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DAVENPORT FINC620 FINAL EXAM 2016

DAVENPORT FINC620 FINAL EXAM 2016. Question

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Question 1

The interest tax shield is a key reason why:

A. the required rate of return on assets rises when debt is added to the capital structure.

B. the value of an unlevered firm is equal to the value of a levered firm.

C. the net cost of debt to a firm is generally less than the cost of equity.

D. the cost of debt is equal to the cost of equity for a levered firm.

E. firms prefer equity financing over debt financing.

4 points

Question 2

Rosita’s has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratio is .60 and the tax rate is .34. What is Rosita’s unlevered cost of capital?

A. 8.83%

B. 12.30%

C. 13.97%

D. 14.08%

E. 14.60%

138 = RU + (RU – .085) × .60 × (1 − .34); .17166 = 1.396RU; RU = .12297 = 12.30 %

Question 3

Juanita’s Steak House has \$12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?

A. \$2,823

B. \$2,887

C. \$4,080

D. \$4,500

E. \$4,633

Present value of the tax shield = .34×\$12,000 = \$4,080

Question 4

The Backwoods Lumber Co. has a debt-equity ratio of .80. The firm’s required return on assets is 12% and its cost of equity is 15.68%. What is the pre-tax cost of debt based on MM Proposition II with no taxes?

A. 6.76%

B. 7.00%

C. 7.25%

D. 7.40%

E. 7.50%

.1568 = .12 + (.12 – Rd)´.80; Rd= .074 = 7.40%

Question 5

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:

A. the capital market line which shows that all investors will only invest in the riskless asset.

B. the capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.

C. the security market line which shows that all investors will invest in the riskless asset only.

D. the security market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.

E. None of these.

Question 6

A stock with an actual return that lies above the security market line:

A. has more systematic risk than the overall market.

B. has more risk than warranted based on the realized rate of return.

C. has yielded a higher return than expected for the level of risk assumed.

D. has less systematic risk than the overall market.

E. has yielded a return equivalent to the level of risk assumed.

Question 7

The primary purpose of portfolio diversification is to:

A. increase returns and risks.

B. eliminate all risks.

C. eliminate asset-specific risk.

D. eliminate systematic risk.

E. lower both returns and risks.

Question 8

A portfolio contains two assets. The first asset comprises 40% of the portfolio and has a beta of 1.2. The other asset has a beta of 1.5. The portfolio beta is:

A. 1.35

B. 1.38

C. 1.42

D. 1.50

E. 1.55

βp = .4(1.2) + .6(1.5) = 1.38

Question 9

Payback is frequently used to analyze independent projects because:

A. it considers the time value of money.

B. all relevant cash flows are included in the analysis.

C. it is easy and quick to calculate.

D. it is the most desirable of all the available analytical methods from a financial perspective.

E. it produces better decisions than those made using either NPV or IRR.

Question 10

A project has an initial cost of \$2,100. The cash inflows are \$0, \$500, \$900, and \$700 over the next four years, respectively. What is the payback period?

A. 1 years

B. 2 years

C. 3 years

D. 4 years

E. never

Question 11

The payback period rule accepts all investment projects in which the payback period for the cash flows is:

A. greater than one.

B. greater than the cutoff point.

C. less than the cutoff point.

D. positive.

E. None of these.

Question 12

The internal rate of return for a project will increase if:

A. the initial cost of the project can be reduced.

B. the total amount of the cash inflows is reduced.

C. each cash inflow is moved such that it occurs one year later than originally projected.

D. the required rate of return is reduced.

E. the salvage value of the project is omitted from the analysis.

Question 13

An investment with an initial cost of \$14,000 produces cash flows of \$4,000 annually for 5 years. If the cash flow is evenly spread out over the year and the firm can borrow at 10%, the discounted payback period is _____ years.

A. 2.5

B. 2.68

C. 4.53

D. 4.87

E. Never

Question 14

Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.

A. overestimate; overestimate

B. overestimate; underestimate

C. underestimate; overestimate

D. underestimate; underestimate

E. accurately; accurately

Question 15

A stock has an expected rate of return of 8.3% and a standard deviation of 6.4%. Which one of the following best describes the probability that this stock will lose 11% or more in any one given year?

A. less than 0.5%

B. less than 1.0%

C. less than 1.5%

D. less than 2.5%

E. less than 5%

Lower bound of 99% probability range = .083 – (3´.064) = -.109 = -10.9%;Probability of losing 11% or more is less than 0.5%.

Question 16

You purchased 300 shares of Deltona, Inc. stock for \$44.90 a share. You have received a total of \$630 in dividends and \$14,040 in proceeds from selling the shares. What is your capital gains yield on this stock?

A. 4.06%

B. 4.23%

C. 4.68%

D. 8.55%

E. 8.91%

Cost = 300×\$44.90 = \$13,470;

Capital gains yield = (\$14,040 – \$13,470) ÷ \$13,470 = 4.23%

Question 17

One year ago, you purchased a stock at a price of \$32 a share. Today, you sold the stock and realized a total return of 25%. Your capital gain was \$6 a share. What was your dividend yield on this stock?

