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Finance Final Exam 1: False
Finance Final Exam 1: False
Q1. The cost of capital for an all-equity-financed company that pays no dividends
is zero.
True
False
Q2. Grandma’s Applesauce, Inc. has a 0.60 probability of a good year with
operating cash flow of $50,000; and 0.40 probability of a bad year with operating
cash flow of $30,000. The company has a debt of $35,000 with 8 percent interest
due next year. Assuming the company has no means of servicing its debt other
than operations, and a 0% tax rate, which of the following is true?
Q3. Which of the following are sources of funds in a statement of sources and
uses?
I only
II and III
III and IV
I and IV
Q4. The higher the opportunity cost of capital the higher the NPV.
True
False
Q5. A company has net income of $20,000 and a tax rate of 35 percent. Its total
debt is $25,000, with principal payments of $5,000 due at the end of each year
and an annual interest rate of 8%. What will be the company’s interest tax shield
in the upcoming year?
$8750
$700
$9450
$2450
True
False
Q8. The item that roughly divides “real” from “financial” activities on an income
statement is:
EBIT
Interest Expense
SG&A Expense
None of the above
Q9. GoodTimes, Inc. has asset turnover of 0.5 times, a net profit margin of 10%
and average total assets of $100, what is its net income (assuming no unusual
items)?
$50
$500
$5
The answer cannot be determined with the information provided.
Q11. A company builds a new plant and finances its construction by issuing stock.
Which ratio is least likely to be affected, all else being equal?
Current ratio
Debt to equity ratio
Debt to asset ratio
Net fixed assets to total assets
Q12. Enterprise Free Cash Flows should include which of the following:
I. Capital expenditures
II. Financing costs
III. Taxes
IV. Working capital requirements
I and IV
I, II and IV
I , III and IV
I, II, III, IV
Q13. You are saving money for a down payment on a house. Suppose you want to
have total savings of $20,000 in 10 years time and you have currently $5,000.
What annual interest rate do you need to earn on your initial investment,
assuming you contribute no additional savings?
10.0%
18.5%
12.5%
15.0%
I , II, III
I only
I and III
III only
Q15. The cost of debt is generally lower than the cost of equity.
True
False
Ans:
11.1%
6.1%
6.0%
12.1%
Q18. The owners of a firm facing a high probability of bankruptcy prefer to invest
in ____ projects, because ______.
Q21. “Real” activities create cash for a business, while “financial” activities
distribute cash within the company.
True
False
True
False
True
False
Common stock
Gross profit
Long-term debt
Revolving credit
Q25. You are trying to decide whether to accept or reject a one-year project. The
project is estimated to generate $5,000 in incremental gross profit, which
includes $200 in depreciation. Incremental SG&A expense is $400. At a 35% tax
rate, the after-tax incremental cash flow is:
$2990
$3190
$3250
$3510
Q26. Which of the following expresses the value of a levered firm (VL) in the
Static Tradeoff model of optimal capital structure? [Note: VU denotes the value of
the unlevered firm; CFD denotes expected costs of financial distress; and PV
denotes present value.]
Q27. A firm is all equity financed, with 10,000 outstanding shares with a market
value of $20 each. Its net income was $30,000, and it decides to pay a cash
dividend of $2,000. Calculate the value of each share after the dividend payout.
$22.8
$20.0
$19.8
Not enough information
Q28. Share repurchases and dividend payouts are most likely to differ in their
True
False
Q30. Which of the following actions, all else being equal, will increase the
sustainable growth rate?
Q31. What is the present value of a growing perpetuity that makes a payment of
$100 in the first year, which thereafter grows at 3% per year? Apply a discount
rate of 7%.
$2000
$3500
$2500
$4000
Q32. A project with an internal rate of return greater than the cost of capital
should always be accepted.
True
False
True
False
Q35. A company’s beta (from the CAPM) is affected by its capital structure.
True
False
Q36. The Pecking Order Theory of capital structure implies a unique optimum
capital structure.
True
False
Q37. A company’s return on assets should be greater than its return on equity.
True
False
Ans:
10.8%
9.6%
12.1%
9.2%
Q40. Analysis of a company’s financial statements: Below are versions of the
balance sheet and income statement for Toys by Tom, Inc. Use this information to
answer the following question.
If sales in 2003 were $10,000, what is the compounded average growth rate?
8.6%
6.7%
6.3%
Not enough information available
Q41. A company has net working capital of $0, current liabilities of $25 and total
assets equal to $100. What is its current ratio?
0.0
1.0
0.5
4.0
Q42. The cash cycle measures the days required to produce finished goods or
delivered services.
True
False
Q44. The Static Tradeoff theory of capital structure implies that firms with higher
business risk should have lower leverage.
True
False
True
False
Q46. The sustainable growth rate is the maximum growth rate achievable over
an extended period of time.
