via diversification.

D. A portfolio of U.S. Treasury bills will have a beta of +1.0.

E. The beta of a market portfolio is equal to zero.

In the spot market, $1 is currently equal to 0.6211. Assume the expected inflation rate in

the U.K. is 4.2 percent while it is 3.4 percent in the U.S. What is the expected exchange

rate one year from now if relative purchasing power parity exists?

A. 0.6161

B. 0.6178

C. 0.6239

D. 0.6261

E. 0.6278

We are evaluating a project that costs $854,000, has a 15-year life, and has no salvage

value. Assume that depreciation is straight-line to zero over the life of the project. Sales

are projected at 154,000 units per year. Price per unit is $41, variable cost per unit is

$20, and fixed costs are $865,102 per year. The tax rate is 33 percent, and we require a

14 percent return on this project. Suppose the projections given for price, quantity,

variable costs, and fixed costs are all accurate to within ±14 percent. What is the worst-

case NPV?

A. $984,613

B. $1,267,008

C. $1,489,511

D. $1,782,409

E. $1,993,870

The primary purpose of a flip-in provision is to:

A. increase the number of shares outstanding while also increasing the value per share.

B. dilute a corporate raider's ownership position.

C. reduce the market value of each share of stock.

D. give the existing corporate directors the sole right to remove a poison pill.

E. provide additional compensation to any senior manager who loses his or her job as a

result of a corporate takeover.

Which of the following are current assets?

I. patent

II. Inventory

III. accounts payable

IV. cash

A. I and III only

B. II and IV only

C. I, II, and IV only

D. I, II and III only

E. II, III, and IV only

Which one of the following is an underlying assumption of the dividend growth model?

A. A stock has the same value to every investor.

B. A stock's value is equal to the discounted present value of the future cash flows

which it generates.

C. A stock's value changes in direct relation to the required return.

D. Stocks that pay the same annual dividend have equal market values.

E. The dividend growth rate is inversely related to a stock's market price.

A supplier grants your firm credit terms of 2/10, net 40. What is the effective annual

rate of the discount if the firm purchases $4,600 worth of merchandise?

A. 27.24 percent

B. 27.86 percent

C. 28.80 percent

D. 29.03 percent

E. 29.27 percent

You are borrowing $17,800 to buy a car. The terms of the loan call for monthly

payments for 5 years at 8.6 percent interest. What is the amount of each payment?

A. $287.71

B. $291.40

C. $301.12

D. $342.76

E. $366.05

High Mountain Foods has an equity multiplier of 1.55, a total asset turnover of 1.3, and

a profit margin of 7.5 percent. What is the return on equity?

A. 8.94 percent

B. 10.87 percent

C. 12.69 percent

D. 14.38 percent

E. 15.11 percent

Heer Enterprises needs someone to supply it with 225,000 cartons of machine screws

per year to support its manufacturing needs over the next 7 years, and you've decided to

bid on the contract. It will cost you $1,170,000 to install the equipment necessary to

start production; you'll depreciate this cost straight-line to zero over the project's life.

You estimate that in 7 years, this equipment can be salvaged for $75,000. Your fixed

production costs will be $360,000 per year, and your variable production costs should

be $12.75 per carton. You also need an initial investment in net working capital of

$112,500, all of which will be recovered when the project ends. Your tax rate is 32

percent and you require a 13 percent return on your investment. What bid price per

carton should you submit?

A. $17.04

B. $16.56

C. $15.79

D. $15.03

E. $14.81

You just received $225,000 from an insurance settlement. You have decided to set this

money aside and invest it for your retirement. Currently, your goal is to retire 25 years

from today. How much more will you have in your account on the day you retire if you

can earn an average return of 10.5 percent rather than just 8 percent?

A. $417,137

B. $689,509

C. $1,050,423

D. $1,189,576

E. $1,818,342

What is the standard deviation of the returns on a $30,000 portfolio which consists of

stocks S and T? Stock S is valued at $12,000.

A. 1.07 percent

B. 1.22 percent

C. 1.36 percent

D. 1.49 percent

E. 1.63 percent

Assume the spot rate on the Canadian dollar is C$0.9872. The risk-free nominal rate in

the U.S. is 5.4 percent while it is only 3.8 percent in Canada. Which one of the

following four-year forward rates best establishes the approximate interest rate parity

condition?

A. C$0.9255

B. C$0.9308

C. C$1.0267

D. C$1.0519

E. C$1.0597

Which one of the following increases the net present value of a project?

A. an increase in the required rate of return

B. an increase in the initial capital requirement

C. a deferment of some cash inflows until a later year

D. an increase in the aftertax salvage value of the fixed assets

E. a reduction in the final cash inflow

Markley and Stearns is a multi-divisional firm that uses its WACC as the discount rate

for all proposed projects. Each division is in a separate line of business and each

presents risks unique to those lines. Given this, a division within the firm will tend to:

A. receive less project funding if its line of business is riskier than that of the other

divisions.