A. 1.25%

B. 3.75%

C. 6.25%

D. 18.75%

E. 21.25%

Capital  gain yield = \$6/\$32=18.75%;

Divided yield = 25%/18.75%=6.25%

Question 18

Excelsior shares are currently selling for \$25 each. You bought 200 shares one year ago at \$24 and received dividend payments of \$1.50 per share. What was your percentage capital gain this year?

A. 4.17%

B. 6.25%

C. 10.42%

D. 104.17%

E. 110.42%

Total Return = (\$25 – \$24)/\$25 = .04167 = 4.17%

Question 19

Murphy’s, Inc. has 10,000 shares of stock outstanding with a par value of \$1.00 per share. The market value is \$8 per share. The balance sheet shows \$32,500 in the capital in excess of par account, \$10,000 in the common stock account and \$42,700 in the retained earnings account. The firm just announced a 10% (small) stock dividend. What will the market price per share be after the dividend?

A. \$7.20

B. \$7.27

C. \$7.33

D. \$8.00

E. \$8.80

Market price per share = (10,000 shares×\$8)÷(10,000 shares×1.10) = \$7.27; Note that the total market value of the firm does not change

Question 20

Samuel’s has 7,000 shares of stock outstanding with a par value of \$1.00 per share and a market value of \$12 per share. The balance sheet shows \$7,000 in the common stock account, \$58,000 in the capital in excess of par account and \$32,500 in the retained earnings account. The firm just announced a 50% (large) stock dividend. What is the value of the common stock account after the dividend?

A. \$7,000

B. \$8,500

C. \$9,000

D. \$10,500

E. \$14,000

Common stock = [(7,000 shares × .50) × \$1] + \$7,000 = \$10,500

Question 21

Samuel’s has 7,000 shares of stock outstanding with a par value of \$1.00 per share and a market value of \$12 per share. The balance sheet shows \$7,000 in the common stock account, \$58,000 in the capital in excess of par account, and \$32,500 in the retained earnings account. The firm just announced a 50% (large) stock dividend. What is the market value per share after the dividend?

A. \$6.00

B. \$8.00

C. \$9.00

D. \$10.50

E. \$12.00

Market value per share = (7,000 share x \$12)

(7,000 x 1.5) =\$8.00

Note that the total market value of the firm does not change

Question 22

A reverse split is when:

A. the stock price gets too high for investors to purchase in round lots.

B. the stock becomes too liquid and highly marketable.

C. the stock price moves into the popular trading range.

D. several old shares, such as 4, are replaced by 1 new share.

E. None of these.

Question 23

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

A. The life of the firm is limited to the life span of the owner.

B. The owner can generally raise large sums of capital quite easily.

C. The ownership of the firm is easy to transfer to another individual.

D. The company must pay separate taxes from those paid by the owner.

E. The legal costs to form a sole proprietorship are quite substantial.

Question 24

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

A. A sole proprietorship is the least common form of business ownership.

B. The profits of a sole proprietorship are taxed twice.

C. The owners of a sole proprietorship share profits as established by the partnership agreement.

D. The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.

E. A sole proprietorship is often structured as a limited liability company.

Question 25

A stakeholder is:

A. any person or entity that owns shares of stock of a corporation.

B. any person or entity that has voting rights based on stock ownership of a corporation.

C. a person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock.

D. a creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm.

E. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.

Question 26

Which one of the following is a capital budgeting decision?

A. Determining how much debt should be borrowed from a particular lender

B. Deciding whether or not to open a new store

C. Deciding when to repay a long-term debt

D. Determining how much inventory to keep on hand

E. Determining how much money should be kept in the checking account

Question 27

Toni’s Tools is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using:

A. net present value only.

B. both net present value and the internal rate of return.

C. their equivalent annual costs.

D. the depreciation tax shield approach.

E. the replacement parts approach.

Question 28

The equivalent annual cost method is useful in determining:

A. the annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended.

B. the tax shield benefits of depreciation given the purchase of new assets for a project.

C. operating cash flows for cost-cutting projects of equal duration.

D. which one of two machines to acquire given equal machine lives but unequal machine costs.

E. which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

Question 29

A company which uses the MACRS system of depreciation:

A. will have equal depreciation costs each year of an asset’s life.

B. will expense the cost of nonresidential real estate over a period of 7 years.

C. can depreciate the cost of land, if it so desires.

D. will write off the entire cost of an asset over the asset’s class life.

E. cannot expense any of the cost of a new asset during the first year of the asset’s life.

Question 30

Your firm purchased a warehouse for \$335,000 six years ago. Four years ago, repairs were made to the building which cost \$60,000. The annual taxes on the property are \$20,000. The warehouse has a current book value of \$268,000 and a market value of \$295,000. The warehouse is totally paid for and solely owned by your firm. If the company decides to assign this warehouse to a new project, what value, if any, should be included in the initial cash flow of the project for this building?

