FIN 571 Final Exam

1. FIN 571 Final Exam
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1) Which of the following statements is true?
A. A security is a claim issued by a firm that pays owners interest, not dividends
B. A call option analyzes conflicts of interest and behavior in a principal-agent relationship
C. An agent-manager can never make bad decisions
D. The difference between the value of one action and the value of the best alternative is called
an opportunity cost
2) Book value, or net book value, refers to
A. the statement of a firm’s financial position at one point in time, including its assets and the
claims on those assets by creditors and owners
B. the price for which something could be bought or sold in a reasonable length of time, where
reasonable length of time is defined in terms of the item’s liquidity
C. an agent-manager never making bad decisions
D. the net of assets less liabilities shown in the accounting statements
3) Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9%
and the current yield is 10%. Which of the following statements is true?
A. The current yield was less than 9% when the bond was first issued
B. The current yield was greater than 9% when the bond was first issued
C. The market value of the bond is more than $1,000
D. The market value of the bond is less than $1,000
4) If the yield to maturity for a bond is less than the bond's coupon rate, the market value of the
bond is __________
A. greater than the par value
B. less than the par value
C. equal to the par value
D. cannot tell
5) For investors, the proper measure of a stock's risk is its __________
A. nondiversifiable risk
B. specific risk
C. nonsystematic risk
D. standard deviation
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2. 6) A company’s beta is -1.5. If the overall stock market decreases by 5%, what is the expected
change in the firm's stock price?
A. Share price decreases by 5%
B. Share price decreases by 6.5%
C. Share price increases by 7.5%
D. Share price decreases by 7.5%
7) Which of these investments would you expect to have the highest rate of return for the next 20
years?
A. U.S. Treasury bills
B. Long-term corporate bonds
C. Intermediate-term U.S. government bonds
D. Money market funds
8) Dimensions of risk include __________
A. uncertainty about the future outcome
B. the certainty of a negative outcome
C. the impossibility of the same return
D. uncertainty about yesterday’s outcome
9) One problem with using negative values for the proportion invested in the riskless asset to
represent a borrowed amount is that the implied borrowing rate of interest is the same as the
__________.
A. prime rate of interest
B. current rate of interest
C. lending rate of interest
D. nominal rate of interest
10) If you were willing to bet that the overall stock market was heading up on a sustained basis,
it would be logical to invest in
A. high beta stocks
B. low beta stocks
C. stocks with large amounts of unique risk
D. stocks that plot below the security market line
11) Stony Products has an inventory conversion period (ICP) of about 70 days. The receivables
collection period (RCP) is 30 days. The payables deferral period (PDP) is about 40 days. What is
Stony's cash conversion cycle (CCC)?
A. 100 days
B. 60 days
C. 140 days
D. 70 days
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3. 12) The main source of short-term operating capital is _________
A. trade credit
B. bank loans
C. bonds
D. sale of treasury stock
13) An investor’s risky portfolio is made up of individual stocks. Which of the following
statements about this portfolio is true?
A. Each stock in the portfolio has its own beta
B. Selling any stock in this portfolio will lower the beta of the portfolio
C. An investor cannot change the risk of this portfolio by her choice about personal leverage
D. Each stock in the portfolio will have a beta greater than 1
14) An all-equity-financed firm would __________.
A. not pay any income taxes, because interest would exactly offset its taxable income
B. pay corporate income taxes, because it would have interest expense
C. not pay corporate income taxes, because it would have no interest expense
D. pay corporate income taxes if its taxable income is positive
15) If a firm wants to lower its weighted average cost of capital (WACC), one way to do so
would be to
A. sell more common shares
B. sell more bonds
C. pay a cash dividend
D. issue a stock dividend
16) Boeing® is a world leader in commercial aircraft. In the face of competition, Boeing® often
faces a critical __________ decision: whether to develop a new generation of passenger aircraft
A. present value
B. payback
C. capital budgeting
D. dividend
17) Ideas for capital budgeting projects come from all levels within an organization. The bottom-
up process results in ideas moving __________ through the organization
A. downward
B. upward
C. sideways
D. any way
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4. 18) Which of the following statements is true?
A. A mutually exclusive project can be chosen independently of other projects
B. When undertaking one project prevents investing in another project, and vice versa, the
projects have a positive payback
C. A conventional project has an initial cash outflow followed by one or more expected future
cash inflows
D. Whenever projects are independent and conventional, the internal rate of return (IRR) and net
present value (NPV) methods will disagree
19) In practice, the __________ rule is the preferred criteria to accept or reject a capital
investment project
A. NPV
B. profitability index
C. IRR
D. payback
20) The Jerome Inc. western regional branch has been looking to install a new distribution
center. The analysts have run the numbers on the distribution center costs and annual inflow
from the investment. The project will cost $5 million at the beginning of the first year. The
project will generate $1 million in earnings before interest and taxes at the end of each year.
Jerome is in the 35% tax bracket and annual depreciation equates to $500,000 per year. The
distribution center’s end of the fifth year’s salvage equals its book value, or $2,500,000.
Compute the project’s NPV, assuming Jerome's WACC equals 12%.
A. -$1,238,328
B. $564,060
C. $1,825,731
D. -$66,776
21) The __________ method breaks down when evaluating projects in which the sign of the cash
flow changes
A. IRR
B. NVP
C. PI
D. Payback
22) Studies show systematic differences in capital structures across industries. These are due
primarily to differences in __________
A. a firm’s inventory turnover ratio
B. the ability of assets to support borrowing
C. accounting practices
D. management’s attitude toward what other industries are doing

5. 23) Capital structure decisions refer to the
A. dividend yield of the firm’s stock
B. blend of equity and debt used by the firm
C. capital gains available on the firm’s stock
D. maturity date for the firm’s securities
24) Which of the following statements concerning preferred stock is true?
A. Preferred stockholders have a prior claim on the income and assets of the firm, as compared
to the claims of lenders
B. Preferred stock dividends per share are normally increased as the earnings of the firm increase
C. Preferred dividends per share are usually not cut or suspended unless the firm is faced with
serious financial problems
D. Preferred stockholders are the ultimate owners of the firm
25) Mortgage bonds are __________
A. secured by a lien on the issuer’s general assets
B. secured by the lien on the issuer’s specific, real assets
C. usually secured by assets such as common shares of one of the issuer’s subsidiaries
D. a form of unsecured debt
26) __________ says to calculate the net advantage of leasing based on the incremental after-tax
benefits that leasing will provide
A. The capital market efficiency
B. The options principle
C. The principle of comparative advantage
D. The principle of incremental benefits
27) From the lessee’s viewpoint, the relevant discount rate for evaluating a lease versus buy
decision is the __________
A. cost of issuing new common stock
B. pretax cost of issuing debt
C. after-tax cost of issuing debt
D. lessor’s cost of debt
28) The wholesale price for Captain John’s is $0.612 per loaf, and the variable cost of production
is $0.387 per loaf. Captain John’s expects that expansion will allow them to sell an additional 4.5
million loaves in the next 5 years. What additional revenues minus expenses will be generated
from expansion?
A. $912,500
B. $1,000,500
C. $1,012,500
D. $1,102,500
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6. 29) Which of the following statements is true?
A. Soft capital rationing refers to the rationing imposed externally by limited funds for
borrowing from outside sources
B. Hard capital rationing refers to the rationing imposed internally by the firm
C. A post audit is a set of procedures for evaluating a capital budgeting decision after the fact
D. Few firms will engage in capital rationing
30) In efficient markets, as in the United States, market prices are not expected to be
__________
A. wrong
B. fair
C. followed by many analysts
D. incorporate all information
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