B. avoid risky projects so it can receive more project funding.

C. become less risky over time based on the projects that are accepted.

D. have equal probability of receiving funding as compared to the other divisions.

E. prefer higher risk projects over lower risk projects.

The stock of Edwards Homes, Inc. has a current market value of $23 a share. The 3-

month call with a strike price of $20 is selling for $3.80 while the 3-month put with a

strike price of $20 is priced at $0.54. What is the continuously compounded risk-free

rate of return?

A. 4.43 percent

B. 4.50 percent

C. 4.68 percent

D. 5.00 percent

E. 5.23 percent

This afternoon, you deposited $1,000 into a retirement savings account. The account

will compound interest at 6 percent annually. You will not withdraw any principal or

interest until you retire in forty years. Which one of the following statements is correct?

A. The interest you earn six years from now will equal the interest you earn ten years

from now.

B. The interest amount you earn will double in value every year.

C. The total amount of interest you will earn will equal $1,000 × .06 × 40.

D. The present value of this investment is equal to $1,000.

E. The future value of this amount is equal to $1,000 × (1 + 40).06.

Which one of the following statements concerning a sole proprietorship is correct?

A. The life of a sole proprietorship is potentially unlimited.

B. A sole proprietor can generally raise large sums of capital quite easily.

C. Transferring ownership of a sole proprietorship is easier than transferring ownership

of a corporation.

D. A sole proprietorship is taxed the same as a C corporation.

E. It is easy to create a sole proprietorship.

Which of the following statements is correct concerning the term structure of interest

rates?

I. Expectations of lower inflation rates in the future tend to lower the slope of the term

structure of interest rates.

II. The term structure of interest rates includes both an inflation premium and an

interest rate risk premium.

III. The real rate of return has minimal, if any, affect on the slope of the term structure

of interest rates.

IV. The term structure of interest rates and the time to maturity are always directly

related.

A. I and II only

B. II and IV only

C. I, II, and III only

D. II, III, and IV only

E. I, II, and IV only

You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero

intrinsic value. Which one of the following best describes this option?

A. worthless

B. unfunded

C. expired

D. in-the-money

E. out-of-the-money

Consider a firm with a contract to sell an asset 3 years from now for $90,000. The asset

costs $71,000 to produce today. At what rate will the firm just break even on this

contract?

A. 7.87 percent

B. 8.01 percent

C. 8.23 percent

D. 8.57 percent

E. 8.90 percent

What is the present value of $150,000 to be received 8 years from today if the discount

rate is 11 percent?

A. $65,088.97

B. $71,147.07

C. $74,141.41

D. $79,806.18

E. $83,291.06

What concerns might a loan officer have when loaning funds to a sole proprietorship

that he or she might not have when loaning funds to a corporation?

Explain how the unethical use of uncollected funds has been impacted by the growth of

on-line retailing and banking.

Compensating balances are frequently a part of revolving lending arrangements with

banks, yet they add to the cost of financing for the borrower. Why, then, would

borrowers agree to such terms? What other types of alternative financing are available?

What are the key features of the accounting, cash, and financial break-even points?

Float management systems may provide only minimal benefits to a firm. Given that

most firms have other projects with higher positive net present values, why should a

firm's managers spend time implementing a float management system?

It is commonly recommended that the managers of a firm compare the performance of

their firm to that of its peers.

Give an example of a protective put and explain how this strategy reduces investor risk.

What is cross-hedging? Why do you suppose firms use this method of risk

management? What are some of the drawbacks?

From a liability point of view, what is the difference between investing in a sole

proprietorship and a general partnership?

How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial

intent of that Act?

Explain how the slope of the security market line is determined and why every stock

that is correctly priced, according to CAPM, will lie on this line.

What is the relationship between the value of the dollar and the value of the euro in

relation to the rate of inflation in the United States?

Identify some real-world factors which might make it more difficult for an individual to

effectively create a homemade dividend policy.

Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum

game".

Why might a firm opt to sell and leaseback an asset which it currently owns?

What lesson does the future value formula provide for young workers who are looking

ahead to retiring some day?

How can an investor lose money on a stock while making money on a bond investment

if there is a reward for bearing risk? Aren't stocks riskier than bonds?

Which do you feel is the more appropriate upper limit for the credit period that a seller

offers to a buyer: the buyer's operating cycle or the buyer's inventory period?

Provide an example of a managerial decision that illustrates each one of the following

behaviors:

Behavior: Overconfidence

Example:

Behavior: Affect heuristic

Example:

Behavior: Loss aversion

Example:

Student answers will vary but should correctly display the type of behavior indicated.