FIN 301 Prof. Thistle Principals of Managerial Finance Fall 2018 FINAL EXAM VERSION A PUT YOUR NAME AND TEST VERSION ON THE SCANTRON FORM MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.) 1) A) $6,577 B) $4,568 C) $7,621 D) $1,056 Use Bird Industryʹs summary financial statements to answer the following questions. Bird Industries, Inc. Balance Sheets 2016 2017 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 $? 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 2) Use Bird Industriesʹ financial statements to determine Birdʹs operating profit margin for 2017. 2) A) 4.2% B) 2.4% C) 4.8% D) 21% 1
3) Use Birdʹs financial statements to determine the total amount of Bird Industriesʹ common stock dividend for 2017. 3) A) $800 B) $2,300 C) $2,000 D) Cannot be determined with available information 4) An emerging market is 4) A) a market located in an economy with low to middle per capita income. B) market for companies coming out from bankruptcy proceedings. C) a market for small, but rapidly growing companies. D) market for promising, but untested technologies 5) In order to maximize firm value, management should invest in new assets when cash flows from the assets are discounted at the firmʹs and result in a positive NPV. 5) A) cost of debt used to finance the project B) cost of capital C) internal rate of return D) rate of return on equity 6) 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 6) A) greater than 12%. B) less than 16.25%. C) less than 14.6%. D) greater than 0. 7) 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? 7) A) $22.22 B) $23.33 C) $15.00 D) $40.00 8) You wish to borrow $2,000 to be repaid in 12 monthly installments of $170.30. The annual interest rate is 8) A) 22%. B) 4%. C) 24%. D).04%. Use the following to answer the following question(s). Roddy Richards invested $12014.88 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%. 9) What is the geometric average return of Roddyʹs Richardʹs investment? 9) A) 6.96% B) 4.63% C) 3.38% D) 8.78% 10) The area of finance that deals with long term investment decisions is known as 10) A) working capital management. B) capital structure. C) capital budgeting. D) financial strategy. 2
11) Your firm has the following balance sheet statement items: total current liabilities of $805,000; total assets of $2,655,000; fixed and other assets of $1,770,000; and long term debt of $200,000. What is the amount of the firmʹs net working capital? 11) A) $80,000 B) $325,000 C) $770,000 D) $25,000 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 12) Based on the information in Table 1, the average collection period is 12) A) 127 days. B) 64 days. C) 84 days. D) 71 days. 13) Based on the information in Table 1, the net profit margin is 13) A) 2.94%. B) 4.61%. C) 5.33%. D) 1.97%. 3
14) 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. 14) A) $1,177 B) $976 C) $751 D) $1,220 15) If you hold a portfolio made up of the following stocks: Investment Value Beta Stock A $2,000 1.5 Stock B $5,000 1.2 Stock C $3,000.8 What is the beta of the portfolio? 15) A) 1.32 B) 1.14 C) 1.17 D) Canʹt be determined from information given 16) Farar, Inc. projects operating income of $4 million next year. The firmʹs income tax rate is 40%. Farar presently has 750,000 shares of common stock, no preferred stock, and no debt. The firm is considering the issuance of $6 million of 10% bonds to finance a new product that is not expected to generate an increase in income for two years. If Farar issues the bonds this year, what will projected EPS be next year? 16) A) $1.53 B) $2.72 C) $4.53 D) $1.98 17) Which of the following best measures an assetʹs total risk? 17) A) The standard deviation B) The cash return C) The probability distribution D) Expected return 18) 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)? 18) A) $71 B) $72 C) $57 D) $70 19) Jay Coleman just graduated. He plans to work for five years and then leave for the Australian ʺOutbackʺ country. He figures that he can save $3,500 a year for the first three years and $5,000 a year for the next two years. These savings will start one year from now. In addition, his family gave him a $2,500 graduation gift. If he puts the gift, and the future savings when they start, into an account that pays 7.75% compounded annually, what will his financial ʺstakeʺ be when he leaves for Australia five years from now? Round off to the nearest $1. 19) A) $24,725 B) $27,178 C) $30,003 D) $36,082 4
