Busn 379 Week 8 Final Exam Page 1 Tco 4 Which Of The Following

BUSN 379 – Week 8 : Final Exam

page 1

1. (TCO 4) Which of the following is true regarding the evaluation of projects? (Points : 4)
sunk costs should be included
erosion effects should not be considered
financing costs are not included
opportunity costs are irrelevant

2. (TCO 4) There are several disadvantages to the payback method, among them: (Points : 4)
payback ignores cash flows beyond the cutoff.
payback can be used in conjunction with time adjusted methods of evaluation.
payback is easy to use and to understand.
none of the above is a disadvantage.

3. (TCO 3 and 4) You can ensure that an investment is expected to create value for (Points : 4)
have a PI equal to zero.
produce negative rates of return.
have positive AARs.
have positive IRRs.
have positive NPVs.

4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 15 percent?

Year 0 1 2 3 4
Cash flow -$45,000 $11,520 $13,630 $16,470 $18,990
(Points : 4)
-$2,989.48
-$2,599.55
$1,153.37
$2,880.08
$3,312.09

5. (TCO 4) Leward Manufacturing is spending $115,000 to update its equipment. This is necessary if the firm wishes to be competitive in the marketplace and provide a wide array of product models. The company estimates that these updates will improve its cash inflows by $27,500 a year, for eight years. What is the payback period? (Points : 4)
4.18 years
5.82 years
6.62 years
7.79 years
This project never pays back

6. (TCO 4) The postponement of a project until conditions are more favorable: (Points : 4)
is not a valuable option.
is referred to as the option to extend.
could cause a negative net present value project to become a positive net present value project.
will generally cause the internal rate of return for a project to decline.

7. (TCO 4) ____________, refers to the situation a firm faces when it has positive net present value projects, but cannot obtain financing for those projects. (Points : 4)
capital planning.
soft rationing.
capital rationing.
hard rationing.
a sunk cause.

8. (TCO 3 and 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points : 4)
The net present value of the project is $11,000
This project should be accepted because it has a negative net present value
This project should be accepted because it has a payback higher than 3 years
The net present value of the project is close to $1,000

9. (TCO 4) Assume Company X plans to invest $60,000 in new computers. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amount under MACRS? (Points : 4)
$12,000
$8,575
$19,800
None of the above

10. (TCO 1 and 4) Assume a project has earnings before depreciation, and taxes of $110,000, depreciation of $40,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? (Points : 4)
$47,000
$89,000
a loss of $21,000
none of these

11. (TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4)
is diversifiable
is the total risk associated with surprise events
it is measured by beta
it is measured by standard deviation

12. (TCO 8) Which statement is not true regarding risk? (Points : 4)
the expected return is always the same as the actual return
a key to assess risk is determining how much risk an investment adds to a portfolio
risks can not always be diversified
the higher the risk, the higher the return investors require for the investment

13. (TCO 8) The stock of Chocolate Galore is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock?
State of Economy Probability of State of Economy Rate of Return
Recession .02 -.06
Normal .88 .11
Boom .10 .17
(Points : 4)
7.33 percent
9.82 percent
11.26 percent
11.33 percent
11.50 percent

14. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock A? (Points : 4)
14.79 percent
15.91 percent
18.42 percent
19.07 percent
25.72 percent

15. (TCO 8) You currently own a portfolio valued at $24,000 that has a beta of 1.1. You have another $8,000 to invest, and would like to invest it in a manner such that the risk of the new portfolio matches that of the overall market. What does the beta of the new security have to be? (Points : 4)
.46
.55
.61
.70
.90

page 2

1. (TCO 8) Company insiders cannot earn excess profits based on the knowledge they have related to their employer if the financial markets are: (Points : 4)
weak form efficient.
strong form efficient.
semistrong form efficient.
efficient at any level.
aware that the trader is an insider.

2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 9 percent (after-tax) and common equity at a cost of 16 percent. Assume debt and common equity each represent 50 percent of the firm’s capital structure. What is the weighted average cost of capital? (Points : 4)
between 4.5% and 8%
more than 13%
between 12 and 13%
between 13 and 14%
none of the above

3. (TCO 5, 6 and 7) An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to eight percent. If the required rate of return is 13 percent, what is its current price? (Points : 4)
$103.68
$36.92
$96.00
none of these

4. (TCO 5, 6 and 7) Which of the following is true regarding the cost of debt? (Points : 4)
It is the same as cost of equity.
It is the interest rate that the firm pays on current/existing borrowing.
An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding.
All of the above are true.

5. (TCO 5) Which of the following is not true regarding the cost of retained earnings? (Points : 4)
it is relevant to the WACC
does not require new funds to be raised
has associated flotation costs
has a cost, which is the opportunity cost associated with stockholder funds

6. (TCO 4) A project has the following cash flows. What is the internal rate of return?

