FINAL EXAM VERSION A

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1 FIN 301 Prof. Thistle Principals of Managerial Finance Spring 2018 FINAL EXAM PUT YOUR NAME AND TEST VERSION ON THE SANTRON FORM MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Fitchminster Armored Car can purchase a new vehicle for $200,000 that will provide annual net cash flow over the next five years of $40,000, $45,000, $50,000, $55,000, $60,000. The salvage value of the vehicle will be $25,000. Assume that the vehicle is sold at the end of year 5. Calculate the NPV of the ambulance if the required rate of return is 9%. (Round your answer to the nearest $1.) 1) A) $7,390 B) $6,048 C) $19,483 D) $6,780 2) Madison was hired to design and decorate the offices of a large pharmaceutical company. She accidentally read a report indicating that a new drug had just been approved by the Food and Drug administration. She immediately bought the companyʹs stock which doubled in price over the following week. This outcome is inconsistent with 2) A) the weak form efficient market hypothesis. B) the semi strong form efficient market hypothesis. C) the strong form efficient market hypothesis. Her action was probably illegal. D) all of the above. 3) 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 five years? 3) A) $5, B) $3, C) $2, D) $3, ) Ingrid Birdman can earn a nominal annual rate of return of 12%, compounded semiannually. If Ingrid made 40 consecutive semiannual deposits of $500 each, with the first deposit being made today, how much will she accumulate at the end of Year 20? Round off to the nearest $1. 4) A) $64,132 B) $82,024 C) $57,901 D) $52,821 5) P. Noel Companyʹs common stock has just paid a $2.00 dividend. If investors believe that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock? 5) A) $22.22 B) $23.33 C) $15.00 D) $ ) You have been offered a credit card with an interest rate of 1.5% per month. This is equivalent to and effective annual rate (EAR) of 6) A) 19.56%. B) 24.00%. C) 12.17%. D) 18.00%. 1

2 7) Caldwell, Inc. sold an issue of 30 year, $1,000 par value bonds to the public. The bonds carry a 10.85% coupon rate and pay interest semiannually. It is now 12 years later. The current market rate of interest on the Caldwell bonds is 8.45%. What is the current market price (intrinsic value) of the bonds? Round off to the nearest $1. 7) A) $1,177 B) $751 C) $976 D) $1,220 8) Blueʹs Chips Inc. has a $1,000 par value bond that is currently selling for $1,300. It has an annual coupon rate of 7%, paid semiannually, and has nine years remaining until maturity. What is the annual yield to maturity on the bond? (Round to the nearest whole percentage.) 8) A) 6.24% B) 3.15% C) 3.12% D) 1.57% 9) Project Full Moon has an initial outlay of $30,000, followed by positive cash flows of $10,000 in year 1, $15,000 in year 2, and $15,000 in year 3. The project should be accepted if the required rate of return is 9) A) greater than 0. B) less than 14.6%. C) less than 16.25%. D) greater than 12%. 10) You wish to borrow $2,000 to be repaid in 12 monthly installments of $ The annual interest rate is 10) A) 24%. B).04%. C) 22%. D) 4%. 11) Which of the following factors will influence a firmʹs P/E ratio? 11) A) The investorsʹ required rate of return B) General market conditions C) Firm investment opportunities D) All of the above 12) Which of the following types of business forms is least risky to investors? 12) A) A public corporation B) General partnership C) Limited partnership D) Sole proprietorship 13) Frost Corporationʹs recent earnings per share were $ Their dividend payout ratio is 20%. Earnings are expected to grow at an average of 6% per year and the companyʹs policy is to maintain the same payout ratio. If investors are requiring a 12% rate of return on this stock, what will they be willing to pay for one share? 13) A) $45.58 B) $43.00 C) $21.50 D) $ ) The cost of capital is 14) A) the opportunity cost of using funds to invest in new projects. B) the rate of return the firm must earn on its investments in order to satisfy the required rate of return of the firmʹs investors. C) the required rate of return for new capital investments which have typical or average risk. D) all of the above. 2