20) The time value of money is created by 20) A) the fact that the value of saving money for tomorrow could be more or less than spending it today. B) the existence of profitable investment alternatives and interest rates. C) the fact that the passing of time increases the value of money. D) the elimination of the opportunity cost as a consideration. 21) Secondary markets 21) A) are concerned with the trading of previously issued securities between investors. B) are an important vehicle for established firms to raise additional money for expansion. C) function as a place for smaller, less well known firms to issue securities. D) are a means by which funds are cycled from savers to borrowers. 22) You are considering buying some stock in Continental Grain. Which of the following is an example of nondiversifiable risk? 22) A) Risk resulting from an explosion in a grain elevator owned by Continental B) Risk resulting from a news release that several of Continentalʹs grain silos were tainted C) Risk resulting from a general decline in the stock market D) Risk resulting from an impending lawsuit against Continental 23) The Sarbanes Oxley was passed in 23) A) 2008 after the collapse of the subprime mortgage market. B) 2010 to protect consumers from financial fraud. C) 2002 after the ENRON bankruptcy exposed unethical behavior by the companyʹs executives and accountants. D) 1933 to separate commercial banking from investment banking. 24) The highest cost of capital at which a project can reach break even NPV is the projectʹs 24) A) component cost of capital. B) internal rate of return. C) cost of common equity. D) project specific cost of capital. 25) 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). 25) A) $833 B) $893 C) $3,106 D) $429 26) Schiller Construction Inc. has estimated the following revenues and expenses related to phase I of a proposed new housing development. Incremental sales= $5,000,000, total cash operating expenses $3,500,000, depreciation $500,000, taxes 35%, interest expense, $200,000. Operating cash flow equals 26) A) $1,150,000. B) $650,000. C) $1,000,000. D) $975,000. 27) 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? 27) A) $2,465.78 B) $3,408.88 C) $5,008.76 D) $3,525.62 5
28) Common stockholders are essentially 28) A) managers of the firm. B) owners of the firm. C) creditors of the firm. D) all of the above. 29) The expected return on VZ next year is 12% with a standard deviation of 20%. The expected return on ANT next year is 24% with a standard deviation of 30%. The correlation between the two stocks is.6. If Emily makes equal investments in VZ and ANT, what is the standard deviation of her portfolio? 29) A) 5.05% B) 15.00% C) 22.47% D) 25.00% 30) Which of the following is true about bonds? 30) A) They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year. B) They are obligations from the investor to the corporation. C) Their interest rate always varies with the Consumer Price Index D) At maturity of the bond, the investor receives the market price of the bond. 31) 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. 31) A) 12.28% B) 11.43% C) 6.14% D) 21.81% 32) What is the expected rate of return on a portfolio 18% of which is invested in an S&P 500 Index fund, 65% in a technology fund, and 17% in Treasury Bills. The expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury Bills. 32) A) 10.25% B) 11.42% C) 8.33% D) 9.00% 33) Which of the following is true about Preferred Stock? 33) A) Preferred dividends must be paid before the company can pay a dividend on its common stock. B) Preferred shareholders always have voting rights. C) Like bonds, preferred stock always has a maturity date at which time the issue price must be repaid to shareholders. D) In most cases, if a company fails to pay a preferred dividend when it is due the preferred shareholders have no right to collect that dividend in the future. 34) Which of the following is NOT one of the categories for a projectʹs relevant after tax cash flows? 34) A) Differential flows over the projectʹs life B) Financing flows C) Initial cash outflow D) Terminal cash flow 35) Diamond Inc. has estimated that a new building will cost $2,500,000 to construct. Land was purchased a year ago for $500,000 and could be sold today for $550,000. An environmental impact study required by the state was performed at a cost of $48,000. For capital budgeting purposes, what is the relevant cost of the new building? 35) A) $3,050,000 B) $3,098,000 C) $3,048,000 D) $2,500,000 36) The issuance of bonds to raise capital for a corporation 36) A) increases risk to the stockholders. B) is a cheaper form of capital than the issuance of common stock. 6