A. \$0

B. \$268,000

C. \$295,000

D. \$395,000

E. \$515,000

Opportunity cost = \$295,000

Question 31

The difference between bank cash and book cash is called:

A. float.

B. disbursement float.

C. net float.

D. collection float.

E. None of these.

Question 32

Collection float increases:

A. disbursement float.

B. bank cash.

C. book cash.

D. gross float times net float.

E. None of these.

Question 33

The Smythe firm expects a total cash need of \$9,000 over the next 4 months. They have a beginning cash balance of \$1,000, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is \$4.00. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. Based on the firm’s current practice, what is the average daily cash balance (a month has 30 days)?

A. \$20.00

B. \$45.25

C. \$54.17

D. \$69.48

E. None of these.

Question 34

Checks written by the firm are said to generate:

A. collection float.

B. ledger float.

C. disbursement float.

D. book float.

E. None of these.

Question 35

The Holly Corporation has a new rights offering that allows you to buy one share of stock with 4 rights and \$25 per share. The stock is now selling ex-rights for \$30. The price rights-on is:

A. \$21.00.

B. \$25.00.

C. \$30.00.

D. \$31.25.

E. impossible to determine without the cum-rights price.

RX=(PX-S)/N=(\$30-\$25)/4=\$1.25; Price = \$30+\$1.25=\$31.25

Question 36

Which of the following is not one of the four main functions that underwriters provide?

A. Risk bearing

B. Marketing

C. Auditing the financial statements

D. Certification

E. Monitoring

Question 37

Venture capitalists are

A. intermediaries that raise funds from outside investors.

B. play an active role in overseeing, advising, and monitoring the companies in which they invest.

C. generally do not want to own the investment forever.

D. intermediaries that raise funds from outside investors and play an active role in overseeing, advising, and monitoring the companies in which they invest.

E. intermediaries that raise funds from outside investors, play an active role in overseeing, advising, and monitoring the companies in which they invest, and generally do not want to own the investment forever.

Question 38

Empirical evidence suggests that new equity issues are generally:

A. priced efficiently by the market.

B. overpriced by investor excitement concerning a new issue.

C. overpriced resulting from SEC regulation.

D. underpriced, in part, to counteract the winner’s curse.

E. underpriced resulting from SEC regulation.

Question 39

An investor discovers that for a certain group of stocks, large positive price changes are always followed by large negative price changes. This finding is a violation of the:

A. moderate form of the efficient market hypothesis.

B. semistrong form of the efficient market hypothesis.

C. strong form of the efficient market hypothesis.

D. weak form of the efficient market hypothesis.

E. None of these.

Question 40

Under the concept of an efficient market, a random walk in stock prices means that:

A. there is no driving force behind price changes.

B. technical analysts can predict future price movements to earn excess returns.

C. the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period.

D. the unexplained portion of price change in one period that cannot be explained by expected return can only be explained by the unexplained portion of price change in a prior period.

E. None of these.

Question 41

In order to create value from capital budgeting decisions, the firm is likely to:

A. locate an unsatisfied demand for a particular product or service.

B. create a barrier to make it more difficult for other firms to compete.

C. produce products or services at a lower cost than the competition.

D. locate an unsatisfied demand for a particular product or service and produce products or services at a lower cost than the competition.

E. locate an unsatisfied demand for a particular product or service; create a barrier to make it more difficult for other firms to compete; and produce products or services at a lower cost than the competition.

Question 42

If the market is weak form efficient:

A. semistrong form efficiency holds.

B. strong form efficiency must hold.

C. semistrong form efficiency may hold.

D. markets are not weak form efficient.

E. None of these.

Question 43

Your _____ tax rate is the amount of tax payable on the next taxable dollar you earn.

A. deductible

B. residual

C. total

D. average

E. Marginal

Question 44

_____ is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities.

A. Operating cash flow

B. Capital spending

C. Net working capital

D. Cash flow from operations

E. Cash flow to creditors

Question 45

Which of the following is not included in the computation of operating cash flow?

A. Earnings before interest and taxes

B. Interest paid

C. Depreciation

D. Current taxes

E. All of these are included

Question 46

Earnings per share is equal to:

A. net income divided by the total number of shares outstanding.

B. net income divided by the par value of the common stock.

C. gross income multiplied by the par value of the common stock.

D. operating income divided by the par value of the common stock.

E. net income divided by total shareholders’ equity.

Question 47

If you have a choice to earn simple interest on \$10,000 for three years at 8% or annually compounded interest at 7.5% for three years which one will pay more and by how much?

A. Simple interest by \$50.00

B. Compound interest by \$22.97

C. Compound interest by \$150.75

D. Compound interest by \$150.00

E. None of these.

Question 48

What is the future value of \$1,000 a year for five years at a 6% rate of interest?

A. \$4,212.36

B. \$5,075.69

C. \$5,637.09

D. \$6,001.38

E. \$6,801.91

Question 49

Your parents are giving you \$100 a month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?

A. \$3,797.40

B. \$4,167.09

C. \$4,198.79

D. \$4,258.03

E. \$4,279.32

Question 50

You estimate that you will have \$24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each month?

A. \$471.30

B. \$473.65

C. \$476.79

D. \$479.37

E. \$480.40

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