True
False
I. Tax shields make debt financing more attractive, all else equal.
II. A firm’s debt ratio falls when it uses excess cash to pay dividends.
III. The cost of equity is low for firms that pay no dividends, all else equal.
IV. Bankruptcy costs decrease the benefits of debt financing all else equal.
I and IV
I, II and IV
I, III and IV
I, II, III and IV
205.00
300.00
315.25
500.00
agency costs.
barriers to entry.
asymmetric information.
tax shields and cost of financial distress
Q1. Which information is NOT required when calculating the weighted average
cost of capital for a company with debt?
Q3. Which of the following liabilities form part of a company’s “real” activities?
I. Short-term debt
II. Accounts payable
III. Accrued operating expenses
IV. Long-term debt
III only
II and III
I and IV
I only
6.9%
0.86
18%
1.2
Q6. The Pecking Order Theory of capital structure implies a unique optimum
capital structure.
True
False
Net income
Pro forma earnings
Operating profit
Net income before taxes
Q9. The owner of Grandma’s Applesauce is planning to retire after the coming
year. She has to repay a loan $50,000 plus 8 percent interest and must rely on
cash flow from operations to do so. Cash flow from operations is uncertain; there
is a 70% probability it will equal $65,000, and a 30% probability it will equal
$45,000. Assuming a tax rate of 0%, what is the owner’s expected cash flow after
debt service?
$9,000
$5,000
$11,000
$7,700
Q10. As EBIT drops, the return on equity (ROE) of a levered firm drops ______ the
ROE of an otherwise identical unlevered firm.
the same as
relatively more than
relatively less than
more or less than (it cannot be determined)
Days in inventory
Receivables turnover
Cash ratio
Average collection period
Q13. The sustainable growth rate is the maximum growth rate achievable over
an extended period of time.
True
False
Q14. The cost of debt is generally lower than the cost of equity.
True
False
Q15. It is possible for a company to grow faster than its sustainable growth rate.
True
False
True
False
True
False
Q18. What is the present value of a perpetuity of $100 given a discount rate of
5%?
$2,000
$3,000
$1,500
$500
True
False
True
False
Q23. For a firm with an optimal capital structure, the weighted average cost of
capital (WACC) is:
Q24. For which of the following generic businesses would you expect a
combination of high asset turnover and low profit margins?
Supermarkets
Banks
Software developers
Arlines
True
False
True
False
Q27. If you invest $2,000 today for three years at 5% interest paid annually, you
will earn a total of $______ in interest. Assume you re-invest all interest.
205.00
300.00
315.25
500.00
Court costs
Attorney and advisor fees
Lost sales due to customers and suppliers lost trust
All of the above
Q30. Suppose a riskless project requires an initial investment of $10 and will
generate a one-time cash inflow of $30 two years later. Assuming a risk-free
interest rate of 5%, which of the following statements about the project is NOT
true?
Q31. If you borrow capital to start a business and the money is provided interest-
free, then your cost of capital is zero.
True
False
Q32. A company has a retention rate of 50%, sales of $25,000, beginning equity
of $50,000 and profit margins of 10%, an asset turnover ratio of .75 and debt of
$10,000. What is its sustainable growth rate?
2.5%
1.7%
3.75%
Not enough information given
Q33. Which items are necessary in calculating the net present value of a project?
I. Investment outlays
II. Discount rate
III. Incremental cash flow
IV. Time period for the project
I, II and IV
I, II and III
II, III and IV
All of the above
Q34. Shareholders prefer high risk projects when facing a high probability of
bankruptcy because
I and III
I, II and III
I and IV
All of the above
Q36. The _________ states that the value of the firm is determined solely by the
value of its assets.
True
False
No arbitrage
No taxes
Corporate investments are risk-free
Symmetric information
Q40. The NPV rule, which says companies should invest in projects for which
NPV is greater than 0, depends on the assumption of value maximization.
True
False
Q41. A firm has $100 of average inventory, operating profit of $500 and sales of
$1,500. What will be its days in inventory?
36.5 days
24.3 days
73.0 days
Not enough information
Q42. The amount by which a project increases the value of the firm is given by
the project’s ______.
Seniority
Covenants
Callability
All of the above
Q44. Which of the following are equivalent under M&M proposition I?
Q45. Compute the net present value of an investment with 5 years of annual cash
inflows of $100 and two cash outflows, one today of $100 and one at the
beginning of the second year of $50. Use a discount rate of 10 percent.
$229.08
$287.60
$233.62
$271.53
True
False
True
False
True
False
Q50. Which of the following expresses the value of a levered firm (VL) in the
Static Tradeoff model of optimal capital structure? [Note: VU denotes the value of
the unlevered firm; CFD denotes expected costs of financial distress; and PV
denotes present value.]