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ANSWERS
FIN 370 Final Exam
1)
The goal of the firm should be.
2) An example of a primary market transaction is
3) According to the agency problem, _________ represent the principals of a
corporation.
4) Which of the following is a principle of basic financial management?
5) Another name for the acid test ratio is the
6) The accounting rate of return on stockholders’ investments is measured by
7) If you are an investor, which of the following would you prefer?
8) The primary purpose of a cash budget is to
9) Which of the following is a non-cash expense?
10) The break-even model enables the manager of a firm to
11) A zero-coupon bond
12) If you have $20,000 in an account earning 8% annually, what constant amount
could you withdraw each year and have nothing remaining at the end of 5 years?
13) At what rate must $400 be compounded annually for it to grow to $716.40 in
10 years?
14) The present value of a single future sum
15) Which of the following is considered to be a spontaneous source of
financing?
16) Compute the payback period for a project with the following cash flows, if
the company’s discount rate is 12%. Initial outlay = $450
17) For the NPV criteria, a project is acceptable if the NPV is __________,
while for the profitability index, a project is acceptable if the profitability
index is __________.
18) Which of the following is considered to be a deficiency of the IRR?
19) The firm should accept independent projects if
20) The most expensive source of capital is
21) The cost associated with each additional dollar of financing for investment
projects is
22) The XYZ Company is planning a $50 million expansion. The expansion is to be
financed by selling $20 million in new debt and $30 million in new common
stock. Fin 370 final exam. The before-tax required rate of return on debt is
9%, and the required rate of return on equity is 14%. If the company is in the
40% tax bracket, what is the marginal cost of capital?
23) Shawhan Supply plans to maintain its optimal capital structure of 30% debt,
20% preferred stock, and 50% common stock far into the future. The required
return on each component is: debt–10%; preferred stock–11%; and common
stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must
Shawhan Supply earn on its investments if the value of the firm is to remain
unchanged?
24) Lever Brothers has a debt ratio (debt to assets) of 40%. Management is
wondering if its current capital structure is too conservative. Fin 370 week 5
final. Lever Brothers’ present EBIT is $3 million, and profits available to
common shareholders are $1,560,000, with 342,857 shares of common stock
outstanding. If the firm were to instead have a debt ratio of 60%, additional
interest expense would cause profits available to stockholders to decline to
$1,440,000, but only 228,571 common shares would be outstanding. What is the
difference in EPS at a debt ratio of 60% versus 40%?
25) Zybeck Corp. projects operating income of $4 million next year. The firm’s
income tax rate is 40%. Zybeck presently has 750,000 shares of common stock
which have a market value of $10 per share, no preferred stock, and no debt. Fin/370
final. The firm is considering two alternatives to finance a new product: (a)
the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new
shares of common stock. If Zybeck issues common stock this year, what will be
the projected EPS next year?
26) _________ risk is generally considered only a paper gain or loss.
27) Capital markets in foreign countries
28) Buying and selling in more than one market to make a riskless profit is
called
29) What keeps foreign exchange quotes in two different countries in line with
each other?
30) One reason for international investment is to reduce