Year 0 1 2 3
Cash flow -$195,600 $99,800 $87,600 $75,300
(Points : 4)
less than 5%
between 5 and 15%
between 15 and 18%
more than 21%

7. (TCO 5, 6 and 7) Which one of the following is a correct statement regarding a firm’s weighted average cost of capital (WACC)? (Points : 4)
the WACC can be used as the required return for all new projects.
the WACC of a leveraged firm will decrease when the tax rate decreases.
an increase in the market risk premium will tend to decrease a firm’s WACC.
the WACC is a starting point for the subjective approach to setting discount rates.
a reduction in the risk level of a firm will tend to increase the firm’s WACC.

8. (TCO 5, 6 and 7) The six percent preferred stock of FKH Manufacturing is selling for $62 a share. What is the firm’s cost of preferred stock, if the tax rate is 34 percent and the par value per share is $100? (Points : 4)
5.98%
7.06%
8.05%
9.68%
10.10%

9. (TCO 2) Which one of the following statements is true concerning a bankruptcy? (Points : 4)
a Chapter 7 bankruptcy is a reorganization proceeding.
a “prepack” is intended to shorten the time a firm spends in bankruptcy.
the absolute priority rule applies to both Chapter 7 and Chapter 11 bankruptcy proceedings, and must be adhered to by the courts.
creditors cannot force a firm into bankruptcy, even though they might like to do so.
a reorganization plan, can only be approved if the firm’s creditors all agree with the plan.

10. (TCO 5) Which of the following statements is false regarding the cost of capital? (Points : 4)
The cost of capital should consider the flotation costs.
All other being equal, it is preferable to use market value weights than book value weights.
The WACC is the most appropriate discount rate for all projects.
Should include the cost of retained earnings.

11. (TCO 2) Select any actions that do not affect the cash account. (Points : 4)
Goods are sold cash
An interest payment on a notes payable is made
A payment due is received from a client
Dividends are paid to shareholders
Inventory is purchased and paid for with credit

12. (TCO 2) Which of the following statements is true? (Points : 4)
Firms should avoid offering credit at all cost.
An increase in a firm’s average collection period generally indicates that an increased number of customers are taking advantage of the cash discount.
The costs of the credit application process and the costs expended in the collection process are carrying costs of granting credit.
Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.
The optimal credit policy, is the policy that produces the largest amount of sales for a firm.

13. (TCO 2) All else constant, a decrease in the accounts receivable period will: (Points : 4)
lengthen the accounts payable period.
shorten the inventory period.
lengthen the operating cycle.
shorten the cash cycle.
shorten the accounts payable period.

14. (TCO 2) The Yellow Box has the following estimated quarterly sales for next year. The accounts receivable period is 45 days. What is the expected accounts receivable balance at the end of the third quarter? Assume each month has 30 days.

Q1 Q2 Q3 Q4
Sales $1,200 $1,400 $1,800 $1,700
(Points : 4)
$600
$750
$900
$1,050
$1,200

15. (TCO 1) Why is maximization of the current value per share a more appropriate financial management goal than profit maximization? (Points : 4)
Because by maximizing the current stock value, you also maximize the company’s profit for the year.
Because this criterion is non-ambiguous.
Because financial managers always act in the best interest of shareholders.
Because it creates short-term gains in the financial statements.

page 4

1. (TCO 6) Which of the following is true regarding put bonds? (Points : 4)
Have coupons that depend on the company’s income
Can be exchanged for a fixed number of shares before maturity only
Can be exchanged for a fixed number of shares before maturity
Allow the holder to require the issuer to buy the bond back

2. (TCO 6 and 7) The document that outlines the covenants and duties existing between bondholders and the issuing corporation is called (Points : 4)
an indenture.
a debenture.
secured debt.
protective covenants.

3. (TCO 6) Company A has a bond outstanding with $90 annual interest payment, a market price of $820, and a maturity date in five years. Assume the par value to be $1,000. What is the bond’s yield to maturity? (Points : 4)
9%
14%
11%
Cannot be determined
None of the above

4. (TCO 2) Which of the following does not reduce collection float? (Points : 4)
consolidate all lockboxes into one lockbox, located near the home office.
consolidate all lockboxes into one lockbox, located far from the home office.
make sure all checks it receives are properly dated and signed.
utilize the benefits of the Check Clearing Act for the 21st Century.

5. (TCO 2) Storage and tracking costs, insurance and taxes, and losses due to theft are examples of: (Points : 4)
Inventory depletion costs
Sunk costs
Inventory costs
None of the above

6. (TCO 1) Recent announcements of massive layoffs have increased stock prices for certain companies. Critics argue that this reaction encourages companies to fire employees. Do you agree or disagree? (Points : 10)

7. (TCO 4) What is an opportunity cost? Provide two real-life examples of opportunity costs for a project. Should opportunity costs be included in the project analysis process? Why or why not? Explain your rationale. (Points : 10)

8. (TCO 8) What is the difference between business risk and financial risk? If Company A has a higher business risk than Company B, should its cost of capital be higher? Why or why not? Explain your rationale. (Points : 10)

9. (TCO 2) What are some important elements of the collection policy? (Points : 10)

10. (TCO 6 and 7) Consider the following statement: “In order to maximize value, all firms should maintain a 30/70 debt to equity ratio”. Do you believe this statement is correct? Explain your rationale. (Points : 10)

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