3 15) Consider the following cash flows: Date Cash Received Amount of Cash 1/1/17 $100 1/1/18 $100 1/1/19 $500 1/1/20 $100 What is the value on 1/1/16 of the above cash flows? Use an 8% discount rate, and round your answer to the nearest $ ) A) $649 B) $800 C) $740 D) $601 Use the following information to answer the following question(s). A firm currently has the following capital structure which it intends to maintain. Debt: $3,000,000 par value of 9% bonds outstanding with an annual before tax yield to maturity of 7.67% on a new issue. The bonds currently sell for $115 per $100 par value. Common stock: 46,000 shares outstanding currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends, which it expects to continue indefinitely. The firmʹs marginal tax rate is 40%. The company has no plans to issue new securities. 16) The after tax cost of debt is 16) A) 6.20%. B) 3.80%. C) 5.40%. D) 4.60%. 17) The firmʹs weighted average cost of capital is 17) A) 10.47%. B) 9.29%. C) 8.63%. D) 7.71%. 18) The current total value of the firm is 18) A) $4,950,000. B) $5,750,000. C) $3,250,000. D) $6,450,000. Use the following information to answer the following question(s). A firm is trying to determine whether to replace an existing asset. The proposed asset has a purchase price of $50,000 and has installation costs of $3,000. The asset will be depreciated over its five year life using the straight line method. The new asset is expected to increase sales by $17,000 and non depreciation expenses by $2,000 annually over the life of the asset. Due to the increase in sales, the firm expects an increase in working capital during the assetʹs life of $1,500, and the firm expects to be able to sell the asset for $6,000 at the end of its life. The existing asset was originally purchased three years ago for $25,000, has a remaining life of five years, and is being depreciated using the straight line method. The expected salvage value at the end of the assetʹs life (i.e., five years from now) is $5,000; however, the current sale price of the existing asset is $20,000, and its current book value is $15,625. The firmʹs marginal tax rate is 34 percent and its required rate of return is 12 percent. 19) If the new machine is purchased, depreciation expense will increase or decrease by 19) A) Increase $6,300. B) increase $6,900. C) increase $8,000. D) decrease $5,000. 3

4 20) Firms that wish to raise funds for investment purposes issue securities in the 20) A) primary markets. B) secondary markets. C) intermediary markets. D) primary and secondary markets. 21) Your portfolio consists of $3,000 in ABC stock, $4,500 of DEF stock and $2,500 of GHI stock. Expected rates of return are ABC 5%, DEF 12%, and GHI 16%. What is the portfolio expected rate of return? 21) A) 11.4% B) 16.0% C) 12.0% D) 10.9% 22) The true owners of the corporation are the 22) A) preferred stockholders. B) board of directors of the firm. C) holders of debt issues of the firm. D) common stockholders. 23) Stephenʹs grandmother deposited $100 in an investment account for him when he was born, 25 years ago. The account is now worth $1,500. What was the average rate of return on the account? 23) A) 11.44% B) 15.00% C) 16.67% D) 6.00% Table 1 Smith Company Balance Sheet and selected Income Statement data Assets: Cash and marketable securities $300,000 Accounts receivable 2,215,000 Inventories 1,837,500 Prepaid expenses 24,000 Total current assets $3,286,500 Fixed assets 2,700,000 Less: accumulated depreciation 1,087,500 Net fixed assets $1,612,500 Total assets $4,899,000 Liabilities: Accounts payable $240,000 Notes payable 825,000 Accrued taxes 42,500 Total current liabilities $1,107,000 Long term debt 975,000 Ownerʹs equity 2,817,000 Total liabilities and ownerʹs equity $4,899,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold 4,312,500 Selling and administrative expense 1,387,500 Depreciation expense 135,000 Interest expense 127,000 Earnings before taxes $412,500 Income taxes 225,000 Net income $187,500 Common stock dividends $97,500 Change in retained earnings $90,000 4

5 24) Based on the information in Table 1, the debt ratio is 24) A) B) C) D) ) Based on the information in Table 1, the net profit margin is 25) A) 1.97%. B) 2.94%. C) 5.33%. D) 4.61%. 26) Based on the information in Table 1, the average collection period is 26) A) 64 days. B) 71 days. C) 127 days. D) 84 days. 27) Based on the information in Table 1, the current ratio is 27) A) B) C) D) ) Which of the following sequences is arranged in the correct order, from highest long term returns to lowest? 28) A) Government bonds, emerging market equities, treasury bills B) International equities, U.S. government bonds, treasury bills C) Corporate bonds, treasury bills, international equities D) International equities, U.S. government bonds, U.S. equities 29) Regal Enterprises is considering the purchase of a new embroidering machine. It is expected to generate additional sales of $400,000 per year. The machine will cost $295,000, plus $3,000 to install it. The embroiderer will save $12,000 in labor expense each year. Regal is in the 34% income tax bracket. The machine will be depreciated on a straight line basis over five years (it has no salvage value). The embroiderer will require annual operating expenses of $136,000. What is the annual operating cash flow that the machine will generate? 29) A) $124,000 B) $165,816 C) $202,424 D) $316,954 Use Bird Industryʹs summary financial statements to answer the following questions. Bird Industries, Inc. Balance Sheets Cash $1,000 $? Accounts receivable 5,000 6,000 Inventories 6,500 6,000 Land 10,000 12,000 Other fixed assets 8,000 9,000 Accumulated depreciation (1,000) (1,600) Total assets $29,500 $? Accounts payable $3,200 $ 6,800 Bonds 4,000 4,000 Common stock 17,000 16,000 Retained earnings 5,300 5,000 Total debt and equity $29,500 $? 5