C) magnifies the returns to the stockholders. D) all of the above. 37) The firmʹs optimal capital structure is the mix of financing sources that 37) A) minimizes the risk of financial distress. B) maximizes after tax earnings. C) maximizes the total value of the firmʹs debt and equity. D) maximizes favorable leverage. 38) If current market interest rates fall, what will happen to the value of outstanding bonds? 38) A) It will remain unchanged. B) It will fall. C) It will rise. D) There is no connection between current market interest rates and the value of outstanding bonds. 39) Your rich great, great aunt just passed away at the age of 91. She liked you more than she let on and left you in her will. You will receive 100 British bonds that pay interest forever. The amount of annual interest payments that you will receive is $5,000. If you could invest your money at 4.25%, how much are these bonds worth today? 39) A) $250,000 B) $197,250 C) $117,647 D) $55,000 E) $64,480 40) Consider a project with the following cash flows: After Tax After Tax Accounting Cash Flow Year Profits from Operations 1 $799 $750 2 $150 $1,000 3 $200 $1,200 Initial outlay = $1,500 Terminal cash flow = 0 Compute the profitability index if the companyʹs discount rate is 10%. 40) A) 1.61 B) 15.8 C) 0.62 D) 1.81 41) Mass Waste Disposal Inc. is considering the construction f a facility at a cost of $20 million. The project will produce positive cash flows of $7 million per year for the next 4 years but the 5th and final year will have a net negative cash flow of $5 million. If the discount rate is 10%, the MIRR of this project is and the project should be. 41) A) 8.16%, rejected. B) 8.16 accepted. C) 7.40, rejected D) 9.11%, accepted 7
42) What is the present value of $300 received at the beginning of each year for five years? Assume that the first payment is not received until the beginning of the third year (thus the last payment is received at the beginning of the seventh year). Use a 10% discount rate, and round your answer to the nearest $1.00. 42) A) $854 B) $1,257 C) $1,137 D) $940 43) Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average. This outcome supports 43) A) the strong form efficient market hypothesis. B) the semi strong form efficient market hypothesis. C) the weak form efficient market hypothesis. D) all of the above. 44) Metals Corp. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common equity. Metals Corp.ʹs after tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Metals Corp.ʹs weighted average cost of capital? 44) A) 6.56% B) 10.84% C) 12.78% D) 8.32% 45) The principal reason for preparing common size statements is 45) A) to make meaningful comparisons between firms that are not the same size. B) to make meaningful comparisons between different quarters within the fiscal year. C) to make meaningful comparisons between firms in different industries. D) to eliminate the effects of inflation. 46) If a stock has a much higher than normal P/E ratio, investors probably expect 46) A) large increases in the price of the stock. B) rapid growth in earnings. C) a declining stock price D) slow growth in earnings. 47) Maximization of shareholder wealth as a goal is superior to accounting profit maximization because 47) A) it considers the time value of the money. B) following the shareholder wealth maximization goal will ensure high stock prices. C) accounting profits are not the same as cash flows. D) A and C. 48) Which of the following would be considered a capital budgeting decision? 48) A) Apple sells bonds and uses the proceeds to repurchase stock. B) Goldman Sachs obtains short term loans to finance day to day operations. C) Pfizer develops a new therapy and brings it to market. D) Walmart purchases inventory for resale to customers. 8
1) A 2) C 3) B 4) A 5) B 6) C 7) B 8) B 9) C 10) C 11) A 12) A 13) A 14) D 15) B 16) B 17) A 18) A 19) B 20) B 21) A 22) C 23) C 24) B 25) D 26) A 27) C 28) B 29) C 30) A 31) A 32) B 33) A 34) B 35) A 36) D 37) C 38) C 39) C 40) A 41) A 42) D 43) D 44) C 45) A 46) B 9
47) D 48) C 10