6 Bird Industries, Inc. Income Statement Sales $84,000 Cost of goods sold 66,400 Gross profit $17,600 Operating expenses (13,000) Depreciation (600) EBIT $4,000 Interest expense (500) EBT $3,500 Taxes (1,500) Net Income $2,000 30) Use Birdʹs financial statements to determine the total amount of Bird Industriesʹ common stock dividend for ) A) $2,000 B) $800 C) $2,300 D) Cannot be determined with available information 31) Use Bird Industriesʹ financial statements to determine Birdʹs operating profit margin for ) A) 4.2% B) 4.8% C) 2.4% D) 21% 32) Project Black Swan requires an initial investment of $115,000. It has positive cash flows of $140,000 for each of the next two years. Because of major demolition and environmental clean up costs, cash flow for the third and final year of the project is $(125,000). The firm uses a discount rate of 10%. The Modified IRR for the project is 32) A) 21.96%. B) 10.00% C) 14.77% D) 31.28% 33) The principal reason for preparing common size statements is 33) A) to make meaningful comparisons between firms in different industries. B) to make meaningful comparisons between different quarters within the fiscal year. C) to make meaningful comparisons between firms that are not the same size. D) to eliminate the effects of inflation. 34) Roddy Richards invested $ in Wolverine Meat Distributors (W.M.D.) five years ago. The investment had yearly arithmetic returns of 9.7%, 8.1%, 15%, 7.2%, and 15.4%. What is the geometric average return of Roddyʹs Richardʹs investment? 34) A) 4.63% B) 6.96% C) 8.78% D) 3.38% 35) If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)? 35) A) $70 B) $57 C) $71 D) $72 6

7 36) WKW, Inc. is analyzing a project that requires an initial investment of $10,000, followed by cash inflows of $1,000 in Year 1, $4,000 in Year 2, and $15,000 in Year 3. The cost of capital is 10%. What is the profitability index of the project? 36) A) 1.04 B) 1.78 C) 1.97 D) ) Siebling Manufacturing Companyʹs common stock has a beta of.8. If the expected risk free return is 2% and the market offers a premium of 8% over the risk free rate, what is the expected return on Sieblingʹs common stock? 37) A) 8.4% B) 14.4% C) 13.4% D) 7.8% 38) Which of the following represents an attempt to measure the earnings of the firmʹs operations over a given time period? 38) A) Balance sheet B) Cash flow statement C) Income statement D) None of the above 39) If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should 39) A) positively affect profits. B) increase the market value of the firmʹs common stock. C) either increase or have no effect on the value of the firmʹs common stock. D) accomplish all of the above. 40) What is the yield to maturity of a nine year bond that pays a coupon rate of 20% per year, has a $1,000 par value, and is currently priced at $1,407? Assume annual coupon payments. 40) A) 12.28% B) 11.43% C) 21.81% D) 6.14% 41) What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1). 41) A) $833 B) $429 C) $3,106 D) $893 42) The Blackburn Group has recently issued 20 year, unsecured bonds rated BB by Moodyʹs. These bonds yield 443 basis points above the U.S. Treasury yield of 2.76%. The yield to maturity on these bonds is 42) A) 4.43%. B) 7.19% C) 12.23% D) mortgage bonds. 7

8 43) Which of the following overhead expenses is a relevant, incremental cash flow? 43) A) The project will increase the number of employees by 10%, so an additional human resources assistant must be hired to handle personnel issues directly related to the project. B) The project will represent 10% of the firmʹs revenues, so 10% of the CEOʹs compensation is allocated to the project. C) The project will occupy 10% of the firmʹs available space, so 10% of the firmʹs property insurance is allocated to the project. D) None of the expenses above should be allocated to the project. 44) If you hold a portfolio made up of the following stocks: Investment Value Beta Stock A $2, Stock B $5, Stock C $3,000.8 What is the beta of the portfolio? 44) A) 1.32 B) 1.17 C) 1.14 D) Canʹt be determined from information given 45) If the new machine is purchased, operating cash flow for years 1 through 5 will increase or decrease by 45) A) Increase $5,346. B) Decrease $9,900. C) Increase $12,246. D) Increase $15, ) Which of the following financial instruments is not traded in the capital markets? 46) A) bonds B) common stock C) debt with a maturity of less than one year D) preferred stock 47) Which of the following financial instruments entails the most risk and potentially the highest returns for investors? 47) A) bonds B) preferred stock C) common stock D) debt with a maturity of less than one year 48) Einstein theory of special relativity states that matter and energy are the same entity and can be changed into one another according to the relationship A) e = mc 2 B) A = πr 2 C) a 2 + b 2 = c 2 D) None of the above 8

9 1) A 2) C 3) A 4) B 5) B 6) A 7) D 8) B 9) B 10) D 11) D 12) A 13) A 14) D 15) A 16) D 17) C 18) B 19) B 20) A 21) D 22) D 23) A 24) D 25) B 26) C 27) B 28) B 29) C 30) C 31) B 32) A 33) C 34) D 35) C 36) D 37) A 38) C 39) B 40) A 41) B 42) B 43) A 44) C 45) C 46) C 9

10 47) C 48) A 10

FINAL EXAM VERSION B

FINAL EXAM VERSION B FIN 301 Prof. Thistle Principals of Managerial Finance Spring 2018 FINAL EXAM PUT YOUR NAME AND TEST VERSION ON THE SANTRON FORM MULTIPLE CHOICE. Choose the one alternative that best completes the statement